In October 2022, the Central Bank Of Nigeria (CBN) announced plans to redesign the 200, 500, and 1000 Naira notes. The regulator set January 31st, 2023, as the last day the old notes of these denominations would be recognized as legal tender. The deadline was later extended to February 10th.
What has happened since the announcement provides critical lessons about the nature of money and, in particular, fiat currencies.
But what exactly informed the decision by the CBN to replace the old notes with new ones?
There are reasons that the regulator has provided through its official communications, and there are those that are being speculated on various forums as the real reasons.
The official reasons for currency redesign
The following are the reasons for redesigning the notes that the central bank has provided to the public through its official communications:
Stop or minimize counterfeiting
According to the CBN, it has, over time, become easier to counterfeit the old notes, which has increased the cash supply in the economy and, as a result, has driven rampant inflation.
“We have a huge challenge of counterfeiting. Nigerians have set up factories and are just churning out bank notes,” Mrs. Amina Abdulmalik, Deputy Director of Currency Operations Department at the central bank, has been quoted as saying.
She further explained that CBN had been struggling to fish out the counterfeits. Therefore the financial regulator resorted to a recourse that other central banks around the world had pursued when the level of counterfeits threatened the confidence citizens have in their currency, which is redesigning it.
The CBN has assured Nigerians that the new notes have enhanced security features, making them difficult to counterfeit.
Giving banks more control over the money in circulation
The CBN estimates that over 80% of the money in circulation is outside the banking system. That means it cannot be monitored, particularly to detect criminal activities.
In 2014, CBN introduced the Bank Verification Number to help identify bank customers and monitor their transactions. This system can only be efficient if a significant part of the country’s currency is transacted through banks and financial institutions.
Having everyone get new notes from the bank is an opportunity to have a record of the amount of money in the citizens’ possession and their transactions.
According to the CBN, much of the currency outside the banking system’s control does not circulate. Instead, it is hoarded by individuals and other entities in homes and private safety deposit boxes.
The change in the legal tender is designed to bring into circulation much of the money that has been kept away, especially for a significant period. The withdrawal limits put in place are, in particular, intended to achieve this goal.
For decades Nigeria has been struggling to overcome crimes like kidnapping, terrorism, and corruption. According to the government, these major enablers have been physical cash received and spent outside the banking system.
By forcing a change of the legal tender, the government anticipates weakening organized crime syndicates as it makes much of the funds they hold worthless.
Drive financial inclusion
According to data from the World Bank, about 64 million Nigerians remain unbanked. The CBN set up the National Financial Inclusion Steering Committee to bring more Nigerians into the financial system. This body has been tasked with the goal of achieving 95% inclusion by 2024.
The central bank has alluded that changing currency designs will help it achieve it. This is most tied to the fact that the regulator intends to limit the use of physical cash and encourage Nigerians to embrace digital payment solutions.
That includes the e-Naira central bank digital currency (CBDC), launched in October 2021 but has yet to gain traction. The most recent reports indicate that less than a million users have downloaded the e-wallet needed to use eNaira.
Some have argued that the CBN redesigned the Naira notes to make it hard for some politicians to bribe the electorate in the coming elections using funds they have hoarded.
Nigerians are going to the polls on February 25 to elect the next president and fill other political offices.
These allegations worry some, especially with reports that well-connected individuals easily get the new notes. That could mean some candidates will have an advantage over others.
Yabagi Sani, the presidential candidate of the Action Democratic Party (ADP), has added another twist to the political angle. He has alleged that redesigning the naira is intended to prevent the elections from happening.
“It is only the enemies of the state that will introduce this kind of thing so that elections will not take place or when it takes place, it takes place under a situation that you can’t guarantee free, fair and credible election,” He has stated.
The process of changing the old notes for the new ones has been anything but smooth. From the start, the process had to overcome major challenges. For example, the points of issuing the new notes needed to be increased.
The CBN has had to mobilize over 30,000 agents to help exchange their old notes for new ones, especially those in remote areas. Nevertheless, many in rural communities have not been reached or have had to travel long distances to change their money.
Meanwhile, there has been a shortage of new banknotes in cities and towns. Nigerians have had to join long queues outside banks and ATMs. This shortage has led to riots in some cities as citizens cannot buy basic needs because they cannot access their money.
The banking agents charge up to 20% commissions to exchange the currency.
Consumers are also struggling with low withdrawal limits. The CBN had initially put withdrawal limits at N100,000 per week for individuals and N500,000 for corporate entities. It later increased to N500,000 for individuals and N5 million for corporate entities.
Part of a global trend
What the CBN is undertaking is not unique. It follows the steps of several countries that have also redesigned their banknotes in the recent past. In 2016, the Central Bank of India redesigned notes of several denominations.
In 2019, the Central Bank of Kenya released new banknotes under very similar conditions to those of Nigeria today. There was an election coming, and there were allegations that the design changes were made to make money held by politicians for campaigns useless.
Indeed, countries have always redesigned banknotes and coins. The common practice has, been to gradually phase out the old notes. What is new is the central banks picking a date on which old notes cease to be legal tender. This forces citizens to queue for the new notes before the deadline.
The lesson here is that fiat currencies cannot be relied upon as a store of value, especially for someone who wants to hold it outside the banking system. Besides being inflationary money, they now carry a significant risk of becoming completely worthless at the expiry of a decreed date.
It is also a reminder that the most reliable store of value is still assets not tied to financial systems. Until recently, that meant precious metals. This class of assets, however, comes with logistical challenges such as security and transportation.
Today we have another option: crypto assets such as Bitcoin. They are based on decentralized technology so that no authority can wake up one day and change their essence, therefore taking away their ability to store value. They are also deflationary, so they will likely maintain their value over time.
Last but not least, the logistics of handling them are more convenient. All you need to carry your value around is a wallet on a device such as a memory stick. Indeed, even with a few words on a piece of paper (Mnemonic wallet), you can easily carry your assets with you anywhere in the world.