Nigeria: The Central Bank's Decision to Change Currency - Implications on the 2023 Election, eNaira, Economy, Business, Security and Identity

PREDICTIONS

• The last two weeks of January will see an increase in mobile banking transactions and other new payment systems transactions.
• Young Nigerians' preference for platforms like Binance and the digital currencies it provides, like the Dollar, Pound, Bitcoin, Ethereum, and USDT, will remain high against the eNaira.
• Individuals hoarding the current naira notes will find it easy to convert the money to assets to avoid such a volume of money being traced to them by the monetary institutions and the financial crimes commission.
• The Bureau de change industry will be unable to cater for the demands for foreign currencies.
• The CBN's determination to ensure the traceability of the new notes is unlikely to deter large-sum withdrawal of new notes by politicians during the 2023 elections.
• Families and companies will find it difficult to pay ransom for victims related to them.
• The new notes are likely to be criticised by citizens if certain elements embedded in the notes are considered divisive and if the images the notes will carry are not generally considered unifying.

DEVELOPMENTS

The CBN has announced that the circulation of the new notes will begin on 15 December 2022, while the deadline for conversion will be 31 January 2023.

INSIGHTS

The expected Naira redesign is a response to serious hoarding of the notes by individuals, as out of the 3.23 trillion Naira in circulation, 2.73 trillion Naira are outside the commercial banks' vaults, typically with the political elites and criminals. In the Central Bank's governor's statement, the redesign was part of its strategy to tackle inflation and counterfeiting, attend to the shortage of clean and fit currency notes, push further the drive towards a cashless economy, fight terrorism and have control of currency circulation. The Central Bank of Nigeria (CBN) will have assessed that its policies and those of the commercial banks have made insufficient progress to force back the hoarded notes within the banking system in recent years to avoid currency change.

The president of Nigeria has approved the redesign of the current Naira notes that would see circulation beginning 15 December 2022 and conversion ending 31 January 2023, 25 days ahead of the general elections. However, the ministry of finance is against the redesign with reference to the further exchange rate fall consequence and the negligence of the CBN to carry the finance ministry along as a fiscal authority in its notes change policy. While the CBN, as a monetary authority, is not obligated by law to report to or inform the ministry of finance about the currency change, however, these polarised views or standpoints have heightened the risk of lack of trust in the bank and the purpose of the redesign. This comes after the public trust in the bank as an independent and non-partisan institution took a negative dive after the bank's governor ventured into politics by deciding to contest for the office of the president of Nigeria.

IMPLICATIONS

Economy

Nigeria will experience more and more cash transactions in the current notes in November and even more in December against the option of mobile money transfers by individuals and businesses. This trend is expected to last up to the start of January. Momentum for only new notes cash transactions will set in also at the beginning of January. The last two weeks of January will see an increased rejection of transactions in the old currencies and increased demand for the new notes and mobile money/banking transactions alongside other new payment systems transactions.

Also, Nigeria may continue to experience rising inflation with the new currency policy. This could prompt the monetary policy committee to increase interest rates, which is expected to contract the money supply and reduce inflationary pressure. However, this is unlikely to achieve the goal in the short term, given the increased spending often associated with end-of-year festivities.

Digital Currency

The drive towards a cashless economy through the increase in the minting of the eNaira, Nigeria's digital currency, as a compliment to the new notes, is unlikely to build the grassroot visibility and usage intended by the government. The existence of the fast and easy mobile banking system and apps by all banks and digital currency platforms like Binance remains a hindrance to citizens' adoption of the eNaira. Individuals, especially young people, are unlikely to embrace the eNaira and the platform as the CBN anticipates and envisages. Preferences will remain high for platforms like Binance and digital currencies on these platforms like the Dollar, Pound, Bitcoin, Ethereum, and USDT.

Business

Businesses in the asset industry, including real estate, and the automotive industry, will experience a boom. Anyone can purchase a piece of land or a house worth millions of Naira outright without necessarily proving the money's source. Individuals hoarding the current Naira notes will therefore find it easy to convert the money in their possession to assets that could be resold to get the new naira notes and avoid such a volume of money being traced to them by the monetary institutions and the financial crimes commission. Eventually, these asset prices will increase because of the increasing demand and willingness to pay the costs for these assets, given the safe haven the industry provides. However, this price hike will only happen in the short term.

Foreign Currency

Finding and converting to foreign currencies will become a largely unavailable service, especially for an average Nigerian trying to make foreign transactions or save money in dollars as a result of the continuous fall of the Naira. This is because the Bureau de change industry provides an opportunity for those hoarding the current Naira notes to keep the money in a different currency without a trace and pay as highest bidders, thereby able to limit access to foreign currencies for an average Nigerian. Moreso, the industry provides an opportunity for certain individuals to buy and hoard foreign currencies, especially the US Dollar, British Pound and Euro, as a way to make money by exchanging for higher prices at the exorbitant black market rates when the Naira as expected further crashes after the festive period and towards the election - late January to early February. The industry will be unable to cater for these growing foreign currencies demand, and international travellers and importers will take the major hit for the looming foreign currency exchange unavailable service.

Political

Vote buying during the general elections is likely to see a fall at the grassroot level. However, vote buying at the elite and major stakeholders level is expected to happen more in foreign currencies, as was seen during the parties' primaries in Abuja earlier in the year. The currency change and CBN's determination to ensure traceability of the new notes are unlikely to deter large sum withdrawal of the new notes by politicians, as was seen during the 2019 elections' bullion vans withdrawals.

Also, parties and political elites' donations to groups would primarily happen in cash using the old notes. This will come at the quest by the elites to initiate a vote value conversion of the notes in their possession to gather political support and influence voters' decisions at the ballot using cash before the CBN conversion deadline.

Terrorism and Kidnappings

With the new policy, it is expected that terrorists' access to large sums of money outside the banking system will begin to dry up. However, demands for ransom for kidnapped victims are likely to shift from the current naira notes to foreign currencies and even to a dual acceptance of foreign currencies and the new naira notes when the currency change is made and even to multi-transaction types to include digital currencies. Given the expected hard currency rush, more families and companies will find it difficult to pay ransom for victims related to them in the foreign currency choice of terrorists and other crime groups.

Socio-cultural

Nigerians' diverse yet collective identity will be tested or boosted by elements embedded in the new notes. Disagreements over the use of Arabic on the current notes alongside English, when Nigeria is only an English-speaking country, had generated heated arguments in the past. The possible use of Arabic on the new notes has also become a major argument since the CBN announced the Niara redesign. Citizens will criticise the new notes if certain elements embedded in them are considered divisive and if images on them are not generally considered unifying. If this happens, the trust and ratings of the CBN as an independent and non-partisan institution will drop even more.