“The fiercest and most accomplished military generals are those that win wars without firing weapons because ultimately all battles end up at the negotiation table. The clever way to deal with differences is by jawing rather than waring. My view is that the NLC should make use of the comfort of time and the convenience of conversation rather than the bruising pain of picketing’’ - Olufemi Awoyemi, mni

Background

Against the background of the continued cash scarcity across the country, the Nigeria Labour Congress (NLC) announced plans to picket all Central Bank of Nigeria (CBN) offices nationwide on March 29, 2023. This comes after a seven-day NLC ultimatum to the Federal Government to increase cash in circulation (CIC). The ultimatum expired on March 20, 2023. 

The Nigerian Economy in Q1 2023 

Q1 2023 has been characterised by deepening economic uncertainty reflected in the reduction in GDP growth estimates for the quarter. The decline in PMI from 53.5% in January to 44.7% in February 2023 (the lowest PMI in over a decade) is indicative of the brewing economic challenges (See Chart 1 below). 

Chart 1:

Q1’ 2023 will feature slow growth and high inflation. The consequence of this is 

• lower domestic real disposable income and consumption, 
• higher domestic unemployment rate, and 
• a higher misery index. 

The first quarter will be tough but not definitive of the full year. Not all the problems in Q1’ 2023 were monetary, other domestic fiscal and international socioeconomic headwinds spilling from Q4 2022 worsened the fragile nature of the Q1 2023 economy).

Fall Outs of the Currency Redesign Policy

The impact of the currency redesign and mop-up policy of the CBN has led to a severe contraction of economic activities.

• Currency in circulation declined by N1.63trn between December 2022 and January 2023 (See Table 1).
• Currency outside of the Bank declined by N1.78trn over the same period.
• S&P PMI slumped to 44.7 in February down from 53.5 in January 2023, showing a severe contraction in private sector manufacturing output (See Chart 1 above).
• The real GDP forecast for Q1 2023 has fallen from 3% at the beginning of the year to a forecast of less than 1% as of the third week in March 2023. 

Table 1:

Are We Near Resolving the Issues Surrounding the New Naira Notes Debacle?

The new naira note exercise requires slightly more patience. Nigeria, like other global economies, cannot be totally cashless. That assumption would receive validation only in a B-rated Hollywood movie. However, we will be increasingly less cash-dependent. Countries that are heavily dependent on digital transactions also have large retail credit activities and require digital footprints that enable assessment of credit risk. 

Nigeria does not have a large retail credit economy and so digital payments and settlements are understandably smaller than more advanced western economies. Nevertheless, by increasing cash supply and using moral suasion and price incentives to change habits of consumers, Nigeria should see larger digital transactions, not a ‘cash-less’ society, as sold to the public (See Chart 2 below).

Chart 2:

The Things Analysts Believe the CBN Needs to do Differently

• The CBN needs to increase the quantity of currency in circulation (CIC) because Nigeria’s CIC as a proportion of the total money supply (M1 and M2) is acceptable by global standards. For instance, the ratio of currency to the money supply in India is 12.9%, in Canada 9.4%, in the Eurozone 9.9%, while in Nigeria it was 5.8% before the currency withdrawal programme (See Chart 3 below).
• The CBN must be transparent about the capacity of the printing and minting company to produce the amount of currency required for transaction purposes.
• The CBN needs to work with retail commercial banks and step-up supervision to ensure that banks meet the currency needs of their customers. 

Chart 3:

Can Nigeria Afford NLC’s Picketing?

There is never an ideal time to protest. The issue is therefore not about labour protest affordability as it is whether Nigeria can avoid disruption and stay focused on building a resilient economy with lower inflation rates and faster-paced growth.

Labour disruption is an event, appropriate monetary policy creates a trend. Trends are more enduring and important. The new Naira note issue will be resolved as the government prints and circulates more new notes and allows old notes to remain legal tender to the end of the year. People tend to muddle a human behaviour moderation exercise for a monetary policy exercise. The currency note redesign and currency withdrawal (confiscation) does not change the total money supply; it simply creates a re-composition, when what was needed was a redenomination.

The NLC needs to allow the CBN to continue with its efforts at increasing the volume of new notes printed as it increases the number of old notes in circulation which would be withdrawn gradually till December 2023. It is neither an ideal nor a thought-led situation, but it’s the more pragmatic option; even while the new administration decides on how to address the substantive conundrum the CBN inflicted on the economy. The next few months should see a rise in the number of old notes which would be withdrawn as the number of new notes in circulation increases, relative to supply (See Chart 4 below).

While speaking at the briefing after Tuesday’s Monetary Policy Meeting, the Central Bank Governor alluded to the fact that the regulator was closely monitoring the situation with the circulation of cash and that it would make the needed adjustment to currency volume in line with optimal transaction needs of the economy. He observed that the regulatory bank was concerned about the difficulty experienced by Nigerians due to the cash squeeze. He, however, noted that it was a priority of the CBN to ensure that the volume of cash outside the banking system did not revert to previous numbers.

Chart 4:

Reasons Why the CBN Offices Should not be Picketed by the NLC

The NLC’s planned picketing of the CBN could have a negative impact on the financial system’s stability and create the wrong foreign perception of the underlying resilience of the sector and economy (See Chart 4 above). 

Some of the potential negative impacts of picketing the regulator include, but are not limited to:

• Loss of confidence in the CBN,
• Negative impact on credit rating,
• Political instability, and
• Disruption of Central Bank’s operations

Alternatives to Picketing the CBN

• Dialogue: The NLC should dialogue with the CBN, wherein the NLC confirms or establishes the willingness of the CBN to produce more notes.
• The NLC should work at eliciting commitment from the CBN as to its plans for reflating CIC to specified levels.
• Joint Monthly Reviews to ascertain the impact of CIC adjustments 

Whats Involved In doing a Currency Makeover in an Economy Structured Like Nigeria?  

The currency makeover is a behavioural modification programme to reduce the cost of cash management in the financial system and to improve transactional transparency. There should not be a mountain in place of a mole hill. Nigeria will for some time be cash dominant in the areas of SME transactions, but over time digital transactions to cash would increase and this would be natural rather than forced (See Chart 5 below).

Chart 5:

The Supreme Courts’ December 2023 Deadline and the Realism Test? 

This is a good milestone that allows for a ramp-up and moderation of dislocations caused by the dismal roll-out of the redesign policy. There is no reason why we cannot tidy up the cash stable by December 2023, if only to stabilize activities.  Really, only the eyes of a child fear a painted devil. We have enough time to establish the equilibrium cash required to ensure stable market transactions without going back to the bad old days of cash kept in septic tanks, overhead water tanks and all kinds of contrivances. 

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