THE CHANGE IN NAIRA NOTE IN NIGERIA, ITS EFFECTS ON THE ECONOMY AND THE CITIZENS

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THE CHANGE IN NAIRA NOTE IN NIGERIA, ITS EFFECTS ON THE ECONOMY AND THE CITIZENS

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Since the Central Bank of Nigeria (CBN) Governor Godwin Emefiele announced a planned redesign of the naira, there have been divergent views on the appropriateness or otherwise of the policy at a time the economy facing storms (Ajakaiye, 2017). From those in support to those vehemently opposed to it, the CBN has stirred up a debate with the fate of the economy at the centre of it all. It will be the 16th time the national currency has been redesigned or changed since 1959 (Ajakaiye, 2017). It is claimed that global best practice permits central banks to redesign, produce and circulate new local legal tender every five to eight years. The last time the naira had a makeover was 20 years ago (Aliu, 2016).

Just as the 2023 general election is around the corner, this new policy of the CBN seems to be politically motivated. But on the other hand, certain financial and political analysts have come out to say that this move would disrupt the plan of some political parties to use cash stored in different individual vaults in the country to buy votes (Aliu, 2016).

Statistics of the banks have it that over 80% of the nation’s currency is stored in private vaults by corrupt politicians who are involved in one crime or the other and who wouldn’t be able to defend the source of such huge funds if brought to the bank (Mobolaji, 2015).

This group applauds the CBN for coming up with such a strong plan at such a strategic season in the country when new leaders are selected. This policy, if successful, is likely to guarantee a bribery-free election by 2023, where voters and agencies would not be offered money to vote candidates into power (Ernest, 2015).

However, none of the changes has attracted as much interest and debate as the awaited 2023 redesign of the naira. On 26th October, the CBN Governor, Godwin Emefiele, announced that some denominations of the naira will wear new looks (Ernest, 2015). These are the N200, N500 and N1,000 notes. Emefiele said the apex bank was worried over the management of current series of banknotes and currency in circulation, particularly those outside the banking system in Nigeria (Felix, 2018).

A major source of concern to the CBN is the escalation in scale and sophistication unscrupulous people have abused the naira, from hoarding to counterfeiting the notes. Emefiele said members of the public were hoarding banknotes “with statistics showing that over 85 per cent of currency in circulation are outside the vaults of our commercial banks (Felix, 2018).

To be more specific, as at the end of September 2022, available data at the CBN indicated that N2.73 trillion out of the N3.23 trillion currency in circulation was outside the vault of commercial banks across the country and supposedly held by members of the public.” (Ghalayini, 2017).

Aside from the attacks on the naira, the CBN said it was compelled to redesign the naira because of the prevailing level of security situation in the country, especially cases of terrorism and kidnapping with perpetrators holding on to what Emefiele described as “large volume of money outside the banking system used as source of funds for ransom.” (Gbadebo, 2019).

The apex bank has admitted that the decision to redesign the naira will impact the value of the naira. Almost immediately announcing the proposed naira redesign, the naira plummeted like a wounded bird and it is now hovering around N800/$ in the parallel market (CBN, 2023). Another consequence of the naira change is the expected rush of bank customers and other members of the public to convert their old currencies to the new within the stipulated time (Henry, 2019).

With the expected rush to dump their old cash for the new in the banks, the CBN will by extension mop up currency in circulation, thereby applying the breaks on an inflation that looks unstoppable albeit temporarily (CBN, 2023). To address these fallouts, all Deposit Money Banks (DMBs) currently holding the existing denominations of the currency N200, N500 and N1,000 have been ordered to return these notes to the CBN immediately pending when “the newly designed currency will be released to the banks (Ghalayini, 2018).

Commenting further, Prof. Kingsley Moghalu said “those with the notes must surrender to get new ones or else it becomes illegal tender after January 31 2023. This is also a way to withdraw currency from circulation, an unorthodox way of tightening the money supply since the country is battling high inflation (Ghalayini, 2018). The flip side is that people who are holding huge amounts of cash outside the banking system for nefarious reasons will go to the parallel forex market to buy hard currency, putting further downward pressure on the value of the naira as too much naira will be chasing too few dollars.” (Frank, 2019).

It was doubted that the redesigning of the naira will solve inflation because there are also other major reasons for inflation such as the forex crisis, which this new move could exacerbate, as well as the impact of the security crisis on food price inflation (Harrod, 2019).

According to the Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, it is difficult to see any compelling value proposition of this currency redesign idea. The cost of such an action would be outrageous and disproportionate compared to the expected benefits advanced by CBN (Harrod, 2019). At a time when the government is grappling with high fiscal deficit, debt crisis, severe revenue crisis and underfunding of many government projects and programmes, it is most inappropriate to embark on such a profligate exercise (Holden, 2019).

He further stated that “Currency as a percentage of money supply is less than seven per cent. The exercise, therefore, has no monetary policy significance. Besides, it will come with huge logistics costs and avoidable dislocations to small businesses, most of who are in the informal sector (Ikpesu, 2018).

This is one intervention we can do without. There are more urgent issues demanding the attention of CBN. We have issues with liquidity in the foreign exchange market, the depreciating currency, the recent Moody’s downgrade of Nigeria, soaring inflation and many more (Ikpesu, 2018). The CBN should save the citizens and the economy the trauma of this currency redesign. It is a distraction we can do without.”

Prof Uche Uwaleke of Nasarawa State University argued that “the decision to replace some naira denominations with new ones will be positive for the economy in the medium to long term (Mankiw, 2018). Although the measure does not amount to demonetization of big currency notes often carried out by central banks to curb black money and corruption, it will go a long way in ensuring that a lot of naira notes circulating outside the banks are crowded in (Miles, 2017). It is with the various perception of Individuals on the economic impact of the naira redesign that the study will attempt to draw a conclusion on the impact of naira redesign on Nigerian economy.

1.2 Statement of the problem

The design of a country’s currency can have a significant impact on its economy, yet there is limited research available on the effects of currency design on economic stability, inflation, and growth. The recent redesign of the Nigerian currency, the Naira, has raised important questions about its potential impact on the economy, but there is a lack of empirical evidence to support the various claims being made. The effects of the Naira redesign on inflation, economic growth, and financial stability remain uncertain, and ongoing debates about the issue highlight the need for a comprehensive evaluation of the impact of currency design on the economy.

Evaluating the impact of currency design on the economy is crucial for informing future monetary policies and promoting economic stability and growth in Nigeria. By providing a detailed analysis of the effects of the Naira redesign on the Nigerian economy, this study will make an important contribution to the field of monetary economics and can inform future policy decisions in Nigeria.

There is a gap in the literature on the impact of currency design on the economy, particularly in the context of the recent Naira redesign. While some studies have explored the impact of currency design on consumer behavior and perception, there is a lack of research that provides an empirical evaluation of the effects of currency design on key macroeconomic indicators such as inflation, economic growth, and financial stability. This study aims to fill this gap by providing a comprehensive analysis of the impact of the Naira redesign on the Nigerian economy.

1.3 Research Objectives

The main objective of the study is to examine the impact of naira redesign on Nigerian economy. The specific objectives are:

To determine the impact of the Naira redesign on inflation in Nigeria.

To assess the effect of the Naira redesign on economic growth in Nigeria.

To evaluate the influence of the Naira redesign on financial stability in Nigeria.

1.4 Research Questions

The research will be guided by the following research questions:

1. What are the impact of the Naira redesign on inflation in Nigeria?

What are the effects of the Naira redesign on economic growth in Nigeria?

What are the influence of the Naira redesign on financial stability in Nigeria?

1.5 Significance of the Study

The completion of this study on the impact of the Naira redesign on the Nigerian economy will bring several benefits. Firstly, it will provide valuable insights into the effects of currency design on key macroeconomic indicators such as inflation, economic growth, and financial stability.

This information will be crucial for informing future monetary policies in Nigeria and promoting economic stability and growth in the country. Secondly, the study will contribute to the field of monetary economics by providing an empirical evaluation of the impact of currency design on the economy.

This will fill a gap in the current literature and provide a foundation for further research on this topic. Thirdly, the study will inform stakeholders, including policy-makers, business owners, and the general public, about the potential impacts of currency design on the economy. This knowledge can be used to make informed decisions and promote economic development in Nigeria. Lastly, the study will serve as a useful reference for researchers and policymakers in other countries who are interested in the impact of currency design on the economy.

1.6 Scope of the Study

The study will focus on the period before and after the Naira redesign and will analyze the changes in key macroeconomic indicators during that time. The data used in the study will be collected over a sufficient time frame to accurately assess the impact of the Naira redesign on the economy. The study will utilize a combination of primary and secondary data sources. The primary data will be collected through surveys and interviews with relevant stakeholders, such as policy-makers, business owners, and the general public. The secondary data will include published reports, academic journals, and other relevant sources of information.

1.7 Operational Definition of Key Terms

Naira redesign: The Naira redesign refers to the process of changing the design and appearance of the Nigerian currency.

Macroeconomic indicators: Macroeconomic indicators refer to quantifiable measures that reflect the overall state of an economy, such as inflation, economic growth, and financial stability

Inflation: Inflation refers to the sustained increase in the general price level of goods and services in an economy over a period of time.

Economic growth: Economic growth refers to the increase in the production of goods and services in an economy over a period of time.

Financial stability: Financial stability refers to the absence of systemic risk in the financial system, which could lead to a financial crisis.

Monetary policy: Monetary policy refers to the actions taken by a central bank to influence the supply of money in an economy, with the aim of achieving economic objectives, such as price stability and economic growth.

Fiscal policy: Fiscal policy refers to the actions taken by the government to influence the level of government spending and taxation, with the aim of achieving economic objectives, such as economic growth and financial stability.

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