Last week Wednesday, President Muhammadu Buhari unveiled the new naira redesigned by the Central Bank of Nigeria (CBN), opening a new vista of events in Nigeria’s monetary policy management framework.
The redesigned naira was received with mix reactions. Many expressed their disappointment via Twitter, as they expected major changes in the new outlook, while some said the new note is more about improving its security, not so much in appearance.
Outside these reactions – especially as the CBN cannot afford to backtrack at this time – the most important ongoing debate is how the naira notes affect Nigerians and the economy going forward?
Recall that Prime Business Africa had reported its partnership with the Institute of Chartered Accountants of Nigeria (ICAN) for a webinar on the business and economic implications of the resdesigned naira.
The webinar will take place on Thursday, December 1, 2022 at 11 am.
The old naira notes will cease from circulation on January 31, 2023, even as the apex bank hinted that over 1.4 million agents would help those in rural and urban areas meet the January deadline for returning old naira notes.
Why the naira was redesigned?
There are two major reasons the Central Bank of Nigeria (CBN) redesigned the naira notes; recover money outside the financial system and improve the naira’s security.
Recovery of naira: The governor of the central bank, Godwin Emefiele, had complained about the volume of naira notes outside the commercial banks.
Emefiele said there are N2.7 trillion notes that the banks can’t account for, out of N3.3 trillion notes in circulation. The CBN said only N600 billion is in banks’ vault. So the new naira will force Nigerians into depositing the old currency to the banks.
Security measure: There have been claims that the old naira notes is easy to replicate. And according to President Muhammadu Buhari, the new naira notes have been fortified with security features that make them difficult to counterfeit.
Cost of printing new notes, is it really worth it
According to financial analyst, Kalu Aja, the cost of redesigning the naira is N280 billion. This means each Nigerian contribute about N1,296 to the creation of the new notes, based on the population of 216 million.
Based on what was unveiled on Wednesday, it almost seem like water in the basket, but since the reason for the change is to recover hoarded naira notes and reduce replication of the notes for fraudulent activities, the funds invested cannot be ruled as a waste.
Already, the CBN has revealed that over N165 billion has been received since the request that people should deposit their money in October due to the new naira. So, this is a sign of it being worth it.
How will the new notes affect Nigerians and the economy?
Rise of dollar, fall of naira: Although, for every positive outcome, there’s a negative, and that’s too many naira will now chase few dollars, as CBN has shown it is serious with its new naira plan.
This will likely cause value of naira to fall in the exchange market in the coming days, most especially the black market, where persons with illegal business will look to dump hoarded naira in exchange for dollar. They will be willing to pay more just to avoid losing the currency.
So while CBN is achieving its plan of forcing people to take the naira in circulation to the banks, Nigerians and others conducting legal business will be paying premium rate in the parallel market to obtain USD, as naira dump will raise dollar rate.
Emefiele had stated that, “We do not want to easily admit that this will just happen but we suspect that this would happen and that, it will possibly impact the value of the naira because we do not want to do any speculation. We want to dwell in reality.”
Fuel Inflation: The new naira will further drive inflation forward in the short term, causing cost of living to skyrocket. Thereby, increasing Nigeria’s poverty population which is 133 million according to National Bureau of Statistics (NBS).
This monetary policy will negate CBN’s effort to curb inflation due to the impact of the new naira on dollar rate. Prior to this administration’s tenure, inflation was nine per cent, but it is up 21.09 per cent as of October 2022.
Inflation will soar into 2023 on the back of weak naira, as one of the major drivers of Nigeria’s inflation is dollar rate, which often determines prices of goods traded in Nigeria.
Also, cost of importation will rise, considering FX scarcity is forcing traders to shuttle between the black or official market regardless of the incentives provided by CBN’s dollar for naira programme.
Hoarding of dollars/Rationalising: Scarcity of FX will rise in the forex exchange market, as persons hoarding naira notes will be motivated to exchange it for dollars and continue hoarding in foreign currency.
Also, this will birth scarcity that causes demand to overshoot supply, as such, CBN and other banks will have to continue rationalising, which means another episode of protest among foreign airlines could happen.
Forex scarcity had forced many banks to review their international spends for Nigerians, with most now hovering around $20 and $50 per month, from what used to be around $1,000.
Drop in company turnover, job loss, GDP contribution: Companies with dollar debt will have to draw more naira from their earnings to buy the USD at a higher rate than when it was borrowed.
This will affect earnings that is already struggling with declining consumer purchasing power and inflation. As a result, to save cost, jobs might be cut in the country, increasing unemployment.
In broader view, industries’ contribution to GDP could fall. Already, Nigeria’s GDP growth rate slowed by 2.25 per cent year-on-year in the third quarter of 2022.
It fell below the 3.54 per cent growth rate reported in the second quarter and 3.11 per cent growth rate reported in the first quarter of 2022.
Inflation on downward path: While the introduction of the new naira will raise inflation further in the short term, it will curb inflation in the long term, as mopping the money in circulation will reduce availability of cash for purchase.
This will force companies into dropping prices of goods and services to push sales. As a result, inflation will hit reverse on the back of falling prices, and reduce cost of living in the long term.