Follow Us on Google
On October 26, the Central Bank of Nigeria (CBN) announced plans to redesign the naira. The affected denominations include N200, N500, and N1000 notes. The exercise, according to the CBN boss, Godwin Emefiele, will take effect from December 15. Under the plan, the new naira notes and existing currencies will remain legal tender and circulate side by side until January 31, 2023 when the existing currencies will seize to be legal tender.
The redesigning of the naira is in line with the relevant provisions of the CBN Act 2007, particularly Section 2(b), Section 18 (a), and Section 19(b). The apex bank got the approval of President Muhammadu Buhari for the exercise. The Minister of Finance, Budget and National Planning, Zainab Ahmed, had, before the Joint Committee of the National Assembly on Finance, claimed that her Ministry was not consulted on the matter, which the CBN said was not necessary under the bank’s Act. President Muhammadu Buhari has reportedly given the exercise his full support. The CBN governor had earlier outlined the reasons behind the plan to change the features of the naira notes. According to him, the exercise will check the increasing ease and risk of currency counterfeiting. Besides, there is need to check the worsening shortage of clean currencies and the attendant image challenge to the apex bank. Currently, efforts to check mutilated naira notes have not been successful. The CBN boss said the redesigning of the currency has been necessitated by significant hoarding, resulting in huge amount being outside the banking system. About 85 per cent of the currency in circulation is reported to be outside the banking channels. As of September 2022, out of a total of N3.2trillion in circulation, N2.73trilion was said to be outside the vaults of the banks.
This is definitely not good for the growth of the economy. But the economy stands to gain if the policy can check hoarding, reduce inflation and excess cash in circulation. Beyond this, the CBN has argued that the exercise will save cost in terms of currency management.
Undoubtedly, currency management remains a major function of the CBN as stipulated in Section 2(b) of the CBN Act 2007. It is commendable that the CBN will closely monitor the activities in the financial system and their impact on the economy. It will also ensure that the exercise will achieve the set objectives. It is important that within the 90 days window or transition that the plan will take to run its full course, the CBN must ensure that bank charges for cash deposits are suspended. This will guarantee confidence in the financial system and show that the policy is not punitive or political as being insinuated in some quarters. The CBN should remain apolitical and follow due process in its policy actions.
The standard practice globally is for central banks all over the world to redesign, produce and circulate new currencies every five to eight years. The expectation from that exercise is that the features of the new banknotes will make it difficult to counterfeit or hoard. If the exercise is effectively implemented, it will deepen financial inclusion and accelerate Nigeria’s cashless policy.
The minting of new Naira notes will also help mop up huge amount of cash that is outside the banking system. It can also rid the economy of illegal funds. The exercise will enable the CBN to effectively monitor the flow of funds in the system. However, relevant stakeholders in the country should be carried along. We think that was the point the finance, budget and national planning minister made. When the relevant stakeholders are not sensitised enough of the benefits of such important policy, there could be short-term unintended consequences, among which is the free fall of the naira at the parallel market as a result of panic and uncertainty.
The exchange rate is not driven by any real economic activity, but by billions of naira outside the banking system. This is not sustainable and could endanger the economy. According to Bloomberg news report, the naira is currently “among the worst performing currencies globally.” This is not good for the country. As the International Monetary Fund (IMF) and others have advised, the CBN must apply utmost caution in the implementation of the new policy to avoid mistakes that can undermine the people’s confidence in the financial system. Therefore, effective coordination is crucial to reduce the pressure in the banks over the exercise. Above all, it should be seamlessly implemented.
