CBN should tread carefully on new naira notes

THE announcement hit the public space like a thunderbolt! Citing “several daunting challenges” afflicting its currency management, “that have continued to escalate in scale and sophistication with attendant and unintended consequences for the integrity of both the CBN and the country,” the Governor of the Central Bank of Nigeria, Godwin Emefiele, announced the redesign, production, and imminent replacement of the N100, N200, and N500 notes currently in circulation. While some reasons proffered are technically sound, and others have created misgivings, its timing, the oversight capability of the regulator and the short time for implementation, unless well managed, could backfire and hurt the precarious economy.

Emefiele’s bold strike comes at a time of grave uncertainty and a fragile economy. The naira is taking a severe battering against other currencies, inflation and unemployment are at record levels, and the money market is tumultuous with lending rates squeezing out the productive sectors and SMEs.

But the CBN governor says these are some of the very problems he aims to solve. These include primarily the hoarding of naira outside the formal financial system, scarcity of clean notes, increased risk to counterfeiting of notes, as well as security considerations.

He cited the need to deny the conveyance of huge sums to kidnappers. Implied too is the inflationary impact of so much money is outside the banking system; managing inflation is more difficult when this happens.

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Up to a point, Emefiele is on solid ground. The CBN has the statutory responsibility to manage the national currency, ensure its integrity, its efficient circulation, and its efficacy in overall monetary policy. To this end, the reality of 85 per cent of naira in circulation outside the banking system is alarming. By the end of September, currency in circulation stood at N3.23 trillion, compared to N1.46 trillion in December 2015.Of this, a staggering N2.73 trillion was outside the formal banking system.

With this, policies to manage inflation and interest rates will constantly flounder. Inflation hit 20.5 per cent in August, up from 19.6 per cent, the highest in 17 years. This makes money mop-up or injection measures to manage inflation and interest rates ineffective. With the benchmark rate at 15.5 per cent, lending rates hovered at average 20 per cent to as high as 40 per cent.

Large sums in the informal system also facilitate dirty, tattered notes and aids counterfeiting, the CBN said, citing high rates of faked N500, N200 and N100 notes in recent years.

Similarly, the CBN’s power to manage or effect changes is enshrined in its enabling law, and as Emefiele has asserted, requires only presidential acquiescence and no other authority.

The Bank reinforces its case by citing global best practices “for central banks to redesign, produce and circulate new local legal tender every five to eight years,” while the naira has not changed features in 20 years. It hopes that it would also cement the eNaira initiative and improve bank penetration where only 45.3 per cent of the Nigerian population have bank accounts.

But Emefiele is on less solid ground on the timing of the change, the time frame, its efficacy in taming inflation, rates and on the security situation. More crucially, the CBN has not demonstrated the capability to efficiently undertake such a feat, and has been weak in enforcing discipline in the banking system. These, experts say, could derail the lofty objectives and worsen the situation the makeover aims to correct.

Already, the fallout has been murky. Zainab Ahmed, Minister of Finance, Budget and Planning, has disowned the redesign, saying the ministry was not consulted. She pointed to a second instant reaction to the announcement: the naira exchange rate leapt from N744 to $1 to N788 to $1 within 24 hours. Then, symptomatic of his dysfunctional regime, the President, Major General Muhammadu Buhari (retd.), in turn disowned the minister, saying he backed the project, convinced that the economy would benefit by way of reduction in inflation, currency counterfeiting, and excess liquidity. When fiscal and monetary policy authorities work at cross-purposes, the much-needed synergy is lost, and policy objectives are harder to achieve. Informing other managers of the economy for such an operation does not impinge on CBN’s autonomy. Keeping the finance ministry in the dark is faulty, as major monetary measures will invariably impact on general economy.

The timeline for rolling out the new notes by December 15, just weeks away is tight. So is the January 31, 2023 date when the old notes will cease to be legal tender. Some economists have warned that this could trigger a demand squeeze as many will refuse the old notes.

Besides, electronic channels are not always reliable in the country, the victims of poor public support infrastructure and weak systems management.

Success depends on the fealty of the deposit money banks to the CBN’s first-come-first-serve directive in exchanging new notes for new. But the banks are notorious for their tricks and extortion of customers, routinely disregarding CBN regulations. The Bank is weak in enforcement, especially on Emefiele’s watch.

They have made nonsense of the policy of stopping direct dollar sales to the bureaux de change, engage blatantly in round-tripping, deny customers foreign exchange remitted to them from abroad, deny legitimate businesses forex at approved rates, and assist money launderers to short-change the economy. The CBN appears helpless, content to impose ineffectual fines that do not dent the billions the culprits realise from their shenanigans.

Though official exchange rate stood at N438.09 to US$1 on Saturday, the rate averaged N770 to N780 to $1 at the more realistic unofficial market. By Monday, the naira was falling in hours, climbing to over N800 to $1.

There is also the issue of denying kidnappers cash. Really, it is the failure of the CBN and law enforcement authorities to effectively enforce money laundering laws and regulations that facilitate the huge sums outside the bank vaults. By failing to enforce cash withdrawal limits for individuals and corporate organisations, redesigning naira notes will not stop huge cash pay-outs to kidnappers. SBM intelligence estimates that kidnappers collected N653.7 million in the year to July 2022. From the Kaduna train kidnap operation alone, bandits reportedly collected over N2 billion in ransoms.

Certainly, redesigning the currency to stop kidnappers hardly justifies the cost of printing new notes. An Islamic cleric known for his close links with bandits has already speculated that kidnappers would now insist on receiving ransom in dollars.

The last time Nigeria undertook an operation of this nature in response to corruption, money in circulation and security concerns was in 1984 when Buhari was military head of state. Then, there was a massive buy-in by the federal and state governments and full mobilisation of the entire security system. The country’s borders were closed for two weeks. The CBN will need to involve all stakeholders, including the customs, and immigration services.

Should Emefiele bungle this assignment, especially by failing to rein in the banks and bankers, securing law enforcement and other stakeholder buy-in, the consequences could prove fatal as the headlong plunge of the naira signposts. He should take a second look at the timeline. Buhari should scrutinise this risky venture more closely.