WHAT IS THE TOPIC?
The Central Bank of Nigeria has decided to redesign the naira, with the huge amount of liquid
currency existing outside of the banking sector serving as the main reason. If the specific
things were in place, this policy would work; sadly, they are not.
Recently, the Naira reached a new peak for devaluation when it traded at N850 to the dollar
and N1000 to the pound. The Naira has been severely battered by inflation in addition to
losing value against other major currencies. The Central Bank would do better to create a
glide path for monetary policy resources to fight inflation given the double jinx effect on the
Naira.
To worsen the situation, the ministry of finance is occupied with distancing itself from the
CBN’s decision to redesign the currency when it should be working with other ministries to
boost economic production, which may help revive the faltering Naira.
The Naira has endured a lot, including devaluation, depreciation, and persistent inflation. In
each of them, the economy that is intended to support its float has a high demand for the
Dollar and other foreign currencies, severely reducing its potential to develop. Even if the
new currency had any advantages, they would be at most marginal. If the CBN is worried
about people keeping Naira at home, why not investigate measures like incentives to
encourage savings in deposit money banks, monitoring excess cash withdrawals and deposits
in banks, particularly by politically exposed persons and ultra-high net worth individuals, and
funding academic research that could identify gaps in currency liquidity and how to close
them. The revised Naira will probably pass through the same holes if the root of the issue isn’t
found.
How is this policy going to affect you?
Given the numerous aspects of the economy we do not yet fully understand, it is challenging
to predict with absolute precision what effect the policy would have. However, based on the
results of similar projects in other nations, we have some expectations (most recently in India
in 2016). India’s goals were similar to what CBN is giving. Because more than 99.3% of the cash
in circulation was returned to banks, the program did not succeed in removing currency used
for illegal operations from circulation. Additionally, there is no proof that it greatly enhanced
financial system participation or decreased terrorism after being put into place. When the
procedure in India was finished, the number of new notes that were counterfeited was
comparable to the levels before the implementation of the policy.
Due to Nigeria’s weak banking infrastructure and the country’s largely informal economy, cash
shortages could result from the short implementation period. This would cause a decline in
economic activity in industries that depend significantly on cash, which might affect the
entire economy.
What should you do concerning this policy?
Since you can’t control the policies, the little you can do is to make sure you don’t carry a lot
of cash so you don’t waste time and energy standing in banking hall lines. Until you get access
to the new notes, you can rely more on electronic modes of payment to complete your
business.
You can provide your clients with electronic payment options if your company relies heavily
on cash. Your sales would suffer if you rejected outdated notes without offering them
alternatives. And request the same from your vendors. Once the new notes are ready, you can
progressively phase out cash payments made with the old notes to save money by not having
to replace them regularly.
