For God’s sake, who needs eNaira?!

After all, the Naira as is, is already quite digital, isn’t it? Nigeria does have one of the most sophisticated financial systems in the world – especially in terms of payment systems. This is probably necessitated by the fact that because of our low per capita income and the informal structure of the economy, so many Nigerians altogether have to make millions of small transfers daily, especially to dependants. In developed countries, this is not the case. A typical worker abroad has all the debits – for rent or mortgage, insurance, taxes, tenement, loans and so on, set up such that they hit their account by month-end and they get by on what is left.

Our economy – perhaps like many other African economies – is structurally different from what obtains in those places. Therefore, we saw quite a bit of innovations in our financial sector that may not be deemed particularly necessary elsewhere. Some of us economists criticize this fact that the financial sector in Nigeria is running ahead of everyone else. We call it financialization, as different from what we actually need; industrialization. We also see that quirk manifest in the yearly declaration of superlative profits by our banks, even in a year like 2020 when half the time businesses where shut, and in the face of expanding poverty in the land.

So, who needs an eNaira?  Why is it necessary?  Is it going to solve the problem of inflation, and corruption, and unemployment, and everything that ails the economy? Will it lead to a revaluation of the Naira which seems to be in a death spiral?  Is the idea just a further ‘financialization’ of the economy?  Or is this not just another gimmick to embezzle funds at the CBN? All these and more are the questions that Nigerians are asking. 

I think the eNaira is very useful, timely, and perhaps one of the smartest things that our central bank has been able to pull off in a while, even though it will certainly not solve every problem that ails our economy. I will therefore attempt to break down some of its likely uses below, even though I must admit that the whole idea of such hyper-digital currency, is still nouvelle to everyone in the world. In other words, a number of central banks around the world are taking the initiative, and 90% of them are thinking in this direction, but certainly mistakes will be made, lessons will be learnt, before the concept stabilizes. The future of currency is digital. And the future, is here. Let’s look at the critical questions:

What is the eNaira?

The eNaira is a Central Bank Digital Currency (CBDC). Though the Naira was fairly digital before (as you can transfer value from your phone or laptop once you are connected to the internet, and via USSD without internet), this is a digital currency on fire! However, unlike other digital currencies (cryptocurrencies), the CBDC is backed by the sovereign – Nigeria – and is tied to the Naira (fiat currency).  If we need to compare it to a cryptocurrency, we can compare to say USDT (a stable currency tied to the US Dollar, called Tether).

What is this idea of being backed by the Naira?

Well, this means that the eNaira and the fiat Naira will not diverge in value. The two types of currency will be same value at all times. Also, that the currency is backed by the government through the CBN is comfort, because people know that the CBN cannot default on its obligations. Investments with the central bank of a country is deemed to be the safest kind that anyone could undertake.  Ordinarily, cryptocurrencies have some issues. People die, and if no one knows the key (their pin), their money is lost forever. People save their keys on devices. Devices get stolen or corrupted and their money is gone if they have no backups anywhere. Meanwhile people are scared backing up their keys anywhere because if anyone gets access to it, they can be wiped out. All sorts of issues occur because the idea is still developing. We have even heard of situations where crypto exchanges have collapsed (like Quadriga in Canada), and those who left money on the table for the exchange to help manage, were wiped out. And with cryptocurrencies, there is no arbiter; no one to run to; no one to guarantee the transactions; no deposit insurance. Nothing. It’s usually a case of ‘who send you’? 

Where did the idea come from?

Whereas the central banks will hardly mention this, it is my strong belief that this is a reaction by central banks to the idea of cryptocurrencies. What started circa 2006/7 as a crazy idea by some crazy folks who were rather miffed by how central banks especially in developed countries bailed out investment and commercial bankers who had used people’s deposits to gamble on arcane derivative products like Credit Default Swaps, Collateralized Debt Obligations and such like, had become a major issue, with market valuation of more than $1 trillion. There are suddenly more than 8,000 cryptocurrencies around the world. It has become a swarm and no one knew which crazy bee among the lot could sting the system in the eye at any point in time. The proponents of cryptocurrencies actually started out with the radical idea of taking down what we know as the financial system today, for past infractions – including for arbitrarily printing currencies or hiking interest rates thereby devaluing the money in people’s pockets and accounts, in the name of monetary policy management. They call their plan ‘decentralized’ banking or finance (Defi), which means ‘down with Central Banks!’. The only thing they didn’t reckon with was that they will need the central banks, investment and commercial banks to achieve this laudable feat.  But will the traditional banks and central banks allow them?  The central banks then got wise, and decided to piggyback on their idea, to save themselves, the banking sector, and the government. Why? The day you take down central banks, you will have taken down every bank because there’ll be nobody to manage currencies or maintain sanity or fidelity in the system. Then how do governments get their taxes? In what currency? Anarchy is the end point.  This move by the central banks around the world is to prevent themselves from becoming so weakened and made vulnerable by the crypto warriors. 

In the case of eNaira particularly, Nigeria showed up as the second highest trading nation in cryptocurrency as at April 2021, allegedly. We are talking of a country with barely $2,000 in per capita income, and the lowest in the world in terms of economic complexity. In other words, the most unsophisticated nation in the world in terms of what we produce. Could it be corruption and crime money driving this… in the main? Therefore, it was important for the CBN to have a response. If the CBN was sitting on its hands and whining, that is when we should be concerned.

What problem will it solve?

For one, the future of everything is digital. Then future of man himself, is digital. The world has stopped talking of the internet of things, now it is internet of EVERYTHING. If the future of currency is digital – and indeed these young Generation Z kids (born between year 2000 and today), and raised by their smartphones only understand digital things – then Nigeria had better get on board and fast. So, the earlier we get on this new reality, the better. But which other problem can it solve? Inflation? Ehmmmm, long shot. But eNaira can help. How? For one, the more successful eNaira becomes, the less money the CBN will spend printing new money. This should reduce the CBN’s budget. However, if the e-Naira is successful, then the world will have a little more respect for our currency, and the Naira may appreciate a bit. If the Naira appreciates, then inflation will slow down, because a considerable part of the inflation we suffer today is as a result of imported goods, and the adjustments that local producers are making, in the fear of further devaluation. You see, devaluation of currency does not only mean that imported goods will cost more. In fact, in our economy, locally-produced goods prices leap much higher. Visit any local store or the market and see what has happened to prices in the last one or two years! Nigerians are really struggling to survive. 

So, eNaira can help us in getting a firmer naira. And there is one other reason for that. If it is what they say it will be, then the e-Naira wallet is sitting in CBN’s books. This means that the e-Naira can, subject to limits, allow Naira to be more convertible. What does this mean? You see, about 35 years ago, when you travel to London, you don’t need to be chasing pounds and dollars around before you go. You just go. When you get to London you change some naira directly into pounds right at the airport, or you go to Oxford Street and make the change. Then we started losing it. They kept devaluing. And no one was sure what the value of naira will be the next day, so people stopped accepting the naira. But since e-Naira is a central bank currency, sitting right on CBN systems, we should be able to convert eNaira to any other currency in a jiffy, and get transactions cleared without the rigmarole of going to a commercial bank. This is a great advantage, isn’t it?  Surely the CBN will set limits. Equally, the CBN hopes to use this platform to ease inflow of foreign currency into the country, by enabling Nigerians to sidestep the usually punitive charges taken by money transfer organizations. Companies like Western Union and Moneygram have always taken delight in slamming transactions heading to Nigeria with high fees. Now remittances could be easier… but you will get official rates. The black market for foreign currency will still exist, but this kind of reform could be the shock treatment that reduces the spread to something negligible. 

Which other problem will it solve?

So, it’s really looking like if some Nigerians and their collaborators don’t spoil this with the usual waywardness, cynicism, lack of patriotism, predilection to defraud, or deception from high places, we may be on to something great with this e-Naira. We may be buying a new lease of life for the currency and the economy. Already, as the CBN stopped selling millions of US Dollars to thousands of BDCs every week, our foreign reserves have leaped by about $4 billion in just a couple of months. We are talking of $40 billion now. That’s great news. Even on the streets, the dollar frenzy has tapered. Smart Alecs have probably found other vocations. We knew they were just bragging and trying to tip this country over so that they can pick up the pieces. When last I checked, the Mallams will not buy dollar at more than N550, with prospects of further strengthening.

The Central Bank of Nigeria also hopes to use this eNaira for better monetary policy management. For every eNaira created, that is one Naira more in the direct control of the CBN. There will therefore be a better oversight over Money Supply. The CBN – like their brother central banks around the world – believes that this is a great tool to reach out to citizens in periods of crisis by being able to make direct transfers to citizens where necessary. Of course, the Bank has to mind operational risks lest some smart guys begin to play games with their system.  Citizens must also continue to alert the CBN to wherever lapses may occur. I have also heard it said that this is like the CBN taking on the functions of commercial banks. Well, it is the sign of the times. It is the evolution of banking and finance. The banks are smart enough to see, that the central banks are only trying to save the entire traditional banking system as we know it from cataclysm. 

I will urge Nigerians to be less cynical but more circumspect. Let us see if this initiative will deliver. Let us do away with all that negative view of the country. Truly, leaders have failed us. But we need not fail ourselves and enter into a spiral of grief. Nothing is bad about this country. Billions of people around the world would wish they had what we have all year round.  We have a country to save. And a currency too. Let’s get on with it.

So, yes. We do need an eNaira.