The central bank is changing the colors of the 200, 500 and 1,000 naira notes and the new bills will go into circulation from Dec. 15. The hope is that when people drop off their old notes, many will choose that moment to switch to making electronic payments via a bank account for their day-to-day finances.
2. What difference would that make?
It’s harder for the central bank to do its job when an estimated 85% of local currency doesn’t go through the banking system and well over 90% of transactions are made using cash. Announcing the currency move in October, bank Governor Godwin Emefiele said it would help to control runaway inflation. It could also 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 to secure their release.
The amount of cash in circulation has more than doubled since 2015 to 3.23 trillion naira. Yet almost half of the population of 220 million don’t have bank accounts. Nigeria has just 4.5 bank branches for every 100,000 people, one of the lowest ratios in the world. The risk is that banks are overwhelmed with new customers trying to open accounts to deposit their old cash as the deadline approaches.
4. What are the banks doing?
They’ve begun ad campaigns and 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 banknotes.
5. How have Nigerians responded?
Many have rushed to buy dollars, causing a temporary shortage of the US currency and sending the naira briefly to a record low on the black market. Finance Minister Zainab Ahmed has questioned the policy, arguing that it could weaken the currency and slow economic growth. But it was upheld by President Muhammadu Buhari, who backed it as a way to tackle corruption. Grain and gold traders in the northern city of Kano have said their business has been booming as some people try to stay off the authorities’ radar by converting cash into hard assets.
6. What was India’s experience?
India implemented a similar demonetization policy that forced farmers to trek for miles to exchange their old banknotes. The move led to cash shortages, long lines at banks and post offices and a slowdown in economic activity. It largely failed to reduce the amount of cash circulating outside the banking system or discourage corruption. Emefiele insisted that Nigeria can avoid India’s fate as banks have taken measures to ease distribution of the new notes and extend access to banking services.
–With assistance from Mike Cohen.
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