Redesigning naira: Change mantra continues

By Nasiru Aminu The currency redesign policy signals that Nigeria is at the sharpened end of the knife of the Buhari administration. The government is desperate to leave a legacy, especially regarding corruption, which was no surprise when Buhari announced that he fully agreed with the Central Bank of Nigeria’s (CBN) policy. But should he? […]

By Nasiru Aminu

The currency redesign policy signals that Nigeria is at the sharpened end of the knife of the Buhari administration. The government is desperate to leave a legacy, especially regarding corruption, which was no surprise when Buhari announced that he fully agreed with the Central Bank of Nigeria’s (CBN) policy. But should he?

There is nothing wrong with redesigning currencies. Countries redesign all the time. The United Kingdom (UK) has just concluded its 5-year currency redesign project in September 2022. They studied the impact of introducing the notes from Canada and kept the public updated two years before the launch in 2016, which they did in phases. In December 2021, the European Central Bank announced it was starting a process to select new designs for banknotes and will consult with citizens from across the 19 nations that use them, before a final decision is taken by 2024.

Some advantages of redesigning currency are curbing illegal activities like counterfeiting and tax evasion and encouraging utilising cashless payments and digital currency. Changing the currency will render the counterfeited currency useless as the criminals cannot exchange their papers in the bank. Those evading taxes will have to exchange their existing currency, which means the authorities will tax them retroactively.

However, redesigning the new currency will incur the cost of printing and minting the new currency, which is undesirable for Nigeria in the present situation. The new currency may not be effective as the targeted criminals may choose to hold other forms of currency or other assets. Also, if the process of redesigning is not handled with competence, it can plunge the nation into an economic crisis.

On the latter, it is important to analyse what the finance minister said after the announcement – that she was not consulted about this policy. Of course, it is not the first time the apex bank refused to consult her, I raised concerns about the lack of consultation with stakeholders when the CBN introduced the eNaira, and the result is evident. Section 19 of the CBN Act requires the President’s approval on the recommendation of its Board, which includes the Permanent Secretary of the Federal Ministry of Finance. The Permanent Secretary’s duties include keeping their principal, the minister, informed on all current issues and problems.

It might be that the Permanent Secretary refused to brief his principal, we do not know, but if so, then it will be disingenuous of the minister to raise public concerns. If the CBN Governor refused to follow the law to seek approval from the Board, which we do not know, then it is inexcusable and sounds dictatorial. Either way, the actions are not good for the government in power.

As for the policy, we ought to know that a paper currency is deeply ingrained in the public’s image of the government and country. Any attempt to change long-standing monetary conventions raises a host of complex issues.

The CBN Governor said the policy is to help take control of the currency in circulation, which will curb rising inflation. Based on economic theory, the statement is counterfactual because inflation is caused when an economy’s money supply grows faster than the economy’s ability to produce goods and services.

Money supply includes physical cash with the public and banks, all bank deposits, bank reserves, and foreign-denominated deposits. According to the CBN’s Money and Credit Statistics, the money supply is N49.5 trillion as of August 2022. As of September 2022, the cash in circulation is about N3.2 trillion, of which N2.73 trillion was outside the banks’ vaults.

When the newly designed currency is released to banks between December 15, 2022 and January 32,  2023, the economy will not have lower inflation if all the cash is swapped without hitches. 

One unanswered question is what the CBN plans to do with the unclaimed newly printed cash. With all the regulatory processes observed, the new cash would have been channelled to commercial banks, increasing the money supply. The CBN will be left with a higher cost of printing money and bank deposits, potentially increasing the money supply. There is also a question of how pushing a more rapid shift to cashless payments would affect transaction costs. Retailers will have to pay a fee to companies for card services. These costs will eventually be transferred to the final consumer.

As stated earlier, Emefiele’s statement of reducing inflation is counterproductive. The inflation rate will even be higher unless additional policies have been implemented to increase economic activity that will grow faster than the money supply. Like the eNaira, no adequate research was conducted. As a result, the intended consequences may not be achieved, leaving the economy worse. The initial outcome is the fall of the Naira in the foreign exchange market.

The policy of a six-weeks exchange window is also a worry. Our economic history books show that Buhari’s approval of currency redesign in 1984 contributed to the country’s economic recession as people suffered from wealth evaporation. The worry of wealth evaporation is also rising today for those who failed to exchange within the deadline. Unlike what the President thinks, more people have legitimate earnings and will struggle to exchange them during the window for unforeseen reasons.

Unlike Nigeria, where everyone has a six-week window to change to the new currency, the UK agrees that old notes can always be exchanged for new ones for new notes at any time after the deadline of the currency exchange passes. This can be done at participating Post Office branches or the Central Bank. Commercial banks still take them as deposits only but not exchanged.

So, like death, Nigerians have no option but to accept the redesign policy. However, people must continue to question the timing and the implementation method