Nigeria’s Money Swap Saga

In 2016, India embarked on an exercise to flush out black money and tax evasion by removing its two highest denominations, representing 86% of all banknotes in circulation, overnight.

The resulting chaos included an immediate drop in GDP, economic hardship, civil unrest and legal challenges that went right the way up to the Supreme Court. And it didn’t even achieve its objectives, as nearly all of the demonetised banknotes were returned to the central bank, showing that the initial assumption that 30% of the notes were in the hands of criminals was vastly over-stated.

It should have served as a warning to other countries but Nigeria has embarked on its own demonetisation – albeit not nearly so dramatic, but with similar outcomes nevertheless.

In October, the Central Bank of Nigeria announced that the three highest naira denominations (the N 200, 500 and 1,000) were being redesigned and reissued, with a six week period between issue and demonetisation (from 19 December to 31 January). The stated objectives were to curb corruption and bring back the 80% of notes in circulation outside the formal banking system.

The announcement came as a surprise, not least to the Minister for Finance, Zainab Shamsuna Ahmed, who claimed that neither she nor her Ministry had been consulted. There was also dissent from other sources, criticising the minimal design changes, as well as objections from legislative and judicial bodies.

Despite these objections, the CBN pressed ahead, but it soon became apparent that there were not enough new notes to replace the old ones, notably in rural areas. And also, that by the deadline of 31 January, Nigeria would be less than four weeks away from a general election.

ATMs have seen longer queues and point-of-sales (POS) operators have taken advantage of cash scarcity to increase their commissions on transactions. The dearth of new notes has led to significant unrest, to some Nigerians resorting to barter, and to riots (banks have been attacked, ATMs burned down and many have been closed). In an attempt to dispel protesters, security forces hve been patrolling the streets.

Currency in circulation has fallen by over 50%. The cash shortages have made life even more difficult in Nigeria, where 63% of the population is on or below the poverty line, 33% is unemployed and as of 2021, only 45% of adults had a bank account, according to the World Bank, meaning that digital payments (which are being encouraged by the government and the CBN) are not an option.

Eventually, the President announced the extension of the deadline to 10 February 2023 and spared the N 200 note. But major shortages have continued and the Supreme Court has now got involved, slapping a temporary ban on the deadline pending the hearing of a lawsuit brought by three of the northern states challenging the redesign.

The IMF has also called for Nigeria to allow more time to complete the process, resulting in the President approving the extension of the deadline for another 60 days.

This saga isn’t over yet. As we go to print, the results of the elections are coming in. No doubt the situation will ease in the coming days and months, but it does highlight the dangers of meddling with cash in an economy so dependent on it. As India also learnt to its cost.