1. What was supposed to happen?
The central bank changed the colors of the 200, 500 and 1,000 naira notes and the new bills went into circulation from Dec. 15. The hope was that when people dropped off their old money at the bank, many would choose that moment to switch to making electronic payments for their day-to-day finances. Banks hired 1.4 million agents to fan out to markets and rural areas to encourage people to open accounts, hoping to avoid a last-minute rush. The central bank suspended charges on cash deposits at banks and directed lenders to open their branches on Saturdays to encourage people to turn in their old notes.
2. What was the purpose of the exercise?
It’s been hard for the central bank to do its job when an estimated 85% of local currency in circulation was outside the banking system and well over 70% of informal transactions were made using cash. The value of bank notes in circulation has more than doubled since 2015 to 3.23 trillion naira ($7 billion). Announcing the currency move in October, bank Governor Godwin Emefiele said it would help to rein in runaway inflation. It was also supposed to reduce corruption and organized crime. The country has a thriving kidnapping industry that sees thousands of Nigerians abducted by bandits each year, with relatives often paying cash for their release.
Recalling 2.7 trillion naira using the country’s under-developed banking network was always going to be a challenge when it wasn’t clear how much old cash citizens were likely to turn in, and where. Nigeria has just 4.5 bank branches for every 100,000 people, one of the lowest ratios in the world. Just 35% of women and 47% of men have a bank account, according to the country’s statistics agency. Banks were overwhelmed and unable to meet demand for the new notes, disrupting day-to-day business and leaving many people unable to deposit their savings. The digital payments system was pushed to breaking point as customers opted for online transfers, with transactions taking hours to complete or failing outright.
4. What was the fallout?
The crisis threatened to backfire on President Muhammadu Buhari, who had supported it in the face of criticism even from within his own government, saying it was an important step to tackle corruption. As the cash crisis spread, he blamed the “selfishness and greed” of the country’s banks and called for more time to resolve the crisis. Finance Minister Zainab Ahmed insisted the initiative was a success as it brought trillions of naira of cash into the banking system. However, three state governors from Buhari’s own party said their regions were “on the verge of anarchy” and went to court to try to force the federal government to suspend the cash swap plan.
5. What did the central bank say?
Governor Emefiele said the central bank was addressing the problems and the situation was improving. He accused some politicians of mopping up the new notes and storing them “for political purposes” and said some Nigerians were hoarding the redesigned bills, causing long queues at ATMs. He said the country’s digital payment systems would ultimately be able to handle the surge in electronic transactions.
6. What does it all mean for the ruling party?
The government’s economic record has been a key issue in the run-up to the Feb. 25 vote to choose Buhari’s successor. His eight years in power have been blighted by economic decay, soaring unemployment, heightened insecurity and an exodus of the educated elite. By every economic metric, Nigerians are worse off than they were when he took power. The ruling party’s candidate to succeed Buhari even suggested the currency replacement plan was a plot to sabotage his electoral prospects or delay the polls.
7. Didn’t anyone see this coming?
Yes. There were warnings that Nigeria could suffer the same problems that India encountered when it pushed through a similar policy. That move led to cash shortages, long lines at banks and post offices and a slowdown in economic activity as farmers trekked for miles to exchange their old banknotes. It largely failed to reduce the amount of cash circulating outside the banking system or discourage corruption.
–With assistance from Mike Cohen.
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