Nigeria’s cash crisis and the future of digitalisation

Heineken’s Nigerian business unit, Nigerian Breweries, has said that its trading in the country has been at its worst in 15 years. The cause has been the scarcity of bank notes – an avoidable problem – that has drained more than 2 trillion Naira ($2.6bn) from the local economy and hit cash-dependent consumers and traders alike.

Why has the cash crisis happened?

The Central Bank of Nigeria (CBN) wants to replace old?1,000 ($2.17), 500 and 200 Naira bills with new notes. The apparently clumsy rollout of this policy has led to huge queues at ATMs and banks as Nigerians have struggled to get hold of cash since the beginning of 2023. The amount of cash in the economy has fallen by more than 60%.

In 2015, there was N1.4 trillion in circulation. By October 2022, this had risen to N3.23 trillion, of which only N500bn was actually held in the banking system. Since the start of 2023, when the CBN has decided to phase out old notes, N2.1 trillion has been collected, leaving just N900bn in use.

In practice, the CBN is using the naira replacement process to bluntly force through its ambition of a 100% cashless economy in Nigeria. Effective Monday, January 9, 2023 through a the policy of naira redesign and new limits on cash withdrawal from banks, it has created a massive scarcity of notes.

The policy is widely unpopular. In late February, ten state governors, most of whom were from the ruling party, called for the supreme court to overturn the policy. Furthermore, Nigeria’s private-sector activity contracted for the first time in almost three years as companies reduced output and cut jobs as a result of cash and fuel shortages.

Are there benefits to the cash crisis?

In mid February,?The Governor of the Central Bank of Nigeria, Godwin Emefiele, stated that limiting cash would have several major effects:

Stabilising exchange rates

Cutting inflation

Increasing financial inclusion by forcing people to open bank accounts

Improving savings rates

Cutting crimes such as [cash] robbery

Boosting fiscal policy and tax collection via formalisation

The tax collection / tax evasion aspect is by far the most important of the mooted benefits. 95% of trade in Nigeria occurs in the informal trade and businesses and consumers alike are loath to trust the Nigerian government to use tax receipts wisely. Even so, financial inclusion, and therefore both the digitalisation and formalisation of the economy is improving.

The uptake of bank accounts in Nigeria has risen sharply during and post-COVID, but still more than half of Nigerians do not have a bank account. The number of active?bank accounts?in?Nigeria?increased to 133.5m in 2021, according to the data released by the?Nigeria Inter-Bank Settlement System Plc (NIBSS). The number of bank accounts grew gently from 2016 (65m) to 2019 (79.3m) before leaping to 114.8m in 2020 as a result of the lockdown restrictions and catalyst for digitalisation due to COVID-19. The long term pattern is that from 2016, when 30% of Nigerians had a bank account 45% did in 2022. Undoubtedly the cash crisis will raise penetration again.

Impact on supply chains

COVID-19 accelerated a pre-existing trend of digitilsation of supply chains. The best examples of this are TradeDepot, Alerzo and Omnibiz, all B2B grocery buying platforms, and Goldman Sachs-backed logistics broker Kobo360. The spike in freight rates, enormous disruption to global supply chains and subsequent rise in inflation has catalysed a fundamental modernisation of supply chains.

To put this in context in the grocery sector, from an outlet universe of around 1.5m stores, TradeDepot and Omnibiz each serve more than 100,000 outlets (many of which will use both buying apps). The scale of modernisation, largely hidden from view as it happens in the cloud via retailers’ smartphones, is breathtaking. Where previously a retailer would need to spend half a day per week travelling to and from a wholesaler, now he can check prices, order goods, manage stock, access trade credit and organise delivery to his store within 24 hours of ordering.

Which is great, but Nigeria is still a heavily cash-based economy and although traders are digitalising their operations, supply chains run on cash. Heineken estimates that 80% of its sales are conducted in cash. The lack of cash also hit fuel sales, causing major issues for suppliers. Bucking a trend of more than five years of improvements, supplier delivery times have lengthened in Nigeria in 2023 as a result of fuel shortages.

What next?

The CBN’s brute force cashless policy has exposed both the gains made in digitalising the economy but also the limits of it, particularly in the north of the country and in rural areas. The pain of cash shortages will incentivise more uptake of bank accounts and undoubtedly will improve the performance of retailers using app-based buying platforms relative to their counterparts who buy offline and with cash only.

Bank account registrations rose by 44.8% in the first year of COVID-19. Even half that uptake of new bank accounts in 2023 would be transformational in terms of how, where and with whom consumers choose to spend. But the next cohorts of digital adopters will be harder to reach: poorer, more rural, more distrustful of their government. Smartphone penetration is between?40% and 45%, so tracks relatively closely to bank account ownership. To the extent that we see the cash crisis driving change in 2023, smartphone uptake and mobile money is likely to be the main beneficiary.

The CBN is not so far moved to change tack on its cashless policy. The pain is an integral part of the process. Rather, it is now attempting to shift the blame to bank managers, accusing them of hoarding stashes of the new notes in bank vaults, rather than distributing them.

Two months into the cash crisis and with a presidential elections already over (although the results are hotly contested) there appears to be little political pressure to increase the circulation of notes. Rather, incoming president Bola Tinubu can sit back, watch the chaos play out under outgoing president?Muhammadu?Buhari and reap the wins from more formalisation and, if he chooses, reverse the cash crisis and position himself as the people’s hero.