Trouble of Redesigning the Naira



It started with a critical omission. When the House of Reps committee on banking was finally able to force former CBN Governor Godwin Emefiele to attend a hearing on his naira redesign policy in February last year, he began with an impassioned speech.

He wanted to save Nigeria’s economy from the scourges of criminal currency hoarders, dirty banknotes, inflation, and financial exclusion.

The CBN was responding, according to him, to a situation that made the bank powerless to fulfill its duty to curtail and manage the rapid growth in the money supply.

To illustrate this, with all the drama that characterized his public engagements, he pointed out that between 2015 and October of 2022, currency in circulation had more than doubled, from N1.4 trillion to N3.3 trillion – of which, N2.7 trillion was cash outside banks.

Much of his evidence was technically true, but without adequate financial knowledge, few could discern that it was a profound misrepresentation.

Many commentators got so bogged down in the process and its politics, that there wasn’t sufficient interrogation of the economic sense of it in the first place.

Regulatory Overreach

Two of the four targets clearly extended beyond regulatory bounds—it’s not the CBN’s role to combat corruption beyond its purview, nor is tackling kidnap ransoms part of traditional economic mandates. Over time, the CBN could simply have worked with banks to retain deteriorating notes as is the standard in the so-called “saner climes”.

The Bank of England gave the far more adequately banked English a period of two years and seven months before the old £20 note ceased to be legal tender.

This is because redesigning your currency is rarely a monetary policy tool for much more than upgrading its security features to prevent counterfeiting.

Even at that, the mad scramble to get the new notes designed, which led Emefiele to defy Buhari’s directive to procure them domestically, left us with few significant security enhancements.

Thus, we’re left with two mildly plausible justifications for such a destructive policy – demonetisation (as a bewildered international press ran with) and inflation busting (as the CBN constantly insinuated).


The policy was tagged a cashless policy in many quarters. The perception of this was bolstered by the launch on the 26th of January 2023 of the AfriGo domestic card scheme to “drive financial inclusion”. The policy, it was argued, was designed to encourage (a deceptively soft way of putting it) the unbanked to adopt digital alternatives.

The trouble, however, was that the real barriers locking 40% of Nigeria’s adult population out of the financial system were structural.

Entire local government areas lack a traditional bank branch. The agent model of financial inclusion, with its regressive withdrawal charges, really gives life to the adage that “it’s expensive to be poor”. Internet access is limited in rural areas. If POS machines fail in swish Lekki lounges, you can get a sense of their lack of reliability in the deepest recesses of the country.

Rural dwellers were told to deposit all their cash in Tier 1 accounts, which require BVN or NIN, to access the new notes.

Then they were restricted to withdrawal limits of N10000 in the new currency. This trapped all of their surplus in accounts that they would have to pay to access.

Emefiele’s proposal to dispatch CBN staff to these areas only seemed feasible because, unbeknownst to many, several Nigerian local government areas surpass Lagos in size but lack reliable transport access.

In any case, the CBN had long been pursuing demonetisation with far less dramatic consequences, and much greater efficacy. Thus, if one was to make sense of Emefiele’s sudden urgency, the only rational excuse left was a vague claim about its capacity to arrest Nigeria’s economic decline.

Grappling with Inflation

In the CBN’s FAQs on the redesign, it was implied that the CBN chose its policy timing because redesign was overdue, and bringing “a considerable amount of money currently outside banks back into the financial system may help ease inflationary pressures”.

Emefiele’s CBN constantly emphasised the idea that the move would strengthen the Nigerian economy in this way.

At the committee hearing, he argued that the scale of currency outside banks was inhibiting the CBN’s capacity to control money supply. What he omitted to inform Nigerians, was that currency in circulation was just 1.52% of GDP and falling.

Bizarrely, in October 2022, currency outside banks represented just 5.6% of M2 and 13.29% of M1, down from 7.27% and 16.99% in December 2015 respectively. Sounds like jargon but what does that mean? Put simply, around 19 of every 20 Naira in circulation was already in the banking system (in short, almost all).

The pace at which cash outside banks grew between 2015 and 2022 was an indication, not that this measure of money supply was spiralling out of control, but instead of Nigeria’s widening inequality.

To confound one further, between June and October 2022, month on month inflation had fallen steadily from 1.82% to 1.24%, meaning that the worst pains of the devastating floods of 2022, and the disruptions of supply chains from the Covid pandemic were easing up. The peak was behind us.

Worsening the Money Supply Problem

Furthermore, if money supply was driving inflation, a massive influx of demand deposits would only worsen the problem. Why? While the CBN is the only institution which can issue currency notes, they aren’t the only institution which can create new money.

In practical terms, when I deposit money in the bank, a portion is reserved as per the Cash Reserve Ratio, and a portion kept liquid as per the Liquidity Ratio. This essentially means the CBN holds onto it until withdrawal or transfer, or to meet its short term obligations.

Within limits, banks leverage deposited funds to generate income. For instance, if someone seeks a loan, the bank can grant it using my deposit as security. Every loan issued effectively increases the money supply. However, the bank must always be ready to honor withdrawals or payments made by depositors.

This system, inherent in fiat currencies, leaves banks vulnerable if borrowers default, as they remain liable to depositors. In the digital era, adjusting account balances simplifies this process, highlighting the intricate workings of modern banking.

It’s a delicate balance, relying on the assumption that not all depositors will withdraw or spend funds simultaneously. Hence, the CBN’s regulatory role, particularly in managing credit creation through the Loan to Deposit Ratio (LDR), while ensuring banks’ capacity to absorb the risk of credit through CRR and adequate capitalisation, is paramount.

It also must stress test banks to prepare for challenging eventualities. If something throws off the balance, the whole system of money we have comes tumbling down. This underscores the criticality of CBN’s oversight beyond FX control. If something throws off the balance, the whole system of money we have comes tumbling down.

Crucially, in an economy where the informal sector is estimated at 58.2% of GDP, and where the informal sector largely borrows informally, interest rate hikes are largely ineffective at curbing borrowing. Informal businesses, apart from traditional money pooling systems like aajo, operate with rates disconnected from formal banking, reducing the impact of marginal MPR increments. Sectors like agriculture and trade, significant in the economy, receive disproportionately less lending, with agriculture, constituting a quarter of GDP, receiving less than 5% of credit.

The Fallout

The result was inevitable carnage. Banks and agents couldn’t keep up with demand. Power determined access – videos of the affluent spraying fresh bundles of the new notes surfaced as a naira-to-naira exchange rate opened up, and people starved. Businesses saw staggering losses as the economy contracted, with estimates from the Centre for the Promotion of Private Enterprise, indicating a loss of N20 trillion to the Nigerian economy.

Given mounting costs from the myriad supply side challenges businesses faced, intensifying demand for credit, the CBN then needed to clamp down on credit creation to tighten liquidity. Unfortunately, it didn’t, retaining the 32.5% CRR it had set in September 2022, and the 65% LDR of 2019.

With demand deposits surging as cash outside banks plummeted, banks had increased capacity to lend and, and money supply went up. Much of this money went directly to government borrowing. Between December 2022 and April 2023, net claims on government grew by 37.35% compared to a mere 5.72 % increase in net claims for other sectors. With inflation accelerating, this imbalance, in real terms, was a transfer of wealth from citizens to the government.

Inflation followed. Food inflation, which had declined, began accelerating once more. By April, month on month inflation across the whole basket was higher than the previous peak of June 2022 at 1.91%.

Several factors contributed to this. First, people panicked. They bought in bulk, fearful of shortages and the stability of the naira. Exploiting this, businesses engaged in price gouging, hiking up their prices. The naira depreciated in the parallel market which was a significant source of FX for importers due to liquidity challenges and quasi-fiscal exclusion in the official market.

Worse still, money supply was growing. M3 moved from N51.6 trillion in November 2022, to N53.2 trillion by February 2023.

The amount of Naira chasing goods increased while supply contracted. Crops on farms went unharvested because farmers couldn’t access cash to pay their seasonal hands as the value of currency in circulation fell below N1 trillion.

This unfolded concurrently with mounting unpaid debt in the agricultural sector, and insecurity and the losses of the 2022 cycle made farmers reluctant to return to their farms.

How could we predict this? When the policy was announced, roughly 5.2 billion pieces of N200, N500 and N1000 notes were in circulation. Despite “best efforts”, by December 2022, CBN had ordered just 500 million pieces, less than 10% of the total. With such a large proportion of the population transacting primarily in cash, the poor suffered disproportionately.

A Morbid Legacy

There has been much speculation about the motivations behind such a rushed ill-advised policy. Whether it was the final tantrum of a failed presidential aspirant, or a result of sheer incompetence, the move certainly made an impression. Efemele (as one viral video renamed him) became one of Nigeria’s most reviled men.

A less obvious but persistent element of this legacy has been the distortion of public discussions of monetary policy, resulting from the elision between money supply and currency in circulation that it invited.

For many Nigerians, after years of seeing the CBN as little more than a warden for dollars, and a sugar daddy to credit starved sectors, the Naira redesign was their first introduction to the language of monetary policy.

Those first impressions have been durable; they continue to shape conversations about monetary policy, despite profound shifts in the dynamics of inflation and money supply.

Overcoming this challenge requires concerted efforts to enhance public understanding, and reframing chapters of the CBN’s history which are reference points in discussions of monetary policy.