Changing a currency: the demonetisation in Nigeria
In November, the governor of the Central Bank of Nigeria (CBN) unveiled plans to the public to replace the ₦200, ₦500 and ₦1000 banknotes. This happened after the President had approved the policy and when asked for reasons for the change, the President explained: ‘‘There was an urgent need to take control of currency in circulation and to address the hoarding of Naira banknotes outside the banking system, the shortage of clean and fit banknotes in circulation, and the increase in counterfeiting of high-denomination Naira banknotes. On this basis, I approved the redesign of the ₦200, ₦500, and ₦1000 banknotes.” Nigeria’s central bank had lost track of
₦2.7 trillion of the ₦3.2 trillion of notes in circulation because Nigerians had been hoarding cash. This has meant Nigerians have been by-passing banks, leading to a thriving informal economy estimated to be as much as 57.7% of Nigeria’s GDP.
To achieve this, the government intended to phase out the old currencies by January 31st, 2023. Subsequently this date was changed to February 10th 2023, but now some of Nigeria’s states are potentially set to sue the Central Bank of Nigeria and the government to extend the deadline. The events that transpired in the months during this currency change spelled out unforetold hardship like never before, such as a $44 daily limit placed on citizens to be able to withdraw money from a bank. In no time, riots and attacks on banks broke out all over the country as people tried to access their cash from the ATMs all over Nigeria.
Source: Blueprint Newspaper
The limit on withdrawal during the currency change was not the first; all commercial banks ceased to condone international transactions on naira MasterCard. This happened months after $20 became the new reduced amount people could make on international transactions using their Mastercard debit card . Unsurprisingly, this has made Nigerians look for alternate financial solutions - such as internet banking, fintech, mobile banking apps, Unstructured Supplementary Service Data (USSD) which enables users without internet connection to access mobile banking, cards/POS and eNaira (Nigeria’s CBDC). These options, except for eNaira, have since stepped in to ease Nigeria’s compulsory move to digital payment solutions and comes at a time when Nigeria has been campaigning for a cashless country, going as far as placing national tax on cash. However, little progress has been made since Nigeria relied heavily on cash. As much as 40% of the Nigerians do not have a bank account and there are only 4.5 banks per 100,000 people in the country. Unfortunately, the government’s crackdown on cash has also not been smooth because all the alternate payment channels face old problems. Nigeria’s cash crunch has had a huge impact on the country’s economy, halting the growth and causing food prices in particular to rise.
The centralised nature of other options, such as USSD, banking apps, etc., makes them hotspots for server overloads so causing multiple banking downtimes for users. Sadly, cryptocurrencies are not an option for Nigerians to turn to as the Central Bank of Nigeria has ordered banks to ban cryptocurrency transactions - although there is a question as to how long this ban will remain. The government would have a new tool to help tackle its informal economy. A smaller informal economy would help Nigeria to generate higher taxes as potentially all transactions are traceable, but at what cost would such a solution be for privacy?
Importance of digital payments
One of the critical goals of demonetisation has been to promote digital payments and reduce the use of cash. Blockchain technology can help achieve this goal by providing a secure and transparent platform for digital payments. With blockchain-based payment systems, transactions can be processed in real time. The risks of fraud, corruption and counterfeiting (which has been used as a reason for changing the currency in Nigeria) can be reduced.
Need for financial inclusion
The demonetisation drives severely impacted rural and low-income communities which had limited access to banking facilities and were largely dependent on cash transactions. This highlights the need for financial inclusion, and digital currencies such as stablecoins or ideally a CBDC can play a critical role in providing access to financial services for the unbanked and underbanked population.
Importance of transparency
The demonetisation program faced criticism for the lack of transparency in the implementation process. Blockchain technology could help provide transparency and accountability in public programs by creating a decentralised ledger of all transactions, which can be accessed and audited by anyone. This can help ensure that public funds are being utilised appropriately and are accountable.
Challenges of adoption
One of the challenges of demonetisation was the rapid shift from cash to digital payments, which many people found difficult to adopt. Similarly, blockchain technology faces challenges in terms of adoption, as people are often resistant to change and may not trust new technologies.
In 2016, India demonetised its currency in an attempt to curb its shadow economy and reduce the use of cash. Yet, still using cash India is at an all-time high. Similarly in Australia where cryptocurrencies are not legal tender, the Reserve Bank of Australia has just launched a project to “Explore the use of CDBC”. So, are we set to see Nigeria do the same? Nigeria’s demonetisation to date has caused much suffering for its 220million citizens and could in part explain why Nigeria is reported to be keen to pass new legislation to allow digital currencies.