Just in: Worries for naira as CBN redesigns currency, mops N2.73tr black money
Yesterday, the Central Bank of Nigeria (CBN) announced the introduction of newly redesigned N200, N500, and N1,000 banknotes. This announcement was seen as the start of a larger currency census and the elimination of black money.
Godwin Emefiele, the governor of the Central Bank of Nigeria (CBN), said during a virtual news conference that the vast amounts of money—an estimated 80% of all money in circulation—that are not in the banking system are a source of concern.
According to Emefiele, as of September 2022, N2.73 trillion of the N3.23 trillion in money in circulation was not stored in commercial banks' vaults.
He added that the amount of money in circulation has increased by more than twofold since 2015, going from N1.46 trillion in December of that year to N3.23 trillion in September 2022.
He continued by saying that in order to solve the "daunting issues" related to cash management and stop currency counterfeiting, the decision was required.
“These (currency management) challenges primarily include significant hoarding of banknotes by members of the public, with statistics showing that over 80 percent of currency in circulation are outside the vaults of commercial banks; worsening shortage of clean and fit banknotes with attendant negative perception of the CBN and increased risk to financial stability and increasing ease and risk of counterfeiting evidenced by several security reports.”
Experts have described the action as being a part of a larger effort to restrict excessive election expenditure and remove black money from the system beneath the surface of problems with currency management.
As the dollar increased by around N10 on the black market yesterday evening to a new all-time high of roughly N765/$ in Lagos, the FX market has indeed responded strongly to the decision.
Some analysts, who had called for a currency audit to restore sanity in the foreign exchange market, scored CBN high on the decision but faulted the timing.
Professor of applied economics and advocate of a currency census, Godwin Owoh, stated that this should have happened after the general elections because no nation changes its currencies just a few months before a significant election.
“That is the right thing to do to save the naira. Currency redesign is the first thing I have always recommended, but the timing is wrong. There is nowhere in the world where currency is changed six months before an election.” Owoh said the implementation cannot be fair to all, especially given the fact that the CBN governor is perceived as a politician.
Owoh said the government may hide under the due diligence requirement to deny members of the opposition party access to their money. People with large amounts of currency are likely to be asked to explain the source of their money under the money laundering and counterterrorism legislation.
He expressed concern that many people who hoard cash would find it safer and more convenient to exchange their money on the black market for foreign exchange while avoiding the prying eyes of regulators and law enforcement.
Also speaking, Bode Ashogbo, an investment expert, said politicians and other politically exposed individuals would flood the market with naira in exchange for dollars. He said the rush would worsen FX scarcity.
Ashogbon predicted that a dollar could surpass N1,000 to a dollar in the wake of heightened panic and speculation.
“Once demand heats up, we are going to see a remarkable adjustment in the FX rate. Ordinarily, an increase in the price of dollars in relation to naira should increase supply. But supply appears to be static because we are not earning much FX. That suggests that the naira would continue to fall,” he feared.
Black money is anticipated to begin flowing into assets like stocks and real estate in the upcoming weeks, therefore a price bubble in these assets might also be a significant result of the decision.
Uche Olowo, a former president of the Chartered Institute of Bankers of Nigeria (CIBN), welcomed the move but argued that in order to fully utilize the new naira notes, rules need be developed for a more successful cashless policy.
He claims that if about 85% of the money is not in banks, inflation would continue to rise and that no monetary policy adopted to limit the excessive liquidity will be successful.
“I think the CBN is trying to use every tool at their disposal to check inflation and excessive liquidity in the system. They have used the CRR to reduce excess liquidity but the effectiveness of the policy is not seen. That means there is actually a hoarding of currency.
“If about 85 per cent of currency is outside the bank, no policy initiative to checkmate excessive liquidity will have any effect. Again, counterfeiting is dangerous to any system. So, the decision is a welcome development provided it targets the right type of inflation.”
In response to a question about the price of creating the new notes, he stated that because cashless initiatives and the fact that 85% of naira notes are already out of circulation would reduce the quantity that needs to be printed.
Prof. Uche Uwaleke said the decision of CBN to replace some naira denominations with new ones will be positive for the economy in the medium to long term. Uwaleke, who is a professor of capital market at Nasarawa State University, Lafia, said although the measure does not amount to demonetisation of big currency notes often carried out by Central Banks to curb black money and corruption, it will go a long way in ensuring that a lot of naira notes circulating outside the banks are crowded in.
He, however, frowned on the January 31, 2023 deadline adding, “I think the deadline is short in view of the number of naira denominations involved, from N200 to N1,000. CBN may consider extending the time.’ ’
The financial expert asserts that the CBN's action may result in huge bank deposits, highlighting the fact that this will provide banks more cash on hand to lend out, perhaps lowering interest rates.
BUT an economist and CEO, Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, has criticised the move, stating that the exercise has no monetary policy significance. He feared that the move would come with huge logistics costs and avoidable dislocations to small businesses, most of whom are in the informal sector.
According to him, the cost of such an action would be outrageous and disproportionate, compared to the expected benefits advanced by CBN.
He said there are more pressing matters that need the CBN's attention and that the redesign was one intervention the country could do without.
“It is difficult to see any compelling value proposition of this currency redesign idea. We have issues with liquidity in the foreign exchange market, the depreciating currency, the recent Moody’s downgrade of Nigeria, soaring inflation and many more.
“CBN should save citizens and the economy the trauma of this currency redesign. It is a distraction we can do without.”
Director-General of Nigeria Employers Consultative Association (NECA), Adewale Oyerinde, said at a time when the naira is on a free fall and inflation rate is going out of control, all efforts should be geared towards strengthening the naira, rather than redesigning it. Noting that issuing new notes is desirable, he expressed worry about what the currency redesign initiative would achieve.
He asked: “What economic challenge will it solve? Will it make the naira appreciate considerably or make FX available to the real sector?’
Senior Advocate of Nigeria (SAN) and professor Bankole Sodipo expressed his disbelief at the news.
According to him, “printing the naira is an expensive venture. Designing and printing is a very expensive venture. I’ve been involved in giving advisory work for the Nigerian Security, Printing and Minting Company. I don’t see how this will deal with inflation.”
He said the announcement is already causing more problems for the naira. “Pound Sterling that was falling against every other currency last week and was trading at N840, is now N890 and it is going to go higher. The reason is that some people are rushing to change their naira into pounds. Also, I don’t think it is right on the eve of an election to go into something very drastic.”
Yesterday, a lawyer, Eze Onyekpere, the lead director of the Centre for Social Justice (CSJ), and Dr. Sam Amadi, the head of the Abuja School of Social and Political Thoughts, said that the decision had no economic value for the nation.
Onyekpere claimed that the decision was made as a distraction to prevent the CBN from fulfilling its legal duties and that doing so would deplete the nation's already low reserve.
He said: “It’s not going to add any value, the primary responsibility of CBN is price stability, it’s not going to add any value to the economy in terms of reducing inflation, it’s not going to add to the value of the naira vis-a-vis other international currencies, it will not add to the foreign exchange and add to the reserves. It’s a pure waste of time, it’s a distraction from the failure to perform statutory obligation.”
On his part, Amadi said such steps might add to the economic hardship the people are already faced with.
“What we need now is how to ensure that we build stronger policies to cushion the shock coming from a global economic crisis and those coming from the weak economy. Increased earning for the people, either through public expenditure and ensuring people have access to resources is very important.”
The Concerned Northern Forum has called for the sacking of Emefiele. In a statement issued by spokesperson of the group, Abdulsalam Moh’d Kazeem, the group demanded the suspension of such plans and prosecution of those behind the initiative, failing which there will be massive protests across the Northern region and Federal Capital Territory.
As Nigeria's economy is struggling and the value of the naira has fallen to its lowest point, in Kazeem's opinion, the CBN's action is nothing more than an example of incompetence.
The Economic and Financial Crimes Commission (EFCC) has supported the movement to redesign the currency, However.
Abdulrasheed Bawa, executive chairman of the EFCC, called the action by the top bank "a well-considered and timely response" to the problems with currency management, which have harmed the nation's monetary policy and security requirements.
Bawa, who expressed his views in a statement by the anti-graft agency's spokesperson, Wilson Uwujaren, claimed that the EFCC, CBN, and other financial sector authorities had recently collaborated closely to establish the best way to stabilize the nation's monetary policy environment.
“It is heart-warming that CBN has demonstrated courage in taking this bold decision, which I believe will bring sanity to the currency management situation in Nigeria,” Bawa said.
To facilitate the smooth withdrawal of the old currencies, he urged operators in the financial services sector, particularly Deposit Money Banks and Bureau De Change operators, to follow the rules set forth by the CBN.
However, Bawa issued a warning that the EFCC will watch the procedure to prevent the exercise from being undermined by fraudulent players, currency speculators, and their allies within the BDCs.
He also charged banks to be alive to their reporting obligations and not assist unscrupulous customers in laundering suspected proceeds of crimes through their system.
The head of the EFCC emphasized that the goals that CBN aimed to accomplish with the redesign and reissue of the naira notes were in line with those of the Money Laundering Prevention Prohibition Act 2022, which makes carrying out cash transactions beyond a specific threshold illegal.
According to Section 2 (1) of the Money Laundering Act 2022, “no person or body corporate shall, except in a transaction through a financial institution, make or accept cash payment of a sum exceeding— (a) N5,000,000 or its equivalent, in the case of an individual ; or (b) N10,000,000 or its equivalent, in the case of a body corporate.
“It is therefore pertinent to issue this stern warning to BDC operators to be wary of currency hoarders who would attempt to seize this opportunity to offload the currencies they had illegally stashed away.”
Source: The Guardian