The Effects Of The Naira’s Redesign On The Nigerian Economy

BY:OlORUNoje MARIAM KOFOWORAOLA

It has been noted that governments in the majority of developing economies have repeatedly altered their currencies over time. Redesigning the currency was viewed as a way for the government to reestablish its control over the currency. In other words, people may start using foreign currencies if they lose faith in their country’s currency. It’s known as “dollarization” to allude to this process. The term “Naira redesign” or “redenomination” can refer to the introduction of a new currency or a change in the number of zeros connected with a particular currency.

The redesign of currency has both positive and negative economic effects. Currency redesigns assist nations reduce counterfeiting and stay one step ahead of threats, which increases the security of a currency.

The economy is expected to grow, cash management expenses to be reduced, financial inclusion to be advanced, and the government’s capacity to watch over the money supply will all be improved.

As a result of less money being stored outside of banks, the money supply will decline, which will halt the long-term trend of inflation. The resulting deflationary pressure could lead to interest rate cuts, which will boost economic activity in the short to medium term, boost aggregate demand, and enhance output growth.
Over 85% of the currency in circulation, according to the Central Bank of Nigeria (CBN), is kept outside the vaults of commercial banks, and the lengthy period between re-designing naira notes, which, by best practice, should be done every 5 to 8 years, made it necessary to redesign the naira. From N1. 46 trillion in December 2015 to N3. 23 trillion in September 2022, the amount of money in circulation has more than doubled. According to CBN data, the value of cash held outside banks increased from the N2.54 trillion reported in a similar period of 2021 by 11.07% year-on-year (YoY).

Furthermore, on November 23, 2022, President Muhammadu Buhari unveiled the new naira note redesign for the N200, N500, and N1000. On the unveiling, the currency has a resemblance to the previous currency, the only difference is the colour change, and the expectation of the redesign is not appealing to the public. Due to these similarities in colors, they can cause a loss of funds during financial transactions in low-power supply areas. More so, counterfeits were highly circulated in the economy because the redesigned naira was massively duplicated in color, which makes it hard to easily detect counterfeits. One way to curb this counterfeiting is for the CBN to add more security features to the redesigned naira.

However, this policy has both positive and negative implications for the economy of Nigeria. On the positive angle, this policy aims at promoting a cashless policy, improving the electronic use of payments, curtailing vote buying in the 2023 election, and also curtailing inflation. On the negative angle, it has humongous consequences because it has made a lot of people hoard cash at home, affected businesses and industry in Nigeria, and has a high chance of declining Nigeria’s Foreign Direct Investment (FDI). In addition, many industries and businesses experienced slow growth, which led to a decline in Nigeria’s real GDP and other macroeconomic uncertainties.