The Central Bank of Nigeria Just Paused Its Demonetisation Program After Visiting Untold Damage on Nigeria’s Economy

Three months after the central bank launched demonetisation, economic conditions in Nigeria continue to deteriorate. Now, one of the country’s leading media organizations is calling for the arrest and prosecution of CBN’s governor.   

As readers know, Nigeria is the world’s first largish economy to launch a nationwide central bank digital currency, the so-called eNaira. So far, it has been a complete flop. One year in, just 0.5% of Nigerians had downloaded the eNaira app. Of those, only 8% were actually using it, according to the IMF’s 2022 staff report. So, the government and central bank doubled down on their strategy. In October, they unveiled plans to replace all high-denomination cash bills in the economy as well as restrict cash withdrawals. That, too, has been an unmitigated disaster.

This week, the Central Bank of Nigeria (CBN) finally postponed its demonetisation program, more than a week after the country’s Supreme Court ruled the program unconstitutional and more than a month after the Supreme Court called for it to be postponed due to the amount of chaos and hardship it was causing. In an editorial last Saturday, the online newspaper Premium Times called for the arrest of prosecution of CBN’s Governor Godwin Emefiele, arguing that the cash withdrawal limit imposed by the central bank is an infringement on the rights of the people.

“[M]ost have had to live with a frightening range of infringements since the banknotes swap policy came into effect,” the newspaper stated. “These have ranged from the economic (loss of earnings platforms across the economy’s informal sector), through the emotional (having to beg for cash from friends, family, neighbours and strangers to meet basic needs) to the conceptual (just struggling to make sense of the policy’s design, implementation and expected outcomes).”

Nigeria’s outgoing President Muhammadu Buhari is still yet to comment publicly on the Supreme Court’s ruling, prompting a stinging rebuke from the Nigerian Bar Association. The association’s president said in a statement this week:

“This is the greatest test or challenge to our constitutional democracy and the Executive cannot afford to disregard the ORDERS of the Supreme Court made for the benefit of the people that elected it to power. I therefore, on behalf of all Nigerians, call on the President to immediately direct compliance with the terms of the orders made by the Supreme Court in its judgement delivered on 3 March 2023″.

Unnecessary Hardship

The CBN began calling in old 200-, 500- and 1,000-naira notes in mid-December in a bid to mop up excess cash, rein in inflation, combat rising insecurity, curb vote buying and further “entrench” a cashless economy. But the central bank failed to print nearly enough new high-denomination notes to replace the old ones, leading to an acute shortage of cash in a still heavily cash-based economy. The result has been unnecessary hardship for millions of Nigerian citizens, countless business closures and significant all-round damage to the country’s already weak economy.

Nigeria’s nominal GDP could decline by as much as 7.6% in the first quarter, according to KPMG Nigeria Chief Economist Yemi Kale, the nation’s former statistician-general. Last Sunday (March 12), the Center for the Promotion of Private Enterprise [CPPE] said the cash shortages have not only stalled economic activity in the country but have become a major risk to the livelihoods of Nigerians:

“Nigerians have not been this traumatized in recent history. The economy is gradually grinding to a halt because of the collapse of payment systems across all platforms. Digital platforms are performing sub-optimally because of congestion; physical cash is unavailable because the CBN has sucked away over 70 per cent of cash in the economy and the expected relief from the supreme court judgement has not materialized.”

On Monday, Nigeria’s central bank finally deferred to the Supreme Court ruling extending the deadline to exchange the old currency for the redesigned notes until Dec 31, 2023. This may give the central bank a little time to repair some of the immense damage it has done to its own reputation. Even many of the stakeholders who stand to benefit most from the CBN’s cashless drive were left distinctly unimpressed by the cash-swap program. For example, the Fintech Association of Nigeria said:

• “The drive for a cashless economy at all costs by the CBN is strategic. However, the execution and results have been described by many pundits as suicidal.”
• “The cash swap is being driven on steroids. This may be perceived to signal insensitivity and a lack of consideration of key stakeholders by the apex bank.”
• “A cashless policy should bring about greater ease and convenience of payments, but it is the opposite effect materializing in Nigeria today.”

Another impressive failing: one of the main reasons cited by the CBN for demonetising Nigeria was to bring inflation under control. Yet somehow the official inflation rate rose slightly in February to 21.91%, its highest level since 2005, even as the volume of money in circulation plunged. The naira’s official exchange rate with the dollar has also continued its long-term downward trend since the program was launched in December.

Declining Trust

The CBN’s prime objective in culling cash was to leave people with little choice but to use digital payment methods, ideally the eNaira. Among its list of reasons for pursuing demonetisation, published in October, the CBN 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.” Also in October, the central bank’s governor, Godwin Emefiele, said: “The destination, as far as I am concerned, is to achieve a 100% cashless economy in Nigeria”.

By removing more than half of the cash in circulation and failing to replace most of it, the CBN has certainly taken a bold step in that direction. But it has done so at a time that Nigeria’s digital payment infrastructure, including the eNaira, is far from ready to take up the slack.

In January, the volume of digital payment transfers surged 237% year over year, according to he Nigeria Inter-Bank Settlement System (NIBBS). The total value of mobile transactions rose by 124% during the same period, albeit from a very low base. In other words, things were going pretty well. But once the deadline for handing in the old cash notes arrived and the cash shortages became widespread, in February, the momentum appears to have slacked, reports Ventures Africa:

In its latest data, NIBBS say the value of electronic payment transactions in Nigeria declined by 5% in February. The total value of e-payments in the country fell from N38.8 trillion recorded in January to N36.8 trillion in February. However, the volume of electronic transactions for the month increased from 541 million in January to 787 million in February, indicating that although more people made payments electronically last month, the value of their transactions was lower than in January.

A logical reason for this may not be unrelated to the innumerable failed cashless transactions encountered by people in the course of a transaction. Prior to this crisis, Nigerian banks have been faulted for unreliable electronic services. Now that more people have switched to electronic payments, there is congestion on digital platforms resulting in suboptimal performance. ATMs fail to dispense cash, and there are several failed transactions from mobile transfers and POS terminals.

Consequently, the level of trust in electronic transactions has declined rapidly. So since the peak of the cash scarcity, many businesses that hitherto accepted electronic transfers stopped even in the face of trade decline.

It remains to be seen whether the eNaira has benefited at all from the cash cull and the swamping of commercial banks’ digital payment systems, but it is unlikely given the CBDC’s still substantial infrastructure issues. In fact, in late February the CBN announced plans to partner with private sector fintech firms to develop a new system to run and manage the eNaira — something it should have done long before embarking on this insane experiment.

Another problem the eNaira has is that most Nigerians cannot even use a CBDC since they do not own a smart phone or have access to the Internet. Of Nigeria’s approximate population of 220 million, between 25 million and 40 million people actually have a smart phone. More than half of the population is unbanked.

In other words, the overwhelming majority of Nigerians had no possible means of using digital payment methods even if they had wanted to. They were given an impossible choice from day one. Many of them took to the streets to protest the restrictions and cash shortages. Banks were vandalised; some were even burnt to the ground. A month ago, at the height of the protests, a coalition of civil society groups demanded that the CBN issue the new notes and end the suffering of millions of Nigerians.

As in India’s demonetisation of 2016, the suffering has come in myriad forms. Businesses of all shapes and sizes, including subsidiaries of global conglomerates, have struggled. The Nigerian unit of Heineken NV, the world’s second-largest brewer, had its worst February in 15 years. Many smaller local companies have simply gone out of business.

CBN’s demonetisation program has also caused huge disruption to Nigeria’s almost entirely private healthcare system. This is one way in which lives were almost certainly lost. As in India, we’ll never know how many. As Reuters reported a few days ago, the cash shortages not only left patients unable to pay for healthcare but also prevented many medical professionals from getting to work “in a country where cash is still very much king”:

Stephen Kache, a paediatric surgeon at a state hospital in the northern city of Kaduna, said it has been demoralising to watch mothers from remote villages take babies needing emergency care back home because they did not have cash.

“Most of our patients are peasants, poor artisans from the villages around the city, and they don’t have smartphones or bank accounts to make transfers,” he told the Thomson Reuters Foundation.

“If we treat them for free, they still need to pay for tests and drugs,” he said.

Only 3% of Nigerians have health insurance, according to data firm Statista. Most are government staff or work in the formal sector, leaving the millions in informal work without a safety net when they fall ill.

A Tiny Glimmer of Hope

As Nigeria’s economy gradually gets back on its feet, one of the most important lingering effects of the Nigerian central bank’s demonetisation program is likely to be increased distrust of both the banking system and the central bank itself. Which is ironic given that lack of trust is one of the biggest obstacles to take-up of the eNaira, says Mosope Arubayi, a Nigerian economist: “People are sceptical about it and afraid of their money disappearing without anyone to hold accountable.”

Even after all that has happened, most Nigerians still either cannot or do not want to use the eNaira. And that should perhaps offer a tiny glimmer of hope to all of us. After all, this monetary experiment, unless stopped in its tracks, is coming to all of us, one way or another. According to the Atlantic Council’s CBDC tracker, 114 countries, representing over 95 percent of global GDP, are exploring a CBDC. They include all of the G20 economies.

In a bizarre interview with a group of Russian pranksters this week, European Central Bank President Christine Lagarde said the fate of a digital euro will be decided in October (i.e. in seven months’ time). She actually used the war in Ukraine and Europe’s increasingly hostile relations with Russia as justification for a CBDC, saying: “I don’t want Europe to be dependent on an unfriendly country’s currency,” such as China’s or Russia’s. She also as good as admitted that one of the key drivers behind the CBDC is control.

But as the Financial Times noted this week, central banks’ digital currency plans are facing a wall of public resistance. And that wall is gradually growing higher.

In closing, I would like to share a few more words from the Nigerian Bar Association President Yakubu Maikyau’s moving speech:

The manner in which the CBN proceeded with the implementation almost without regard for the apparent sufferings of the people as could be seen across the country began to raise questions as to the true motive of the cash redesign policy. Nigerians did not have to die and neither should there be any loss of properties on account of the implementation of a Naira redesign policy if properly undertaken.

Unfortunately, and sadly so, that was our experience. Nigerians died. Properties were destroyed and lost. There is hunger in many homes as people are unable to use their hard-earned funds which they deposited in the banks because of the apparent high handedness of the policy. The rural economy was stifled. Economic activities have dwindled, many farmers engaged in dry season farming have not been able to cultivate their farmlands – only about one out of every ten hectares of rice fields have been cultivated in most parts of North-western States. Food security has come under threat as the cash crunch has affected the ability of rural farmers to engage in farming activities. Simply put, the implementation of the policy appears not to have a human face.