March 16, 2023/United Capital Research

The seven-member panel of Justices of the Supreme Court in an undisputed decision nullified the ban on using the old N200, N500 and N1000 banknotes as legal tender, and held that the old banknotes should remain valid legal tender until 31-Dec. The Supreme Court’s decision could be as a result of the anti-currency redesign policy backlash that has gathered steam in recent months. Nevertheless, the Federal Government is yet to respond to the ruling of the Supreme Court, even as commercial banks await a directive from the Central Bank (CBN). Meanwhile, despite the order from the Supreme Court, the old bank notes are still being rejected by businesses and in the broader economy.

The CBN’s currency redesign policy and Naira swap program was set to improve the efficacy of the CBN’s monetary policy by constricting the volume of currency in circulation. At the time of its announcement on 26-Oct-2022, CBN data indicated that N2.7trn of the N3.3trn in circulation was outside the banking system. Upon implementation of the policy, currency in circulation had plummeted by 58.1% to N1.4trn at the end of January. Similarly, the policy also aimed at curbing currency speculation and inducing a shift toward a cashless economy. Data from the Nigerian Interbank Settlement System (NIBSS) showed a surge in Point-of-Sale (PoS) and e-payment transactions, by 40.0% and 55.0% respectively in Jan-2023. Also, the Naira has remained relatively stable in 2023, at N750/$ – N765/$ in the parallel market, and N461.0/$ – N462.2/$ in the I&E window.

Although the intent of the policy might seem unobjectionable, the policy has however faced controversies concerning its methodology and implementation. The new notes are elusive, creating a cash squeeze. This has hampered productivity in an economy which is largely cash-based. It also accentuated inflation, up by 48bps to 21.8% y/y in Jan-2023. The buoyant system liquidity resulting from inflows from the economy has fostered a depressed yield environment, altering investment positions. These unintended consequences, if not mitigated may present upside risk to Nigeria’s GDP growth, inflation, and external sector outlook. 

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