FRI, 28 OCT, 2022-theGBJournal| The governor of the Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, held a special press briefing yesterday (26 October), announcing the apex bank’s intention to issue new Naira bank notes.
In his briefing, the governor cited that over 80.0% of the currency in circulation is outside the vaults of commercial banks; the ease and risk of currency counterfeiting have increased; and there have been increased shortages of clean and fit bank notes.
Accordingly, these challenges have limited the currency management function of the CBN, undermining the integrity of both the CBN and the country. Consequently, the governor announced that the CBN has sought and obtained the approval of the President to redesign new series of banknotes for the N100, N200, N500 and N1,000 denominations. In line with the approval, the new currency will be in circulation from 15 December. At the same time, the existing currencies will cease to be legal tender from 31 January 2023.
In the subsequent sections, we provide our views on the possible impacts of this directive in the context of the timeframe introduced to complete the exercise.
Potential Positive Impacts
Illicit hoarders may recourse to the parallel market FX operators to convert their naira to dollar instead of going directly to deposit the money in the banks. However, given that Anti-Money Laundering (AML) rules are expected to be tight, we believe parallel market FX operators will not accept the money from the illicit hoarders as they could be apprehended for Money Laundering if they subsequently deposit such money at the banks. Consequently, this directive would effectively render illegal and stolen monies useless.
Also, given our belief that the new notes will not equal the amount being phased out, the CBN could further institute measures to limit withdrawals, such as ensuring that part of any future withdrawals are done in eNaira, likely increasing the adoption of the digital currency. Other measures could include the CBN announcing amendments to the cashless policy after the existing notes cease to be legal tender. Some specific amendments to the current cashless policy could include higher processing fees for withdrawals above N500,000 by individuals (currently 3.0%) and N3.00 million by corporates (currently 5.0%) and (2) a reduction in the cumulative free withdrawal limits – currently N500,000 for individuals and N3.00 million for corporates.
The reduced cash in circulation would also reduce naira liquidity ahead of the 2023 general elections. Given that some individuals may have hoarded money ahead of the general election, this new development will likely force them to deposit the cash in the banks so as not to render the tender useless after the 31 January 2023 deadline.
Over the medium term, the lower cash in circulation would reduce the local currency volatility, providing some respite for the naira.
Finally, the phasing out of existing currencies and replacing them with new ones could improve the effectiveness of the monetary transmission mechanism as counterfeited, illegal and high-volume cash is significantly reduced.
Potential Negative Impacts
If the AML rules are tactically relaxed to increase money in the system over that which is outside the system, or illicit hoarders find ways to exchange the money with parallel market operators for US dollars, there is likely to be significant pressure on the local currency.
On, the illicit hoarders could be wary of the AML relaxation, given the exposure. Accordingly, they could prefer to exchange the naira for foreign currency (specifically USD) at the parallel market, while the operators in that segment of the FX market subsequently deposit flows in banks.
There is also the tendency for this development to cause panic among the populace, who will race to exchange their naira for US dollars at the parallel market before the 15 December new banknote circulation date, increasing the pressure on the naira.
Overall, the CBN’s directive could lead to pressure on the local currency in the short term based on our analysis above. However, barring unexpected shocks or if handled well, we believe it would achieve the stated objectives over the medium term.-With Cordros Research
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