‘Aggressive spending, worsening FX crisis’ — how CBN’s naira redesign will affect economy

The Central Bank of Nigeria (CBN), on Wednesday, announced that it redesigned some new naira notes.

Speaking on the development, Godwin Emefiele, CBN governor, said the circulation of the new designs begins on December 15, 2022. 

According to Emefiele, the new notes include N200, N500, and N1000.

The CBN governor said the decision was due to persisting concerns with the management of the current series of banknotes, and currency in circulation — particularly those outside the banking system in Nigeria.

He said in recent times, currency management has faced several daunting challenges that have continued to grow in scale and sophistication with attendant and unintended consequences for the integrity of both the CBN and the country.

According to Emefiele, these challenges primarily include significant hoarding of banknotes by members of the public; 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.

He added that recent development in photographic technology and advancements in printing devices have made counterfeiting relatively easier.

In this piece, TheCable brings highlights the implications of CBN’s decision.

BAD TIDINGS FOR ‘MONEY STACKERS’

With the new development, Emefiele said by January 31, 2023, the current series of naira bills are expected to be phased out. 

Therefore, he advised Nigerians to take old notes to banks to enable them to withdraw the new banknotes once circulation begins.

Emefiele said charges for cash deposits are suspended with immediate effect to facilitate the phasing out of the current naira notes.

The apex bank directed deposit money banks (DMBs) to ensure cash returned/paid into their accounts attracted zero charges.

Speaking on the development, Temitope Omosuyi, investment strategist, Afrinvest Securities Ltd, said the move would hugely discourage the culture of illicit money stacking.

“For people that have illicit money stacks in the house, they have to bring them out,” he said.

“Before now, they may have been using illegal means to take them out of the financial system, but now they have to bring all of that money out to the commercial bank so as to convert them to the new currency.”

TIGHTEN GRIP ON MONEY SUPPLY

While announcing the naira notes redesigns, Emefiele lamented that over 80 percent of currency in circulation was outside the vaults of commercial banks even as the issue “takes money supply out of the hands of the central bank”.

However, with the development, the CBN can circulate the new notes, controlling the level of liquidity in the system for monetary stability.

When the CBN regains control over money supply, Emefiele said the soaring inflation, which reached 20.77 percent in September 2022, might be controlled.

“As at September 2022, we had N3.23 trillion in circulation. Out of that, N2.73 is outside the vaults of the banks,” the CBN governor said.

“First of all, what we want to do is mop up all these N3.32 trillion back into the CBN so we can take control of money supply again, and begin to see how this will help rein in inflation. No doubt, we believe it has positive impact on inflation.”

According to Forbes, one significant monetary way to curb inflation is to control money supply in the economy.

But Omosuyi believes the CBN’s directive might trigger aggressive spending by people stacking money, which in turn, could spur inflation in the short term.

“A number of people have this money stacked in their house so they want to take it out to spend,” he said.

He said this set of people could invest in real estate or even other asset classes — which will push prices up — especially if they do not want to put money in financial institutions.

“Although, in the medium to long term (three to six months), depending on the timing, it will ultimately enhance monetary policy,” he said, adding that it would help CBN manage currency efficiently.

TO IMPACT VALUE OF NAIRA

Before the old currency is completely phased out, a genuine question is how the transition would help stabilise the foreign exchange (FX) market.

This is even as the country is currently faced with FX crisis, affecting key sectors in the country.

As more people would consider disposing off the old notes, increased dollar purchases will be inevitable in the coming days, further exacerbating the naira free fall.

It, however, remains to be seen if currency sellers will still accept cash from buyers rather than bank transfers.

More likely, they will now insist on electronic transfers of naira payments for FX purchase.

Emefiele said the change of currency notes would influence the value of the naira, but did not give further details.

“We do not want to easily admit that this will just happen but we suspect that this would happen and that, it will possibly impact the value of the naira because we do not want to do any speculation. We want to dwell in reality,” he said.

However, Omosuyi argues that the FX crisis will worsen, saying “if you put more pressure on the dollars because you quickly want to exchange your money to keep it in dollars, that’s more pressure on the naira”.

CONCERNS ON COST OF PRINTING NAIRA NOTES

Mada Yusuf, chief executive officer (CEO), Centre for the Promotion of Private Enterprise (CPPE), described the CBN’s decision as committing scarce resources to a venture that should currently not be prioritised.

He said the cost of printing the new series of banknotes would be an additional burden on the country’s fiscal strength.

CBN had said it spent N58.618 billion to print naira notes, valued at N1.06 trillion in 2020.

“The cost of such an action would be outrageous and disproportionate compared to the expected benefits advanced by the CBN,” Yusuf said.

“At a time when the government is grappling with high fiscal deficit, debt crisis, severe revenue crisis and underfunding of many government projects and programmes, it is most inappropriate to embark on such a profligate exercise.

“Currency as a percentage of money supply is less than seven percent. The exercise, therefore, has no monetary policy significance.”

He added that there are more urgent issues demanding the attention of the CBN.

“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,” he said.