Cash Scarcity: Banks’ Investments Collapse

In 2022, the Central Bank of Nigeria (CBN) initiated a plan to redesign the naira, aiming to encourage cashless transactions and address issues such as counterfeit currency and ransom payments. However, the move faced numerous challenges, leading to significant consequences for businesses and the economy.

Redesign and Policy Announcement:

• CBN Governor Godwin Emefiele announced the release of re-designed naira notes by December 15, 2022.
• The goal was to control currency in circulation, curb counterfeit currency, and reduce ransom payments.
• The new series included N100, N200, N500, and N1,000 notes, with the old versions set to cease being legal tenders by January 31, 2023.
• The CBN also revised money withdrawal limits and encouraged the use of digital platforms for transactions.

Challenges and Consequences:

1. Naira Scarcity and Economic Impact:
   • Citizens faced difficulties accessing note , impacting daily transactions.
   • The policy aimed to control inflation but led to a rapid economic downturn.
   • Naira scarcity triggered riots in Oyo, Ondo, Benue, and Kwara states.
2. Protests and Unrest:
   • Riots erupted in various states, with protesters expressing frustration over the scarcity of Naira .
   • Incidents of violence occurred in different locations, exacerbating the situation.
3. Humanitarian Consequences:
   • Reports emerged of individuals facing dire consequences due to the unavailability of cash for medical bills and essential needs.
   • Instances of deaths and health-related issues were linked to the cash scarcity.
4. Impact on Small Businesses:
   • Small businesses, particularly those relying on daily cash transactions, experienced a significant slowdown.
   • Lack of access to cash affected the speed of transactions and movement of goods.
5. Digital Infrastructure Challenges:
   • Despite Nigeria’s touted digital infrastructure, challenges arose in supporting the transition to a cashless economy.
   • System downtime, app crashes, and failures in digital transactions were reported.
6. Negative Influence on GDP Growth:
   • Nigeria’s GDP growth fell to 2.31% in the first quarter of 2023 from 3.52% in the previous quarter.
   • The reduction was attributed to the adverse effects of the cash crunch caused by the redesign policy.
7. Losses and Economic Setbacks:
   • The Nigerian economy reportedly lost about N20tn in the first quarter of 2023.
   • Millions of citizens faced financial challenges, and the informal sector suffered due to disruptions caused by the policy.
8. Lack of Positive Impact on Inflation:
   • The policy did not have discernible positive effects on inflation; rates edged higher in the aftermath.
   • Exchange rate premiums also remained elevated.
9. Trust Erosion in Banking System:
   • System failures, failed transfers, and challenges with digital channels eroded customers’ trust in the banking system.
   • Merchants resorted to cash payments despite empty ATMs, affecting confidence.
10. Lessons from India’s Demonetization:
    • The report draws a parallel with India’s demonetization in 2016, emphasizing the negative consequences on GDP and jobs.

Looking Ahead:

• The CBN acknowledges the challenges but expresses a commitment to enhancing the cashless policy.
• The focus is on improving infrastructure to support digital transactions and creating a more resilient cashless system by 2025.

In summary, the attempt to redesign the naira and promote cashless transactions in Nigeria faced severe challenges, resulting in economic setbacks, protests, and humanitarian consequences. The experience highlights the need for comprehensive planning, infrastructure development, and stakeholder engagement in implementing significant monetary policy changes.