AACS Fortnightly
(Mondays)
7th November 2022

From the Chairman’s Desk,

The Currency Redesign Policy – The Good & The Ugly 

The Central Bank of Nigeria (CBN) on the 26th of October announced a currency policy aimed at redesigning the ₦200, ₦500 & ₦1000 notes within a 90 day period, ending on the 31st of January 2023. At AACS, we believe it is a good and necessary policy at this point for a lot of critical reasons, not limited to:

a. It mops up the huge amount of cash that is out of the banking system, currently estimated at ₦2.73trn or about 85% of the total cash in circulation. This is totally bad for monetary stability 

b. This policy rids the economy of a lot of ‘black money’, and helps to improve the health of the system and strengthen security, as regulators can monitor funds flow better

c. It deepens financial inclusion by getting most people into the banking system, a sine qua non to improving credit in the system, and expanding productive activities

d. It will usher improved cashless policy, and tighten the money supply, which combats inflation

As good as the policy will be in the long run, there are short term unintended ugly consequences, chief of which is now manifesting in the depreciating value of the naira, as the unbanked excess cash in the system chases scarce dollars. Parallel markets at the weekend hovered around ₦820 and ₦850, close to a 20% depreciation within one week, and the prognosis is that this would continue in the short run.

The CBN could have managed the policy better by reducing the time frame of the old notes exchange from 90 to 45 days for all amounts in excess of ₦500k, to ensure that black money does not destabilise the polity too much, and allow exchange of retail amounts of less than ₦500k to run for 120 days. This way, retail cash in the hands of millions of Nigerians who do not have easy access to bank accounts or facilities, will have more time to get into the system organically. The CBN would also need to come up with more measures to tighten FX deposits into bank accounts, and penalise attempts at ‘dollarising‘ the economy if it must check the indiscriminate hoarding of dollars that hurts the value of the naira so much.

In all, AACS advises that the public in need of FX should hold off for as much as possible, because the present exchange rates are not driven by any real economic activity, but rather, it’s the scores of billions of naira not in the banking system trying to beat the currency policy. It is not sustainable, and clearly not real in value terms.

Falil Ayo Abina

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