Yemisi Izuora
The Central Bank of Nigeria, CBN, has said that the country’s inflation is trending downwards while the exchange rates is now relatively stable with the currency redesign.
Governor, of the Bank, Godwin Emefiele, while addressing the Diplomatic and Consular Missions on the Recent Monetary Policy Decisions of the Central Bank of Nigeria on Tuesday, explained that the principal aim, with the currency redesign initiative, is to make the Monetary Policy decisions more efficacious and to increase financial inclusion in the country by reducing the number of the unbanked population. Further justifying the policy, the Governor, said the initiative aims to support the efforts of security agencies in combating banditry and ransom-taking in Nigeria and through the program the Military is making good progress in this important task.
Available data at the CBN, showed that in 2015, currency in circulation was only N1.4trillion while as at October 2022, currency in circulation had risen to N3.23 trillion; out of which only N500 billion was within the Banking System and N2.7 trillion held in people’s homes.
“These indicate that, so far, we have held excessive amounts of currencies in our hands rather than in banks or in cashless platforms. Ordinarily, when CBN releases currency into circulation, it is meant to be used and after effluxion of time, it returns to the CBN thereby keeping the volume of currency in circulation under the firm control of the CBN. It should also be noted that the Notes in private homes and outside the banking system are not available for economic activities and thus may affect the economy attaining its potential growth.” Emefiele said.
Continuing, he said that ” Our in-house analysis of the pre-policy currency adequacy indicated not only that currency outside banks was excessive but also that quantum of currency in circulation was suboptimal. Exhaustive simulation and model-based analysis founded on the drive to achieve a 20% – 40% cashless economy indicate that the optimal value of currency in circulation for the Nigerian economy is only N700 billion. This is just a fraction of the hitherto currency supplied to the economy and could explain, in part, the excess demand we have witnessed in foreign exchange market and to some extent goods market.”
Emefiele, also explained that Generally, currency redesign policies are designed by countries to strengthen the performance of key macroeconomic parameters and equally combat social improprieties.
Chiefly, it is expected to reduce the amount of cash in underground or illicit economy, truncate the activities of racketeers, and obliterate rent-seeking businesses in the black market. By reducing currency outside banks, it will shrink money stock and accordingly lower the long-run path of inflation. The ensuing deflationary pressure could elicit interest rate cuts that will in the short- to medium-term boost economic activities, spur aggregate demand, and enhance output growth.
The macroeconomic impacts of currency redesign are multidimensional and could seem uncertain especially at this early stage when its inconvenience is widespread. By spurring more people to use bank accounts, this policy will further increase bank account ownership and increase the use of accounts by enhancing people’s saving behavior, he said.
Again he said it could encourage some hitherto informal business operators to formalize the pattern of transactions and adopt more formal settlement channels. As experiences from other jurisdictions have shown, effective currency redesign can support regulatory reform, increased legislative reach and coordinated fiscal and structural policies.
He said that aside the general benefits of a currency redesign, the Bank expect a number of economic gains for Nigeria, including Reduction in Money Supply.
He said that effectively implemented currency redesign causes a fall in money supply as this will lead to reduction of value of money in circulation and a deceleration of the velocity of money in the economy leading to less pressures on domestic prices.
“As we mop up cash in circulation, money supply could decline, under certain assumptions. In addition, the speed at which money changes hands could reduce. Basic economic tenets under the quantity theory of money suggests that the fall in monetary velocity could retard price growth and taper nominal money supply.” Emefiele explained.
Another advantage he said is that the policy is typically expected to cause deflation in the market as less cash holding reduces currency outside banks and retards money circulation.
According to him, “The accompanying decline in money supply will thus slow pace of inflation. As you can see, we have stated to witness inflation trending downwards, following general price stability in almost all genre of markets including for goods and financial products. For instance, analysis shows that an effective implementation of the policy could by itself scrape four percentage points off the current level of inflations as it steadily slows inflation rate to about 18.0 per cent by mid-2023.”
This he asserted is quite achievable, as data from market sources indicate that the prices of grains and key staples, around Suleja and Lambata markets for instance, have generally been on the downward trend since the beginning of the policy.
Also, he said the price for soya beans has dropped from N30,000 to N22,000. Maize from N18,000 to N16,000, while the price of a bull fell from N400,000 to N330,000 and ram from N75,000 to N50,000.
Prior to the announcement of the policy, the Governor said the huge cash haul outside the banking system had exerted significant pressures on the exchange rate at all windows, but more so at the parallel market as it engendered asset substitution by speculators, and rent-seekers.
“While the policy was initially estimated to lead to more speculations due to panic moves as most people try to understand the policy action, it is expected to reduce speculation in the medium- to long-run. Today, the limited circulation of the new Naira notes has forced the hands of speculators and we are beginning to witness some stability. The initial pressure is projected to further moderate as the implementation of the policy takes-off and a wider understanding pervades the system.”
The Governor however acknowledged and regretted the widespread inconveniences due to this policy, saying, “We have observed pervasive incidences of hoarding and predatory activities of some vendors and unscrupulous Nigerians.”
He observed that the principal causes of the hardship to the citizens following the redesign policy include, hoarding by some members of the public thereby restricting their flow through the economy.
He said, “Cash kept at home will not circulate but may fuel a perception of scarcity which leads to higher demand for the currency, signalling to those who don’t have an urgent or immediate need to store cash.”
