New banknote swap wreaks havoc on business in Nigeria

Photo credit: Punch

The introduction of new bank notes has had a detrimental impact on many businesses in Africa’s largest economy. A shortage of the new currency has led to plummeting sales for traders and rising inventories for manufacturers. Some experts have stated that while the policy in itself may not be flawed, its implementation has been mismanaged.

The Central Bank of Nigeria introduced new 200, 500, and 1,000 naira (US$0.43, US$1.09, and US$2.17) notes in the middle of an election campaign season in a bid to curb counterfeiting and hoarding of cash outside the banking system. The Bank hoped its policy would discourage vote buying and encourage more people to go digital. The deadline set for replacing the old notes with the new ones was set for 31 January 2023. But as the date approached a shortage of new notes threw Nigeria's business community and economy into chaos. Nigeria's economy relies mainly on cash and is largely informal. As a result, the deadline was extended until 10 February. Nonetheless, insufficient new notes were available, leaving many without cash to purchase essential items. Violent protests ensued, and queues at ATMs extended for as long as seven hours. Some individuals even set fire to cash-dispensing machines.

The CBN has been criticised for not printing enough new notes, while the apex bank has accused politicians of hoarding the new notes for election-related purposes. The election took place on 25 February.

Regardless of the reason for the shortage it has dealt a severe blow to businesses, especially informal traders who account for over 90% of retail sales in the country. With customers unable to pay with cash these traders are struggling to make any sales. Perishable food vendors are the hardest hit, with some forced to discard their goods as they go bad before they can be sold. Others have lowered their prices below cost to generate cash. Electronic bank transfers are not a viable solution for most shopkeepers as they encounter difficulties accessing cash at the bank. Additionally, digital point of sale systems are not considered a feasible option due to their high transaction fees. 

Informal shopkeepers’ inability to trade also had knock-on effects on fast-moving consumer goods companies. Unsold goods have been piling up in warehouses, and products with a limited shelf life had to be written off. This has forced manufacturers to cut down on production to prevent any further losses. 

The agricultural sector, which is mainly composed of smallholder farmers, has also been affected. For example, cocoa farmers receive payment in cash for their crops. Isaac Arayela, a manager at the Ile-Ife Cooperative Produce Marketing Union in Osun State, explained that the cooperative is currently unable to pay its members for their cocoa supplies, and that they are unwilling to accept bank transfers as an alternative.

Some traders have even resorted to using the CFA franc, which is used in French-speaking West African countries, instead of the scarce naira.

In an attempt to ease tensions, President Muhammadu Buhari announced on 16 February that the old 200 naira note would remain a legal tender for a further 60 days. Additionally, the old 500 and 1,000 naira notes can be exchanged until 10 April. However, these measures have not alleviated the cash shortage and many are still unwilling to accept the old notes.

One of the beneficiaries of the situation is mobile money operators. In the two months since October, when the new notes were first announced, the value of mobile money transactions has increased by 25%, reaching US$5.4bn, as reported by the Nigeria Inter-Bank Settlement System. As a result, fintech firms are positioning themselves to meet the sustained increase in demand. This is because only 40% of Nigerians have access to bank accounts, while mobile phone penetration in the country is at 117%, offering an opportunity for rapid expansion.

On 22 February, the Supreme Court resumed hearing a case in which several Nigerian states are attempting to force the CBN to extend the use of old banknotes by six months. The court has stated that a judgement will not be issued before 3 March.

 

References

‘CBN, police, and other agencies to prosecute sellers, abusers of naira’, Central Bank of Nigeria, 02 February 2023

‘Nigeria delays plans to replace its banknotes after chaotic scenes at ATMs’, CNN, 09 February 2023

‘Nigerian cash crisis a boon for MTN and other mobile-money players’, News24, 12 February 2023

‘Cash crunch: Manufacturers, businesses may shut down’, Business Hallmark, 13 February 2023

‘Naira crisis: Perishable goods traders lose millions, customers cash-strapped’, The Punch, 15 February 2023

‘Nigeria's naira shortage: President Buhari extends use of old notes’, BBC News, 17 February 2023

‘Nigerian states sue over withdrawal of old banknotes before elections’, Reuters, 22 February 2023

‘Amid Scarcity of New Naira Notes, Tinubu Support Group Embarks on Currency Swap’, This Day, 22 February 2023