Short transition period of naira redesign may affect economic activity, World Bank warns

The World Bank has warned that the timing and short transition period of the naira redesign policy may have negative impacts on economic activity.

The international financial organisation issued the warning in its latest Nigeria development update (NDU) report titled ‘Nigeria’s choice‘.

On Thursday, commercial banks began dispensing the redesigned N200, N500 and N1,000 notes to customers across the country.

TheCable reported that the new naira notes were dispensed over-the-counter alongside the old ones in most banks.

But the old notes will cease to be legal tender from January 31, 2023, according to Central Bank of Nigeria (CBN).

Commenting on the monetary policy, the World Bank, in its report, said the phasing out of existing naira notes over a short time period may add to the challenges of poor households and small-scale businesses.

“The CBN announced on October 26, 2022, that it planned to redesign, produce, and circulate new series of Nigerian naira (N) 200, 500 and 1,000 notes (equivalent to roughly US$0.5, US$1, and US$2 at the official rate). The three notes are the highest denominations out of the eight legal tender notes in Nigeria,” the report reads.

“Following the launch of the new designs on November 23, 2022, the new currency notes are to be circulated from December 15, 2022, with both the new and existing notes considered legal tender until January 31, 2023. Thereafter, only the new notes will be legal tender.

“Bank charges on cash deposits have been suspended to facilitate the transition.

“While periodic currency redesigns are normal internationally and the naira does appear to be due for it, since naira notes have not been redesigned for two decades, the timing of and short transition period for this demonetisation may have negative impacts on economic activity, in particular for the poorest households.

“International experience suggests that rapid demonetisations can generate significant short-term costs, with small-scale businesses, and poor and vulnerable households, potentially being particularly affected due to being liquidity-constrained and heavily reliant on day-to-day cash transactions.

“At present, households and firms already face elevated financial pressures from prolonged, high inflation, recently compounded by external food and fuel price shocks, and the severe floods, and phasing out existing naira notes over a short time period may add to their challenges.”