By Victor Ogiemwonyi
Ever since that announcement of Wednesday, October 26, 2022, the debate has been about the intention of the Central Bank of Nigeria (CBN) to redesign, reprint and distribute the three highest denominations of Nigeria’s national currency- the Naira, while calling in the old notes for cancellation.
The debate, essentially, has been about whether this is a good or bad policy. Like anything else, every good thing, has a bad side.
All we have heard from critics is that it is badly timed. So what is the right timing? Whatever is good, is good, no matter the time.
Now let’s look at the reasons the CBN adduced for wanting to do this now.
First, that it has lost control of the currency in circulation, with 80% of the legal tender in circulation outside the banking system, a situation that should, ordinarily, alarm anyone who cares about a sound monetary system for Nigeria.
The evidence is there for all to see. People now go to the streets to toss money out for passers-by to pick. This is not the monies sprayed in parties. Anyone who works for his/her money knows this cannot be real money. They are more likely to be counterfeit or proceeds of crime. Therefore, getting a larger percentage of this currency said to be outside the banking system is a necessary step.
The CBN also says it wants to reduce cash available for ransom payments and terrorism financing. This is also a good reason for undertaking this project. No one can deny that recent kidnapping payments are possible, because cash is available to make such huge payments.
The CBN also says it wants to check cash counterfeiting that is now more frequent due to improvements in printing technology, added to the burden of the old notes that should have long been replaced.
The biggest reason for letting this policy happen now, I believe, is the need to check spiraling inflation. Our inflation has now gone beyond hiking interest rates, and any more interest rate hikes will destroy the little growth the economy has recorded so far. The slow Naira velocity that will follow the currency change in the next three quarters will slow down the economy and bring about some kind of mild recession. Therefore, we need now to slow inflation in our economy. We also must note that each time the Dollar rate goes up, it imports inflation into our economy.
All the reasons given by the CBN Governor, Godwin Emefiele, are enough reasons to embark on the current project, just as we can also add that corruption will be impacted, as payments of bribe, particularly in the political arena is cash based. A good reason, why it should be now, before next year’s general elections.
The two frequently sighted negative consequence of this policy are that the timing is bad, and it will force hoarders of cash to exchange their cash for the US Dollars, British Pounds and the Euro, which will further devalue the Naira as we are seeing already. The timing issue is neither here, nor there.
In fact, the timing in my considered opinion, is perfect if the policy is implemented to plan. The widow for depositing the old notes into the banking system, will ensure that some of the illegally hoarded Naira notes, will be stranded and an adjustment by the coming new Administration will not be possible to change this policy direction.
Those who fear the country maybe returning to the 1984 confusion- the last time such an exercise was carried out should realize that more people have their money in the banks now, when compared to the situation then, especially with the widespread use of Automated Teller Machine cards and the various channels that have eased access to cash at any time of the day.
We have something to learn from the recent experience of India where a similar policy was implemented, leading initially to chaos, essentially because of the large rural population like in our case. However, everything soon settled, with new studies showing that despite the initial suffering that followed the exercise in the rural areas, the policy was mostly successful.
We will need to learn from the Indian experience, by first mounting a strong campaign that would help reduce the suffering, especially among rural dwellers among whom financial inclusion is still far from the ideal, because there are no banks nearby.
However, thank God for the multiplicity of Point of Sales and agency banking outlets now in place. We must offer the necessary information on how these channels can help the rural dwellers get their cash to the banking halls for exchange.
The security Agencies should also be vigilant at this time given the possibility of dumping the old notes on farmers in the rural areas to purchase commodities will be prevalent. There is nothing wrong with this, if the intention is good, but there are foreigners amongst us who have always used this as a money laundering scheme. This time, we need to be vigilant.
Now for those changing their Naira cash to the US Dollars and other major currencies, leading to the rapid depreciation of the Naira that we see today, that should not worry us much, we have since lost the battle to defend the Naira.
The monetary authorities have been reckless, in using our US Dollar reserves to defend the Naira. It was always going to be a lost battle, because the only way to defend the Naira, was to have increased the productivity level of our economy. Having multiple exchange rates have not helped.
In fact, it is the source of the biggest fraud and corruption in Nigeria to date. Those who allocate FX on whatever criterial have a lot to answer for, anyone who receives US Dollar allocation at the official rate and knows that the actual value is twice what he paid for it, will be a fool not to do the rational thing- profit from it, whether a manufacturer, importer or Bureau de change operator. Everyone is in on it, the prolonged racket for the Bureau De Change regime was possible, because many of the owners of the outfits were rumoured to be CBN employees and political bigwigs. The waste of billions in defending the Naira, was a willful damage that could have been avoided.
Anyone who reads my views on this already knows that I have always favored floating the Naira. The fear of what will happen, if the Naira is floated, is now with us. We feared it will reach N200/US$. It did… then whether it will reach N400/US$and again, it did.
We are now looking at N1000/US$, it will, if we don’t do the needful.
Let the Naira be floated now and let it, find its value. The markets always do a better job of allocating scares resources. He who is down, fears no fall. There is nothing more to fear about the falling value of the Naira.
We are at the point now where floating the Naira will actually benefit us after many missed opportunities, and floating the Naira at the end of this year, will complete the needed reforms. It will end all the currency speculation, promote manufacturing and exports in our economy. Imports will reasonably fall and that will help our Balance of payments and rev our economy in ways we have never before seen.
Foreign investments will also come in, to take advantage of the lower value of the Naira.
Finally, to make this reforms complete, the CBN should ban all Dollar cash transactions in Nigeria. Domiciliary Accounts should be the allowed as the medium of personal FX transactions. All banks should be encouraged to get their customers to open these accounts and operate them freely.
At first, not more than six weeks should be given to let all those with US$ cash deposit such into their various domiciliary accounts and should be allowed to operate freely as it was in 2015 before the disastrous decision to tamper with it. It was said at the time, that Nigerian bank’s domiciliary account balances reached $26bn, and because of its distributive nature, it was efficient. This was another Dollar Reserve that supported the economy apart from the CBN FX reserve balances.
The decision to tamper with domiciliary account balances was a disaster, just when Nigerians were getting used to enjoying this phenomenon, someone decided that it was the cause of corruption and targeted it. Nigerians who were using their Domiciliary Account Balances to meet their personal FX needs, suddenly got a rude shock. By the time the error was realized, the balances have vanished, bringing back pressure on the CBN to fund personal education and medical healthcare abroad, as well as travels generally.
The CBN seems to have woken up from its slumber. This latest policy initiative has its merits, which is why I believe the apex bank should be allowed to complete the necessary reforms that will put the economy back in place. We have no other alternative right now.
- Ogiemwonyi, a retired Investment Banker, writes from Ikoyi, Lagos, Nigeria.