The Central Bank of Nigeria (CBN) has announced that it will redesign the N200, N500, and N1,000 notes and begin circulating the new notes on the 15th of December 2022.
This, as Godwin Emefiele, governor of the Central Bank of Nigeria noted, is an effort to reduce the inflationary pressure on the currency. According to him, the suggested changes will boost the value of the naira and assist reduce inflation.
The Central bank has therefore given the 1st of February 2023 as ultimatum for all old naira notes to be returned to banks else they would cease to be legal tender.
Prominent Nigerians and experts alike have responded differently to the policy shift. The CBN has received both praise and criticism.
To be fair, though, Nigeria isn’t the first country to try anything like this. For those who have tried it before, though, how well did it work?
India is the last major emerging market economy to make this sort of policy shift. The Reserve Bank of India implemented its demonetisation programme in 2016, which resulted in the temporary elimination of R500 and R1,000 banknotes from circulation for a period of six months.
India’s previous prime minister, Narendra Modi, has previously stated that the country’s corruption was directly proportional to the amount of cash in circulation.
Back then, he claimed the use of illicitly obtained funds exacerbates inflation. The poor will be hit hardest. The purchasing power of the lower and middle classes is directly impacted.
The Indian government declared on November 8th, 2016, that the R500 and R1000 currency notes would cease to be legal tender as of that day in an effort to reduce corruption and black money in the country.
What this meant was, the citizens will no longer be able to use these notes for transactions. Individuals with anti-national and anti-social agendas will soon be left with worthless stacks of 500-rupee notes.
It’s part of the government’s effort to “strengthen the hands of the common man in the fight against corruption, black money, and fake currency,” as the Indian government puts it.
Although it was tough for low-income Indians to wait in long lines to have their banknotes exchanged, the Central Bank of India deemed the initiative a “success” because 99.3 percent of the banknotes were returned.
Although it was tough for low-income Indians to wait in long lines to have their banknotes exchanged, the Central Bank of India deemed the initiative a “success” because 99.3 percent of the banknotes were returned.
According to Bloomberg, however, the scheme had the opposite effect, freezing “agriculture and small businesses with a liquidity shock, putting people through unnecessary hardship, disrupting supply chains, and destroying demand for everything from autos to property, the result can’t be such a gigantic anticlimax: 107 billion rupees ($1.5 billion) weeded out of a $2.5 trillion economy.”
One year after demonetisation, India’s net savings were 50 percent lower than the five-year average preceding the policy change. This indicates that India’s strategy did not result in a surplus of household savings at the banks, which could have been lent to the economy’s productive sectors.
When the demonisation was announced, Bloomberg Data showed that there were 18 trillion rupees in circulation in India. The figure jumped to 20 trillion rupees in a little over a year.
In terms of gross domestic product, India’s economy slumped to a four-year low of 6.5% in 2017-18, down from 7.1% in 2016-17 due to lost man productive hours.
At least 1% of India’s GDP and 1.5 million jobs were lost as a direct result of the demonetization exercise.
Former Indian finance minister Palaniappan Chidambaram said the country would have to pay a “big price” because of its demonetization strategy.
Taking the nation of India as an example, the Central Bank of Nigeria’s policy of redesigning the country’s currency may as well be fruitless. The most defenceless members of society (those without bank accounts) will be hit hardest.
Nigeria needs to take precautions to ensure it doesn’t experience the same fate as India. Recently, the IMF cautioned the Central Bank of Nigeria (CBN) against rushing into a new design for the naira in an effort to slow inflation.
