How Nigeria can improve Free Trade after a ‘failed’ Currency Redesign

During the first quarter of 2023, Nigerians experienced cash circulation shortages due to the naira redesign policy. This policy negatively impacted several informal sector businesses, such as local retail shops, artisans, and commercial bus drivers. Trading activities for small-scale manufacturers were also affected. The impacts of the naira redesign policy show a need to revive the cashless policy for small businesses to address cash scarcity. Promoting strategic monetary approaches that complement the naira redesign policy will boost free trade in Nigeria.

The rejection of old notes by banks, motorists, and other traders caused significant challenges for Nigeria’s informal economy. Also, the country’s high percentage of unbanked individuals underscores financial inclusion. For instance, people living in remote areas without bank branches rely on point of sale agents with limited access to the new naira.

A financial system with numerous mobile money operators encourages competition and better service delivery. But this can only happen if the CBN reduces the capital required to obtain a mobile money service provider license.

As of February,  the Central Bank of Nigeria (CBN) maintained that the naira notes were no longer legal tenders. Though the decision got a nod from President Muhammadu Buhari, many state governors objected. The governors of Kaduna, Kogi, Zamfara, and Ogun filed a lawsuit against the federal government and the CBN. The case successfully challenged the implementation of the currency redesign policy.

The implementation of the naira redesign policy also revealed Nigeria’s economic vulnerability. Due to limited access to physical cash, many Nigerians could not pay for basic needs and engage in trading activities. Some bank customers closed their bank accounts in protest of the cash crunch. The CBN must address financial access and reduce reliance on physical cash.

Since 2012, Nigeria has operated a cashless policy, yet the country’s ₦‎198 trillion GDP is still cash-based and largely informal. To overturn this, the CBN has to reduce the barriers placed on mobile money licensing. During the cash crunch, financial services, like Opay and Palmpay, acted as payment service banks (PSBs) to ensure swift remittances. 

These PSBs onboard new users using their phone numbers. Hence, mobile money operators could easily capture the unbanked population. Nigeria needs more PSBs. A financial system with numerous mobile money operators encourages competition and better service delivery. But this can only happen if the CBN reduces the capital required to obtain a mobile money service provider license. 

The CBN had projected that the naira redesign would reduce inflation. Yet, inflation rose to 22.04 percent in March. That was a 3.2 percent rise compared to when the new notes were introduced in December 2022. Cash scarcity caused negative impacts on food prices and commodities. Food prices rose by 0.45 percent during the cash crunch between February and March. The rise in essential items revealed that the CBN needed to complement the naira redesign policy with other monetary policies. 

A monetary policy such as cutting bank interest rates would encourage borrowing, increase investment and stimulate economic growth. The redesign policy and cash availability at commercial banks and PSBs will facilitate trading activities. Cash availability amidst a currency redesign policy will reduce Nigerians’ physical and economic hardship during everyday activities.

The apex bank has reluctantly complied with the Supreme Court judgment. CBN reintroduced the old ₦‎200, ₦‎500, and ₦‎1000 notes into circulation. But, the damage to the economy has already been done. Nigeria’s nominal GDP loss for the first quarter is estimated at ₦10 trillion due to problems caused by the naira redesign policy. Some informal businesses lost money because they had to pay more for physical cash. 

The cash crunch caused reduced trading activities in the informal economy. The Nigerian government must prioritize implementing the African Continental Free Trade Area (AfCFTA) strategy to enhance these trading activities. The strategy includes improving trade infrastructure, such as transport costs for goods and services. Helping small and medium-sized enterprises improve their payment and delivery systems is another AfCFTA strategy. The strategy also promotes value addition and boosts agricultural productivity. Enforcing these strategies can help put the economy back on track.

Effective implementation of Nigeria’s AfCFTA strategy requires collaboration between the CBN, the federal ministries of finance, and industry, trade and investment. Collaboration is necessary to develop policies and programs that complement local trade and banking policies. The CBN and Ministry of Trade and Investment should prioritize policies such as reducing licensing fees for PSBs. They must also cooperate to create a regular cash availability strategy for the informal economy. With these complementary policies and a well-implemented AfCFTA strategy, trading activities will increase, assure economic growth, and open up more job opportunities.

The currency redesign policy resulted in unintended consequences and hardship for citizens. However, the naira redesign policy can be a massive leverage for promoting free trade when the appropriate stakeholders enforce complementary policies that align with Nigeria’s current realities.

Olakunle Mohammed is a writing fellow at African Liberty.

Photo by Sunday Abegunde via Unsplash.