The Central Bank of Nigeria (CBN) redesigns the Naira as a currency

On March 26, 2023, at about 19:18:37 PM, The Central Bank of Nigeria (CBN) redesigns the Naira as a currency was updated.

Mrs Aisha Ahmad (left), Deputy Governor, Financial System Stability (FSS), Central Bank of Nigeria (CBN), Governor, Central Bank of Nigeria (CBN), Godwin Emefiele, and Deputy Governor, Corporate Services, Edward Lametek Adamu, during a press conference on the issuance of new naira banknotes at the CBN head office in Abuja... yesterday.

• Optimistic step toward reining in inflation, ransom payment, and increasing the value of the naira • Announcement interpreted as beginning black money mop up.

• Ashogbo warns that the decision could spark an asset bubble; Yusuf says the exercise has no monetary policy implications; the naira reacts immediately, falling to N765/$ in the Lagos parallel market; experts are concerned about the timeline, and the NFIU is urged to monitor large deposits.

• Northern group wants Emefiele fired and threatens regional protests.

• The EFCC supports the move but warns against sabotage.

The Central Bank of Nigeria (CBN) announced the introduction of newly redesigned N200, N500, and N1,000 banknotes yesterday, signalling the start of a larger currency census and the eradication of black money.

At a virtual press conference, CBN Governor Godwin Emefiele expressed concern about large amounts of money outside the banking system, which are estimated to account for 80% of the total money in circulation.

Emefiele revealed that as of September 2022, N2.73 trillion of the N3.23 trillion in circulation was not in commercial bank vaults.

He also claimed that the value of the currency in circulation has more than doubled since 2015, rising from N1.46 trillion in December 2015 to N3.23 trillion in September 2022.

He went on to say that the decision was driven by the need to address the "daunting challenges" of currency management and combat currency counterfeiting.

"These (currency management) challenges primarily include significant hoarding of banknotes by members of the public, with statistics indicating that more than 80% of currency in circulation is outside the vaults of commercial banks; a worsening shortage of clean and fit banknotes, with the attendant negative perception of the CBN and increased risk to financial stability; and an increasing ease and risk of counterfeiting, as evidenced by several security reports."

But, beneath the surface of currency management issues, experts say the move is part of a larger effort to rein in excessive election spending and clean up black money in the system.

Indeed, the FX market reacted sharply to the decision, with the dollar gaining about N10 on the black market yesterday evening, reaching a new all-time high of about N765/$ in Lagos.

Some analysts, who had called for a currency audit to restore order to the foreign exchange market, praised the CBN's decision but criticized the timing.

Godwin Owoh, an applied economics professor and proponent of currency censuses as a check on ill-gotten money, believes this should have happened after the general elections because no country changes its banknotes a few months before a major election.

"That is the correct thing to do in order to save the naira."

The first thing I always recommend is currency redesign, but the timing is off. Nowhere else in the world does currency change six months before an election." According to Owoh, the implementation cannot be fair to all, especially given the CBN governor's reputation as a politician.

Individuals with large sums of money are likely to be asked to explain the source of their funds under money laundering and counter-terrorism laws, according to Owoh, and the government may hide behind due diligence requirements to deny members of the opposition party access to their funds.

He warned that a large number of people with cash holdings would find the informal forex market a safer and more convenient way to exchange money while avoiding the prying eyes of regulators and law enforcement.

Also speaking, investment expert Bode Ashogbo predicted that politicians and other politically exposed individuals would flood the market with naira in exchange for dollars. He predicted that the rush would exacerbate FX scarcity.

In the aftermath of increased panic and speculation, Ashogbon predicted that a dollar could surpass N1,000 to a dollar.

"Once demand heats up, we will see a significant adjustment in the FX rate." Normally, an increase in the value of the dollar relative to the naira should increase supply. However, supply appears to be static because we are not earning much foreign currency. That implies that the naira will continue to fall," he predicted.

A major ramification of the decision could be an asset price bubble, as black money is expected to flow into assets such as equities and real estate in the coming weeks.

Former President of the Chartered Institute of Bankers of Nigeria (CIBN), Uche Olowo, described the decision as a welcome development, but suggested that policies be designed to maximize the benefits of the new naira notes.

According to him, if close to 85% of the currency is held outside of banks, it will continue to drive inflation, and no monetary policy will be effective in reducing such excessive liquidity.

"I believe the CBN is attempting to use every tool at its disposal to control inflation and excess liquidity in the system." They used the CRR to reduce excess liquidity, but the policy's effectiveness is unknown. That means there is a hoarding situation.

According to him, if close to 85% of the currency is held outside of banks, it will continue to drive inflation, and no monetary policy will be effective in reducing such excessive liquidity.

"I believe the CBN is attempting to use every tool at its disposal to control inflation and excess liquidity in the system."

They used the CRR to reduce excess liquidity, but the policy's effectiveness is unknown. That means there is a currency hoarding going on.

"If approximately 85% of currency is outside the bank, no policy initiative to curb excessive liquidity will be effective."

Counterfeiting, once again, is hazardous to any system. As a result, the decision is a positive step in the right direction.

On the cost of producing the new notes, he stated that with 85 percent of naira notes already out of circulation, combined with cashless initiatives, the amount to be printed would be minimal, lowering the overall cost of printing more notes.

Prof. Uche Uwaleke believes the CBN's decision to replace some naira denominations with new ones will benefit the economy in the medium to long term. Uwaleke, a capital market professor at Nasarawa State University in Lafia, said that while the measure does not amount to the demonetization of large currency notes, which is often carried out by Central Banks to combat black money and corruption, it will go a long way toward ensuring that a large number of naira notes circulating outside banks are crowded in.

He, however, expressed concern about the January 31, 2023 deadline, saying, "I believe the deadline is too short in light of the number of naira denominations involved, ranging from N200 to N1,000." CBN may think about extending the deadline.'

According to the financial expert, the CBN's move could result in large deposits in banks, implying that banks will have more money to lend, potentially lowering interest rates.

Dr. Muda Yusuf, an economist and CEO of the Centre for the Promotion of Private Enterprise (CPPE), has criticized the move, claiming that it has no monetary policy significance. He was concerned that the relocation would result in massive logistics costs and avoidable disruptions for small businesses, the majority of which are in the informal sector.

According to him, the cost of such an action would be exorbitant and disproportionate to the benefits advanced by CBN.

Noting that the redesign was one intervention the country could do without, he stated that the CBN's attention should be focused on more pressing issues.

"It's difficult to see how this currency redesign idea provides a compelling value proposition."

We have liquidity issues in the foreign exchange market, a depreciating currency, a recent Moody's downgrade of Nigeria, soaring inflation, and many other issues.

"The CBN should spare citizens and the economy the agony of a currency redesign." It's an unnecessary distraction."

Adewale Oyerinde, Director-General of the Nigeria Employers Consultative Association (NECA), stated that at a time when the naira is in free fall and inflation is out of control, all efforts should be directed toward strengthening the naira rather than redesigning it. While issuing new notes is desirable, he is concerned about what the currency redesign initiative will achieve.

"What economic challenge will it solve?" he inquired. Will it cause the naira to appreciate significantly or make foreign exchange available to the real sector?'

Prof. Bankole Sodipo, a Senior Advocate of Nigeria (SAN), expressed shock at the news. "Printing the naira is an expensive venture," — he says. Designing and printing are both costly endeavors. I've done consulting work for the Nigerian Security, Printing, and Minting Company. I'm not sure how this will handle inflation."

He claims that the announcement has already exacerbated the naira's problems. "Pound Sterling, which was falling against every other currency last week and was trading at N840, is now trading at N890 and is expected to rise further." The reason for this is that some people are rushing to exchange naira for pounds. Also, I don't think it's appropriate to do something drastic on the eve of an election."

Yesterday, Eze Onyekpere, a lawyer and the lead director of the Centre for Social Justice (CSJ), and Dr. Sam Amadi, Director of the Abuja School of Social and Political Thoughts, described the decision as having no economic value for the country.

Onyekpere stated that the decision is a distraction to keep the CBN from fulfilling its statutory obligations, noting that such action will deplete the country's dwindling reserves.

"It's not going to add any value, the CBN's primary responsibility is price stability, it's not going to add any value to the economy in terms of reducing inflation, it's not going to add to the value of the naira vis-a-vis other international currencies, it's not going to add to the foreign exchange and reserves," he said. It's a complete waste of time, and it serves only to distract from the failure to perform statutory obligations."

According to Amadi, such measures may exacerbate the people's already dire economic situation.

"What we need today is to figure out how to establish better measures to cushion the shocks of a global economic crisis and a weak economy." Increased earnings for the people, whether through governmental spending or ensuring people have access to resources, are critical."

Emefiele should be fired, according to the Concerned Northern Forum. According to the organization's spokesperson, Abdulsalam Moh'd Kazeem, "the group demands that such preparations be halted and individuals behind the project be prosecuted, failing which there would be major protests across the Northern area and Federal Capital Territory."

According to Kazeem, the CBN's decision is nothing more than ineptitude, given that Nigeria's economy is in decline and the naira has devalued to its nadir.
However, the Economic and Financial Crimes Commission (EFCC) has backed the initiative to restructure the currency. Abdulrasheed Bawa, Executive Chairman of the EFCC, welcomed the decision by the apex bank as "a well-considered and timely solution" to the issues of currency management, which has badly impacted the country's monetary policy and security imperatives.

Bawa, who stated his position in a statement issued by the anti-graft agency's spokesperson, Wilson Uwujaren, stated that the EFCC, CBN, and other financial sector regulators have recently worked closely to determine how best to stabilize the country's monetary policy environment.

"It is heartening that the CBN has shown courage in making this bold decision, which I believe will bring sanity to Nigeria's currency management situation," Bawa said.

He urged financial service providers, particularly deposit money banks and bureau de change operators, to follow CBN guidelines to ensure the smooth withdrawal of old currencies.
Bawa, on the other hand, warned that the EFCC would monitor the process to ensure that unscrupulous players and currency speculators, as well as their cohorts among the BDCs, do not undermine it.

He also warned banks to be mindful of their reporting obligations and to refrain from assisting unscrupulous customers in laundering suspected criminal proceeds through their system.

The EFCC chief noted that the goals of the CBN's redesign and reissue of naira notes aligned with the goals of the Money Laundering Prevention Prohibition Act 2022, which criminalizes the conduct of cash transactions above a certain threshold.
Section 2 (1) of the Money Laundering Act 2022 states that "no person or body corporate shall, except in a transaction through a financial institution, make or accept cash payment of a sum exceeding—(a) N5,000,000 or its equivalent in the case of an individual; or (b) N10,000,000 or its equivalent in the case of a body corporate."

"It is therefore necessary to issue this stern warning to BDC operators to be wary of currency hoarders who may try to take advantage of this opportunity to offload the currencies they have illegally stashed away."