September 25, 2023/CSL Research

Money Supply statistics from the Central Bank of Nigeria (CBN) for July 2023 showed that currency in circulation decreased month-on-month marginally by 0.29% in July to N2.59trn from N2.60trn as of June 2023.

Also, currency outside banks declined month-on-month by 2.39% to N2.21trn (representing 85.10% of currency in circulation) as of July 2023 from N2.26trn (representing 86.93% of Currency in Circulation) in June 2023. Between January and July 2023, currency in circulation has risen by 87.23% (N1.21trn) while currency outside banks surged by 178.85% (N1.42trn). This is however due to reinjection of some old naira notes previously mopped up by the CBN into the banking system.

The challenge of having a high proportion of currency in circulation outside the banking system has remained since independence despite previous currency redesigns and printing. However, the ex-CBN Governor’s efforts at mopping up the currency outside the banking system met with wide criticisms given the circumstances.

We reiterate however that the objective of reducing the significant amount of cash outside the banking system to ensure monetary policy effectiveness, curtail criminal activities and promote financial inclusion amongst others is strongly desirable. Reducing the amount of cash outside the banking system also helps to curb money laundering activities if the implementation is done in conjunction with agencies like the EFCC and the banks. Suspicious transactions can easily be flagged as cash comes in and out of the system. That said, we believe the timing and implementation process were flawed.

From reported numbers, we can conclude that the Naira redesign policy would have been moderately successful in mopping up currency outside circulation if it wasn’t halted. The currency in circulation reduced by 138% between October 2022 (when the Naira redesign deadline was announced) and January 2023 i.e., from N3.30trn to N1.39trn.

Also, percentage of currency outside banks to currency in circulation in October 2022 and January 2023 were 86% and 57.14% respectively, a considerable  reduction. With the extension of the validity of old naira notes as legal tender to 31 Dec 2023, we believe the currency outside banks will remain at current levels if actions are not taken to ensure they remain with the banks. For example, we expect the CBN to implement tighter rules around withdrawals to retain the money within the system once the old cash has been taken out of circulation.

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