Before the announcement, the dollar was trading at N760. However, by the evening on 26 October, it had hit N765 and has now reached an all-time high of N780. The exchange rate has, however, remained stable at N437/USD1 on the official market, which most Nigerians lack access to.
At a briefing, CBN governor Godwin Emefiele, expressed concerns over large amounts of money outside the banking system, which is estimated at 80% of the total money in circulation.
Emefiele said as of September 2022, N2.73tr of the N3.23tr in circulation was outside the vaults of commercial banks.
He added that the currency in circulation has more than doubled since 2015, rising from N1.46trn in December 2015 to N3.23trn as of September 2022.
According to the governor, the CBN has finalised arrangements for the new currency to begin circulation starting 15 December 2022.
Even the British pound which is falling in other countries is rising in Nigeria.”
Emefiele said the new and existing currencies will remain legal tender and circulate together until 31 January 2023 when the existing currencies shall cease to be legal tender.
The governor said all commercial banks currently holding the existing denominations of the currency may begin returning the notes to the CBN immediately.
FX demand to rise
Bureau de Change operators tell The Africa Report that those with questionable sources of wealth will most likely throng various BDC hubs to change their money to FX. This will lead to an increase in the demand for foreign currency and affect the naira in the short term.
“Naira has fallen by 10 points since the CBN made the announcement. The demand for FX has already risen. Even the British pound which is falling in other countries is rising in Nigeria. Don’t be surprised if the dollar hits N800 in the next few days. However, the naira will rise again after things simmer down,” an operator said.
Speaking to The Africa Report, Investment Banker and Economist, Adetilewa Adebajo, said indeed there would be a temporary rise in demand for forex.
Adebajo, who is Managing Director of the Corporate Finance Group, said: “People that have a lot of cash would want to change it to dollars. So, they hold the dollar in cash and when the new naira notes come, they will change it back to naira.”
“Maybe the temporary thing is to see the exchange rate going up but eventually, by the time the CBN has withdrawn all the naira, they would be able to control how much money they put back,” he adds.
The economist says this could be effective in tackling inflation, especially in a country that is cash-driven despite advancements in e-payments.
Curbing money laundering
The CBN governor maintained that the new move would help curb ransom payment. He said: “In view of the prevailing level of the security situation, the CBN is convinced terrorism and kidnapping will be minimised as access to large volumes of money outside the bank used as funds for ransom payment will begin to dry up.”
He adds that it would also reduce counterfeiting as well, saying recent technological advancements have made it easy to make fake naira notes.
Don’t be surprised if the dollar hits N800 in the next few days. However, the naira will rise again after things simmer down.”
The Economic and Financial Crimes Commission (EFCC) has hailed the move by the CBN and promised to monitor bank deposits in order to tackle money laundering.
The EFCC warned that it would “monitor the process to ensure that unscrupulous players and currency speculators and their cohorts among the bureau de change operators do not undermine the exercise.”
It called on banks to be alive to their reporting obligations and not assist unscrupulous customers in laundering suspected proceeds of crimes.
Nigerian law mandates all transactions above N5m for individuals to be done within a financial institution while for corporate organisations, the limit is N10m.
But Adebajo says the need to reduce inflation and the cost of logistics in handling the naira is more pressing than tackling money laundering.
“The volume of the naira in circulation is quite significant so it is the cost of managing this currency because the CBN has 36 branches across the country and they have air charter that transports currencies across the country.
“It is a major logistics operation managing cash in Nigeria today. The issue with money laundering and vote buying are secondary,” he adds.
2023 elections
The naira usually witnesses a drop in its value during election season in Nigeria due to the rise in the purchase of FX as well excess naira liquidity. Politicians are known to give money to voters during elections.
With the CBN’s move coming less than four months before the highly anticipated polls, would this reduce incidents of vote buying?
But Economist, Muda Yusuf, believes the new CBN move is a waste of resources.
Yusuf, who is a former Director-General of the Lagos Chamber of Commerce and Industry, tells The Africa Report that redesigning the currency would not curb vote buying.
“Vote buying doesn’t have to be by cash. You can transfer money to people’s accounts or designate PoS (Point of Sale) outlets to pay voters,” he says.
Yusuf, who is the Chief Executive Officer, Centre for the Promotion of Private Enterprise, adds that money laundering usually takes place through the banking system and this would not suddenly stop because the currency is being redesigned.
“Will terrorists not ask for new notes if they abduct people? Can’t they ask for dollars?” he asks.
“The cost of printing N3trn new notes would be too high. Consider the logistics. This move has no effect on monetary policy. In any case, the cash component of the money supply is less than seven percent. The money supply is N48trn, the cash component is N3trn. So, what is the essence of this new policy?” says Yusuf.
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