How Does the Issuance of New Naira Banknotes Affect You?
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Question
I have heard of the issuing of new naira notes by the CBN. Please, how does this affect the average Nigerian? And are there any necessary steps one needs to take?
Answer
What has the CBN done again?
The CBN recently announced its plans to redesign and distribute new N200, N500 and N1,000 banknotes to replace existing notes. This is expected to start by December 15 when the new notes will be available for withdrawal by the public from commercial banks. However, the old notes are not immediately phased out, as they can be used for transactions until January 31, 2023. From February 2023, only the new notes will be legally recognised and allowed for transactions.
There is a possibility that the deadline for phasing out old notes could be extended if the distribution of the new notes would not 0be seamless and effective within the stipulated time.
Why is the CBN doing this?
Hoarding of currency notes. To support this claim, they cited that 85% of the current currency in circulation were outside the banks. Aren’t currencies meant to be held?
Shortage of “clean and fit” banknotes. This affects the perception of the CBN and poses risk to financial stability. Surely, this can be solved by replacing unclean notes instead of redesigning the notes.
Reduction in the counterfeiting of banknotes. Counterfeit notes are fake notes that are produced and distributed by fraudsters.
The more ambitious benefits the CBN expects include reducing cashless transactions, bringing more people to the formal financial sector and reducing the incidence of kidnapping and terrorism if there are no notes to pay ransom.
What impact would this policy have?
It is hard to say with complete certainty the impact the policy would have, as there are many things we don’t know about the economy. But we have some expectations based on the experience from similar initiatives in other countries (most recently in India in 2016). India had similar ambitions as outlined in the section above. However, the policy failed to remove currency used in illicit activities out of circulation as over 99.3% of the currency in circulation was returned to the banks. There is also no evidence that it reduced terrorism or increased participation in the financial system significantly after implementation. In fact, after the process in India was completed, the number of new notes counterfeited was similar to the levels before the policy was introduced.
Even though this plan is unlikely to yield the anticipated benefits, it could cause real pain. As the Nigerian economy is mostly informal and cash is still popular, the short implementation period could lead to cash shortages given Nigeria’s poor banking infrastructure. This would lead to a slowdown in economic activity in sectors relying heavily on cash, possibly impacting the entire economy.
What should you do to avoid the possible pain?
To ensure you do not waste time and energy queueing in banking halls, ensure you do not hold a lot of cash. You can rely more on electronic means of payments to settle your transactions until you have access to the new notes.
If you run a business that is cash-dependent, you can offer your customers electronic means of payment. Rejecting old notes without providing alternatives to customers would affect your sales. And ask your suppliers for the same. To reduce the cost of having to replace old notes frequently, you could gradually phase out cash payments with old notes once the new notes are available.
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