“Nigeria must go cashless. It is a global policy, checking insecurity and fighting corruption”: Central Bank of Nigeria Governor Godwin Emefiele
Like India in 2016, Nigeria is undergoing the shock therapy of demonetisation. Its central bank is withdrawing high-denomination notes from circulation and replacing them (or at least supposed to be replacing them) with newly designed ones. As in India, the result has been unmitigated chaos and economic pain for citizens and businesses.
As in India, the government and central bank have provided a laundry list of reasons for taking such a drastic step, many of which seem, on paper, plausible and laudable. They include combating counterfeiting, bringing more cash into the formal economy (by forcing people to deposit their old notes at the bank), curbing money laundering and terrorism financing, increasing tax revenues and, crucially, preventing vote buying in the upcoming general elections (Feb 25).
But there is another objective at play which, I believe, supersedes all others: shrinking the amount of cash circulating in the country, with a view to accelerating Nigeria’s transition toward a cashless economy. Among its list of reasons for pursuing demonetisation, published in October, the Central Bank of Nigeria (CBN) itself said the redesign of the currency will “help deepen our drive to entrench a cashless economy as it will be complemented by increased minting of our eNaira,” Nigeria’s central bank digital currency (CBDC).
To help nudge transactions online, the central bank has limited cash withdrawals by an individual customer to 500,000 naira ($1090) a week, up from a 100,000 limit set on Dec. 6, and 5 million naira ($10,900) for a corporate customer, up from 500,000. It imposed a 3% processing fee on withdrawals above the limit by an individual customer and 5% for companies. But for many Nigerians, the challenge right now is getting hold of usable cash at all.
Amid the resulting chaos, central banks from around the world will presumably be watching on and taking notes. According to the Atlantic Council’s CBDC tracker, 114 countries, representing over 95 percent of global GDP, are exploring a CBDC.
“Nigeria Must Go Cashless”
Last week, the CBN Governor Godwin Emefiele said the central bank’s cashless policy was both necessary and part of a “global” policy (though it is unclear what he meant by the world “global,” whether relating to the whole world or encompassing the whole of something):
“Nigeria must go cashless. It is a global policy, checking insecurity and fighting corruption.”
The CBN’s “drive to entrench” a cashless economy, or at least a less-cash economy, dates back over a decade, and has so far been a dismal failure. Cash in circulation more than doubled between 2015 and 2022. As an op-ed in Premium Times notes, “there are no data to support the central bank’s claim that Nigeria is a cashless economy,” or even close to becoming one. “An economy in which 83% of your cash in circulation is not sitting in bank vaults cannot be cashless.”
That didn’t stop the CBN from becoming the world’s first central bank of a largish economy to begin issuing a central bank digital currency, or CBDC. In October 2021, it launched the eNaira, with the technical support of the International Monetary Fund. But the CBDC was a gargantuan flop. One year after its launch, just 0.5% of Nigerians had downloaded the eNaira app. Of those, only 8% are actually using the app, according to the IMF’s 2022 staff report. Despite the government’s and central bank’s marketing efforts, most people have preferred to continue using cash.
So what did the central bank do? It doubled down.
In October, it unveiled plans to replace all high-denomination cash bills in the economy. The CBN initially said the old notes would cease to be regarded as legal tender as of Jan 31, 2023. But as that date approached, the deadline was extended to February 10, with a grace period of seven days for old notes to be deposited in banks.
Then, on February 8, as the scale of the potential fallout was becoming clear, the Supreme Court issued an injunction ordering the Nigerian government to delay the cash swap and allow the continued use of old N200, N500 and N1,000 notes. But both President Muhammadu Buhari and the CBN have refused to comply. In a national broadcast last Thursday, Buhari admitted that the new currency policy is causing “difficulties”, but he only approved the continued use of the old N200 notes as legal tender.
Disappearing Half the Cash in Circulation
Nigeria’s central bank has so far done a stellar job of hoovering up the old high-denomination notes, with roughly 80% of the cash previously held in private now deposited with financial institutions, according to Emefiele. But it is not printing nearly enough cash to replenish the money supply. In other words, people are handing in their old money and getting no new money back.
On Monday (Feb 20), the Nigerian daily Punch reported, citing CBN documents, that the total amount of currency-in-circulation in the Nigerian economy had plunged 53% between October 31, 2022 (a few weeks before the CBN began implementing the naira redesign policy) and January 31, 2023, ten days before the final deadline, from N3.3 tillion to N1.54 trillion. This, in a country where physical cash accounted for 63% of point-of-sale (POS) transactions in 2022 — compared to an average of 44% across the Middle East and Africa.
As in India, the shock to the system has been brutal. While India’s demonetisation program was much more abrupt and unexpected, literally happening overnight, Nigeria’s macroeconomic health today is far weaker than India’s was in 2016.
Inflation is at a 16-year high while the naira is at its lowest point ever against the dollar. Public debt has more than doubled in the past five years. The crumbling naira, together with rising interest rates in the US and beyond, have also made it much harder for companies and the government to service their foreign-denominated debt. As if that were not enough, the country is also suffering nationwide fuel shortages despite being Africa’s largest oil producer.
The withdrawal of more than half of the country’s cash supply is sowing even more economic pain and hardship in a country where 63% of the population is poor and 33% unemployed. A piece published Saturday (Feb 18) in the Associated Press paints a vivid picture:
No one in Godgift Inemesit’s family of eight is sure when they will eat each day — except for her three kids, two of whom have malaria. She can’t pay for the drugs they need or feed the rest of her family regularly.
Like most Nigerians, the family’s savings are trapped in the bank. A changeover to redesigned currency has plunged Africa’s largest economy into crisis just ahead of a presidential election: There aren’t enough new banknotes in a country reliant on cash.
For Inemesit, 28, the shortage of cash means even basics like food and medicine are getting trimmed for her husband, mother, kids ages 4 to 8 and two other relatives. One recent afternoon, only the children had gotten bread and hot drinks.
“We usually eat three square meals, but now we eat once sometimes because there is no money to use,” Inemesit said in her house in Banana village, an overcrowded shanty town tucked in the southern corner of the Nigerian capital of Abuja.
“We were told to drop the old currency (notes) in the bank and that new one is coming,” she said. “But we don’t have the new currency and no old currency. Everything is just tough.”
A Small Price to Pay
Emefiele has hailed the cash swap as a success despite all the chaos and economic pain it has unleashed. For her part, Nigeria’s Finance Minister Zainab Ahmed said the “only sore point is the pain it has caused to citizens.”
That pain, of course, was all too predictable. In my December 9 article, “The Central Bank of Nigeria Just Gave a Whole New Meaning to the Term ‘Financial Repression,’” I noted that the CBN, like the Reserve Bank of India before it, was making a facile assumption that most people would transition quickly, smoothly and painlessly from cash to e-money, as if most people’s attachment to cash was little more than a lifestyle choice. All that’s needed, they think, is a little nudge in the right direction for people of all walks of lives and income levels to abandon cash and embrace digital payments.
The reality, as the piece in Premium Times notes, is that Nigeria is not nearly ready for such a transition, and “a more gradual approach is necessary. The country must first address the lack of access to digital payment methods, as well as the inadequate infrastructure and support systems necessary for a cashless economy.”
There is also a risk that the turmoil unleashed by the demonetisation program will spark a banking crisis, as Reuters reported last week:
Foreign exchange shortages faced by local Nigerian companies may threaten bank liquidity, while a devaluation of the naira precipitated by these shortages would weaken banks’ capital, ratings agency Moody’s said in a note on Thursday.
Banks have been providing trade finance to companies to cover the foreign exchange (FX) costs of imports, meaning they are on the hook if the companies fail to make the foreign currency payments, Moody’s said.
But there will, of course, be winners amid the wreckage. As I noted in December, for fintech companies, most of them foreign, opportunities will abound, as many in the middle classes begin using digital payment options more frequently, much as happened in India.* Lo and behold, on Feb 12 Bloomberg reported that Nigeria’s crisis was proving to be quite the boon for mobile-money “startups.” According to the Nigeria Interbank Settlement System, digital transactions increased by 55% in January alone, albeit from a very low base.
* Interestingly, six years after demonetisation India has seen huge growth in digital payments, particularly on its real-time, mobile-enabled system, the Unified Payments Interface (UPI). But at the same time cash in circulation has reached a record high. As Business Times reported in December, 2022, there is now 72% more cash in circulation than in early November, 2016, on the eve of India’s demonetisation.