Nigeria’s Central Bank halted its naira redesign policy 10 days after the Supreme Court ruled that the apex bank didn’t give sufficient notice to the public. Despite the CBN governor’s assurances that there was enough cash for circulation, the transition from old bank notes to new ones devolved into a burdensome cash scarcity. Citizens queued up daily at bank premises and were usually unable to access the funds they had deposited as per CBN’s orders. Frustrated customers resorted to forcing their way into banks and destroying ATMs.
Given this failure of traditional banks, many customers turned to alternative options such as point of sale (POS) agents and mobile transfers. These POS agents bought cash from businesses such as fuel stations, alcoholic drink wholesalers, and market traders, and charged a premium for withdrawals. As the demand for cash increased, the fees surged to as high as 20% of the withdrawn amount, effectively shutting out more Nigerians from accessing cash.
The Central Bank of Nigeria’s (CBN) short-lived policy had an outsized impact, as it shrank the Nigerian economy to pandemic levels; and so the injection of old banknotes back into Nigeria’s economy brings an end to a torturous cosmetic exercise. It also ends yet another attempt by the CBN to lead the country into a cashless economy.
The apex bank has unsuccessfully chased a cashless economy for years, with varying arguments on its benefits. It kicked off the country’s transition from old to new N200, N500, and N1,000 bank notes on December 15, 2022. It also installed a weekly withdrawal limit of N20,000 and N500,000 for individuals and businesses, respectively, arguing that Nigeria had too many bank notes (currently over 85%) outside the banking system.
With no evidence to show that having too many bank notes outside the bank has any economic downsides, the CBN also argued that the redesign would curb inflation, kidnapping, counterfeiting, and money laundering. However, It was and still remains hard to understand how the CBN could have reduced the cost of goods and services by storing cash away in banks if there are other means of payment.
Instead of curbing inflation, as predicted, the redesign increased it to 21.82% in January 2023 and 21.9% in February, as people resorted to online transactions following the scarcity of the new notes. The demand and supply of money didn’t reduce but the burden of cash scarcity weighed on the lives of millions of Nigerians who didn’t have cheap, or any, access to other forms of payment.
Not only did traditional banks not have the cash to give their customers during the cash scarcity, but they were unprepared for a surge in digital users. Banks buckled under the weight of mobile transactions which grew by 125% in January, and 121% in February. USSD codes were mostly unavailable, and transfers via apps took on a snail’s pace and sometimes failed in the end. Queues at banks grew daily as customers spent their days in lines to make complaints about failed services which were disrupting their daily lives.
Some have said bank services failed due to a buggy network while others said the bank’s infrastructure was not used to handling such high volumes of transactions, as experienced during the cash crunch.
While we continue to wonder why banks didn’t predict and prepare for the increased demand, questions should be asked of the Central Bank itself, which failed to promote its recently launched electronic currency, the e-naira. The e-naira could have been a great alternative as it was accessible even without smartphone access. But the apex bank remained eerily unmoved when it could have pushed for adoption when cash was scarce and e-channels of traditional banks failed. While the CBN claims there was an increase in the usage of the e-naira, it could have been much more.
There was increased adoption of other payment solutions during the cash crunch. MTN deployed 224,000 agents to boost the adoption of its mobile wallets, while technologies like OPay, Carbon, and Pocket saw increased adoption because they had fewer users, compared to banks, and room in their infrastructure for more users. The cash crunch created a few winners, but this victory comes at a steep cost.
Cash wins this round again
About half of Nigeria’s population live in multidimensional poverty, and these people carry out their everyday activities in settings where digital banking services are unavailable. Most of these people are already financially excluded from the banking sector, and a policy built on the exclusion of almost half of the country’s population is set for failure. The settings that enable digital banking are typically more expensive and found in more urban areas—places over half of the country cannot access.
In the past, redesigns were implemented without causing such difficulties; old notes are gradually phased out while new notes are introduced, just like the Supreme Court has ordered. The implementation of the failed naira redesign policy highlights a disconnect between government agencies and the actual experiences of the people they serve.
Cash remains supreme for many Nigerians, and that is a glaring reality that one does not need to be an economist to see.