How does the Central Bank of Nigeria (CBN) retrieve 84.5 percent of a country’s currency in circulation in just 90 days?

This was one of the many questions seemingly begging for answers when Nigeria’s apex bank announced its plan to redesign the three higher value notes of the naira (N200, N500 and N1,000) on October 25, 2022.

Fast-forward to three months and three weeks (a week before the general elections) and a majority of Nigerians are now confronted with a shortage of naira notes that is proving disruptive to lives and livelihoods.

Given the analysts consensus that a 90-day window was simply insufficient to complete the project, it is difficult to conceive a scenario where the CBN did not anticipate the challenges that have accompanied this transition period.

President Muhammadu Buhari, in his address to Nigerians on February 16, 2023, said: “I am not unaware of the obstacles placed on the path of innocent Nigerians by unscrupulous officials in the banking industry, entrusted with the process of implementation of the new monetary policy. I am deeply pained and sincerely sympathise with you all, over these unintended outcomes”.

In what appears to be a clear case of buck-passing by the Federal Government, the blame is being laid squarely on the banking industry’s purported failings and not any lapses in the policy’s design or hasty execution.

Depending on whom you ask; a performance appraisal of the CBN’s execution of the redesign project would range from grossly unprepared to poor implementation.

Agusto & Co, a leading Pan-African credit rating agency, in its opinion, reasoned that the CBN failed to do enough through the media to effectively sensitise the public, particularly the rural dwellers and manage expectations. Most Nigerians assumed a simple exchange of old Naira notes for new ones. However, if we are to believe claims by the Kaduna State Governor, Nasir El-Rufai, the CBN printed circa N400 billion in new notes, leaving a shortfall of N2.3 trillion. So, while the exercise has reportedly reeled in 80 percent (N2.1 trillion) of the N2.7 trillion held outside the banking system thus far, the average Nigerian is once again confronted with a test of resilience.

Cash has become commoditised, hoarded by many and now commanding outrageous premiums of up to 20-30 percent at Point-of-Sale (PoS) outlets.

The road to perdition, now famously paved with good public outrage has degenerated to violent protests in some cities, with incidents of vandalism and arson at several banks’ facilities – and PoS outlets.

The cash crunch and the uncertainty surrounding the policy are fanning a long-simmering fire of public resentment, triggered by deteriorating economic conditions and recently exacerbated by unending petrol shortages. The result has been a significant loss of manhours, logistics constraints to many businesses and possible threats to the successful execution of the general elections.

The CBN, when launching the redesign project, outlined the objectives clearly. Perhaps its most compelling arguments centred on the need to combat terrorism and reduce counterfeiting. The others largely revolved around driving the cashless policy through a shift away from cash and toward increased adoption of digital banking channels for transactions.

This was underscored by a need to deepen financial inclusion (currently at 64 percent4) and drive an efficient payment system that would improve the efficacy of monetary policy tools in combating inflation.

While the design of the policy gave room for underhand dealings by a privileged few, where the banking industry has really fallen short is in the capacity of the current digital payment infrastructure, which was already plagued by ‘transaction failures’ and an apparent inability to implement instant refunds, to handle the surge in transaction volumes.

For context, in the five years leading up to 2021, electronic payments surged by 386 percent to N272 trillion, accounting for over 94 percent of the entire value of transactions in Nigeria’s banking system.

Financial institutions also responded accordingly, by upscaling digital infrastructure to support the increasing adoption of electronic banking.

Recently, the Nigeria Inter-Bank Settlement System (NIBSS) reported a spike in the value of total cashless transactions in Nigeria to N39.58 trillion in January 2023 – a year-on-year increase of 45.41 percent – largely on the back of the CBN’s redesign and cash withdrawal policy. Nevertheless, on evidence, the abrupt shift to electronic payments, which the current cash shortage has necessitated, has overwhelmed the banking industry’s digital payments infrastructure. Nigerians are currently grappling with an unprecedented rate of electronic transaction failures.

To further complicate matters, many transactions have not only failed, but refunds are taking days, even weeks in some instances, leaving many stranded and constraining commercial activity.

Unintended consequences:

The hardest hit by the policy have been the most vulnerable members of the population (the poor, the unbanked and the rural dwellers). Nigeria is still a largely cash-dependent economy, with informal economic activity accounting for approximately 65 percent of GDP and being dominated by Micro Small Medium Enterprises (MSMEs). These MSMEs account for up to 96 percent8 of businesses and 86.3 percent of the national workforce. These are mostly cash-based businesses – particularly the micro-enterprises which account for 99.8 percent of Nigeria’s 37.1 million MSMEs.

Given the low levels of education and exposure of a significant number of Nigerians in this category, many of whom live in rural areas with inadequate or non-existent telecommunications infrastructure, a quick and seamless transition to digital payment channels was always unlikely.

In addition, while mobile phone ownership in Nigeria is estimated at 81 percent by Enhancing Financial Innovation & Access (EFinA), internet penetration is still a mere 44.3 percent, as 60 percent of Nigerians live in rural areas where network outages were widespread even before the latest wave of transaction failures, and coverage was often non-existent, limiting access to traditional banking services.

The Unstructured Supplementary Service Data (USSD), launched by banks and TelCos to enable deeper mobile banking penetration in communities lacking mobile data, has also been plagued by network related setbacks.

The disruption to transactions, trade (domestic & foreign), productivity and all-round economic activity is likely to be significant enough to trigger a contraction in GDP in Q1’23 and possibly a loss of livelihoods for many. Many cash-dependent businesses are being pushed to the brink. For example, cocoa farmers are currently unable to pay their laborers and transporters, jeopardising production and exports.

The cash constraint is also likely to compel consumers to prioritise spending on necessities, leaving many businesses, particularly MSMEs, with decreased sales and heightened credit risks. Worse still, living standards could decline further, particularly for many rural dwellers, as an inability to access cash could limit access to critical services like healthcare, stoking public discontent even further.

•On the flip side, some of the biggest beneficiaries of the current lapses in electronic transactions have been Fintechs like Opay, Moniepoint, Paga, and Kuda, amongst others, which are reportedly far less prone to glitches and charge significantly lower transfer fees. Whether this is down to lower transaction volumes than traditional banks or the capacity of their digital infrastructure, or both, it remains unclear.

•Solution: However, getting traditional banks to invest in expanding their digital infrastructure in a period of rapid currency depreciation (most of the required infrastructure is imported) and, just as crucially, enhancing their cyber security will be crucial in convincing Nigerians to go cashless. Some of the tier 1 banks spent an average of 5.4 percent of their operating expenses on ‘IT and related expenses” in 2021. Raising this expense in the face of shrinking margins would become increasingly difficult, as it is likely to further impinge on profitability.

Final thoughts: Many contend that the solution to the immediate problem is rather straightforward: print more of the redesigned naira notes while gradually phasing out the old ones. There is, however, a contrarian view

suggesting that agreeing to the aforementioned is to not have a full appreciation of the nuances at play.

Perhaps the most significant takeaway from President Buhari’s recent address is clarity over who makes decisions and who must approve any deviation from the current position on which naira banknotes are legal tender. The President concluded his address by noting that the policy’s success in minimising the influence of money in politics was a “positive departure from the past.”

Given the timing of the policy, many argue that curbing vote-buying was the overarching objective.

The question is whether the long-term benefits of redesigning the naira outweigh the short-term costs and inconvenience of Nigerians being practically compelled to do away with cash.

The hope is that the average Nigerian, now confronted with even greater hardship amid the current cost of living crises, is not a mere pawn in a political chess game. (Daily Sun)

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