Worries for naira as CBN redesigns currency, mops N2.73tr black money
• Hopeful step may rein in inflation, ransom payment, boost naira value
• Announcement interpreted as beginning black money mop up
• Decision could trigger asset bubble, says Ashogbo
• Yusuf: Exercise has no monetary policy significance
• Naira reacts immediately, falls to N765/$ at Lagos parallel market
• Experts worry about timeline, urge NFIU to monitor huge deposits
• Northern group wants Emefiele sacked, threatens protest across region
• EFCC backs move, warns against sabotage
The Central Bank of Nigeria (CBN), yesterday, announced the introduction of newly redesigned N200, N500 and N1,000 banknotes, a move interpreted to mark the beginning of a broader currency census and the mop up of black money.
At a virtual press briefing, CBN Governor, Godwin Emefiele, admitted the concern over large amounts of money outside the banking system, which is estimated at 80 per cent of the total money in circulation.
Emefiele revealed that as of September 2022, N2.73 trillion of N3.23 trillion currency-in-circulation was outside of vaults of commercial banks.
He also stated that the currency in circulation has more than doubled since 2015, rising from N1.46 trillion in December 2015 to N3.23 trillion as at September 2022.
He added that the decision was necessitated by the need to address the “daunting challenges” associated with currency management and rein in currency counterfeiting.
“These (currency management) challenges primarily include significant hoarding of banknotes by members of the public, with statistics showing that over 80 percent of currency in circulation are outside the vaults of commercial banks; worsening shortage of clean and fit banknotes with attendant negative perception of the CBN and increased risk to financial stability and increasing ease and risk of counterfeiting evidenced by several security reports.”
But beneath the veneer of currency management challenges, experts have described the move as part of a broader effort to contain excessive election spending and mop up black money in the system.
The FX market, indeed, has reacted sharply to the decision as the dollar gained about N10 at the black market yesterday evening, to a new all-time high of about N765/$ in Lagos.
Some analysts, who had called for a currency audit to restore sanity in the foreign exchange market, scored CBN high on the decision but faulted the timing.
Godwin Owoh, a professor of applied economics and advocate of currency census, as a check on ill-gotten money, said this should have come after the general elections as no country changes its banknotes few months before a major election.
“That is the right thing to do to save the naira. Currency redesign is the first thing I have always recommended, but the timing is wrong. There is nowhere in the world where currency is changed six months before an election.” Owoh said the implementation cannot be fair to all, especially given the fact that the CBN governor is perceived as a politician.
Individuals with huge volume of currency likely to be requested to explain the source of their money under the money laundering and counter terrorism laws, Owoh said government could hide under due diligence requirement to deny members of the opposition party access to their money.
He warned that a large number of individuals with cash holdings would find the informal forex market safer and more convenient to swap their money and evade prying eyes of regulators and law enforcers.
Also speaking, Bode Ashogbo, an investment expert, said politicians and other politically exposed individuals would flood the market with naira in exchange for dollars. He said the rush would worsen FX scarcity.
Ashogbon predicted that a dollar could surpass N1,000 to a dollar in the wake of heightened panic and speculation.
“Once demand heats up, we are going to see a remarkable adjustment in the FX rate. Ordinarily, an increase in the price of dollars in relation to naira should increase supply. But supply appears to be static because we are not earning much FX. That suggests that the naira would continue to fall,” he feared.
Asset price bubble could also be a major fallout of the decision 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 stated that there should be policies designed for more effective cashless policy to get the maximum benefit of the new naira notes.
According to him, if close to 85 per cent of the currency is outside the banks, it will continue to drive inflation and no monetary measure adopted to reduce such excessive liquidity will be effective.
“I think the CBN is trying to use every tool at their disposal to check inflation and excessive liquidity in the system. They have used the CRR to reduce excess liquidity but the effectiveness of the policy is not seen. That means there is actually a hoarding of currency.
“If about 85 per cent of currency is outside the bank, no policy initiative to checkmate excessive liquidity will have any effect. Again, counterfeiting is dangerous to any system. So, the decision is a welcome development provided it targets the right type of inflation.”
On the cost of producing the new notes, he said with the 85 per cent of naira notes already outside the system, coupled with the cashless initiatives, the amount to be printed would be minimal, which would ultimately lower the cost of printing more notes.
Prof. Uche Uwaleke said the decision of CBN to replace some naira denominations with new ones will be positive for the economy in the medium to long term. Uwaleke, who is a professor of capital market at Nasarawa State University, Lafia, said although the measure does not amount to demonetisation of big currency notes often carried out by Central Banks to curb black money and corruption, it will go a long way in ensuring that a lot of naira notes circulating outside the banks are crowded in.
He, however, frowned on the January 31, 2023 deadline adding, “I think the deadline is short in view of the number of naira denominations involved, from N200 to N1,000. CBN may consider extending the time.’ ’
According to the financial expert, CBN’s move could lead to large deposits in banks, stressing that it means the banks will have more money to lend, which may reduce interest rates.
BUT an economist and CEO, Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, has criticised the move, stating that the exercise has no monetary policy significance. He feared that the move would come with huge logistics costs and avoidable dislocations to small businesses, most of whom are in the informal sector.
According to him, the cost of such an action would be outrageous and disproportionate, compared to the expected benefits advanced by CBN.
Noting that the redesign was one intervention the country could do without, he said there are more urgent issues demanding the attention of the CBN.
“It is difficult to see any compelling value proposition of this currency redesign idea. We have issues with liquidity in the foreign exchange market, the depreciating currency, the recent Moody’s downgrade of Nigeria, soaring inflation and many more.
“CBN should save citizens and the economy the trauma of this currency redesign. It is a distraction we can do without.”
Director-General of Nigeria Employers Consultative Association (NECA), Adewale Oyerinde, said at a time when the naira is on a free fall and inflation rate is going out of control, all efforts should be geared towards strengthening the naira, rather than redesigning it. Noting that issuing new notes is desirable, he expressed worry about what the currency redesign initiative would achieve.
He asked: “What economic challenge will it solve? Will it make the naira appreciate considerably or make FX available to the real sector?’
Prof. Bankole Sodipo, a Senior Advocate of Nigeria (SAN), said he was shocked when he heard the news. According to him, “printing the naira is an expensive venture. Designing and printing is a very expensive venture. I’ve been involved in giving advisory work for the Nigerian Security, Printing and Minting Company. I don’t see how this will deal with inflation.”
He said the announcement is already causing more problems for the naira. “Pound Sterling that was falling against every other currency last week and was trading at N840, is now N890 and it is going to go higher. The reason is that some people are rushing to change their naira into pounds. Also, I don’t think it is right on the eve of an election to go into something very drastic.”
A lawyer and the lead director, Centre for Social Justice (CSJ), Eze Onyekpere and Director, Abuja School of Social and Political Thoughts, Dr. Sam Amadi, yesterday, described the decision as of no economic value to the country.
Onyekpere stated that the decision is a distraction to shield the CBN from performing its statutory obligation, noting that such action will eat into the dwindling reserve of the country.
He said: “It’s not going to add any value, the primary responsibility of CBN 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 will not add to the foreign exchange and add to the reserves. It’s a pure waste of time, it’s a distraction from the failure to perform statutory obligation.”
On his part, Amadi said such steps might add to the economic hardship the people are already faced with.
“What we need now is how to ensure that we build stronger policies to cushion the shock coming from a global economic crisis and those coming from the weak economy. Increased earning for the people, either through public expenditure and ensuring people have access to resources is very important.”
The Concerned Northern Forum has called for the sacking of Emefiele. In a statement issued by spokesperson of the group, Abdulsalam Moh’d Kazeem, the group demanded the suspension of such plans and prosecution of those behind the initiative, failing which there will be massive protests across the Northern region and Federal Capital Territory.”
According to Kazeem, the move by CBN is nothing but a sign of incompetence, as Nigeria’s economy is down and naira has depreciated to the minimal value.
HOWEVER, the Economic and Financial Crimes Commission (EFCC) has thrown its weight behind the move to redesign the currency. Executive Chairman of EFCC, Abdulrasheed Bawa, described the move by the apex bank as “a well-considered and timely response” to the challenges of currency management, which has negatively impacted the country’s monetary policy and security imperatives.
Bawa, who made his position known in a statement by the spokesperson of the anti-graft agency, Wilson Uwujaren, said EFCC, CBN and other regulators in the financial sector have worked closely in recent past to determine how best to stabilise the country’s monetary policy environment.
“It is heart-warming that CBN has demonstrated courage in taking this bold decision, which I believe will bring sanity to the currency management situation in Nigeria,” Bawa said.
He called on operators in the financial services sector, especially Deposit Money Banks and Bureau De Change operators to work within the guidelines provided by CBN to ensure seamless withdrawal of the old currencies.
Bawa, however, warned that EFCC would monitor the process to ensure that unscrupulous players and currency speculators and their cohorts among the BDCs do not undermine the exercise.
He also charged banks to be alive to their reporting obligations and not assist unscrupulous customers in laundering suspected proceeds of crimes through their system.
The EFCC boss pointed out that the objectives, which CBN seeks to achieve with the redesign and reissue of the naira notes, were in tandem with objectives of the Money Laundering Prevention Prohibition Act 2022, which criminalises the conduct of cash transactions above a certain threshold.
According to Section 2 (1) of the Money Laundering Act 2022, “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 pertinent to issue this stern warning to BDC operators to be wary of currency hoarders who would attempt to seize this opportunity to offload the currencies they had illegally stashed away.”