CBN’s Currency Redesign Plans: Right Call… Yet, Inadequate

Photocredit: Sun News website

We share our perspective on CBN’s recent announcement to replace the existing banknotes of higher denominations effective December 15, 2022 – barely seven weeks before the current banknotes of these denominations become irrelevant. This decision, according to the CBN is hinged on the need to curb large-scale hoarding of banknotes by non-bank actors, worsening shortage of clean and fit banknotes, and the elevated risk of currency counterfeiting. Like other Apex Banks across the world, the CBN is constitutionally empowered to take measures that would ensure the preservation of the integrity of the fiat note, as part of currency management functions. By convention, the global best practice for Central Banks is to redesign, produce, and circulate new banknotes every 5 to 8 years. For the CBN, the last of such actions was in 2007 when the ₦50 and other lower notes were redesigned and reissued

In our view, though the timing of the CBN’s action could be considered a masterstroke in easing some of the contemporary social (e.g. vote buying and ransom payment) and monetary policy challenges (e.g. weak transmission mechanism) bedevilling the economy, other fundamental factors needs to be addressed concurrently to get the desired results. For instance, the CBN noted that over 85.0% of currency in circulation (CIC) was outside of banks’ vaults in September 2022. While this submission is undeniable, our analysis of CBN’s data on CIC and currency outside of banks’ vaults since 1960 points to a similar trend. We opine that this could be linked to the high financial exclusion rate (2020: 55.0%, EFInA), large informal sector activities (2018: 60.0%, IMF), lack of banking presence in many remote communities, and the weak confidence in the efficiency of the formal financial system, especially by informal sector players. These dynamics we believe partly contributed to the failure of the recent MPR hikes from stemming inflation as anticipated by the CBN.

Furthermore, we are of the view that the problem of a worsening shortage of clean and fit banknotes would persist if the CBN and relevant law enforcement agents do not up their games. For instance, public sensitisation on the proper handling of banknotes tops CBN currency management roles as stipulated in the CBN Act 2007. This effort (in our view) has been very weak, especially in large informal communities and rural settings where cash handling is prevalent. Also, the synergy between the CBN and relevant law enforcement agencies in enforcing the laws against selling, spraying, writing, stapling, tearing, soiling, and mutilating has lost its stem. 
In the table below, we present the likely gains and trade-offs of the planned currency redesign on Households, Businesses, DMBs, CBN, and the FG given the current domestic and external economic conditions.