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Nigeria’s decision to replace high-denomination currencies with new banknotes has created a massive liquidity crisis in Africa’s largest economy. The shortages have sparked protests and riots in parts of the country as millions queue for hours at ATMs and banks to try and get their money.
The country’s central bank began issuing redesigned naira notes late last year to crack down on counterfeit notes and reduce the amount of money circulating outside the banking system. It was “no longer tenable to continue as before,” said Central Bank Governor Godwin Emefiele when announcing the measure.
But the way demonetization – withdrawing banknotes from circulation – has been carried out has left Nigerians struggling to pay for food and supplies. The country of over 220 million originally had just 1½ months to exchange existing bills for new ones, and demand far outstripped the supply of new bills.
The normally crowded streets of Lagos’ Idumota market, one of the country’s largest, have felt oddly quiet in recent weeks, vendors said, comparing it to the time of the pandemic lockdowns.
Here’s what you should know about the currency changeover in Nigeria.
What is Nigeria’s demonstration plan?
Nigeria confiscates banknotes that are in circulation in denominations of 200, 500 and 1,000 naira (ranging in value from around 40 cents to US$2.10). Originally, residents had until January 31 to exchange them for new ones.
The rollout was criticized for being carried out without adequate support. As a result, the bank extended the deadline for the exchange of all notes to mid-February; Authorities later said the smallest denomination would remain legal tender until the end of April. Nigeria’s top court is also dealing with a legal challenge to the way the overhaul was carried out.
The central bank initially introduced a withdrawal cap of 100,000 naira per week, but increased it to 500,000 naira ($1,085) after criticism. Still, the shortage is so great that banks are rationing their cash, typically only giving out between 2,000 and 5,000 naira to each person at counters and ATMs.
The country attempted a similar currency swap in 1984, which critics say was also poorly managed.
Why is Nigeria changing its currency?
The central bank says Nigerians hold a large stash of cash that is beyond the control of regulators. 85 percent of the naira is used outside of the commercial banking system, Emefiele said in October, adding that the currency in circulation has more than doubled in the past 8 years.
The bank also said the move would help the country switch to digital payments and control organized crime like kidnappings. The naira has not been restyled for two decades.
Some experts say the policy is sound in theory. The decision could help manage runaway inflation — at nearly 22 percent — and boost tax revenues, said Ayokunle Olubunmi, a financial analyst at ratings agency Agusto. “However, poor implementation of the policy has negated any potential benefits. Some companies that we cover have seen sales drop as much as 40 percent.”
What impact has this had on Nigerians and the country’s economy?
Painful. Nigeria’s cash-dependent informal sector, which by one estimate accounts for nearly 58 percent of its economy, has been hit hard by people’s lack of access to legal tender. The liquidity crisis comes amid a bleak economic outlook as the naira is at historic lows against the dollar.
On a recent evening at a night market in Lagos, vendors were preparing to head home at a time when trading should have started. Abiodun Alawiye, who said she usually sells at least 20 pairs of shoes a day, said she hasn’t sold more than a pair in recent weeks.
“The city isn’t moving. It doesn’t groove,” said Alawiye, 56, as she sat on a staircase with her daughter and grandchildren. “Now the business is paralyzed. Everything is paralyzed.”
She needed help transitioning to digital banking but was dreading going back to the bank knowing the line would be hundreds of people long. “We just needed more time,” she said.
Busayo Bamidele, a 30-year-old who sells jewelry and trinkets, said the banking network is so slow that digital transfers often fail to go through. She said she hasn’t made much money lately, and clients are opting to spend what little money they have on essentials.
“I had to borrow money to buy food this morning … and we haven’t eaten anything else since,” she said.
What other countries are struggling with demonetization?
Countries that have overcome currency exchange challenges include Myanmar, Zimbabwe and the former Soviet Union. A notable recent example was Indian Prime Minister Narendra Modi’s decision to void 86 percent of his country’s cash in 2016, leading to large-scale job losses in the informal economy.
“India’s strategy of rapid demonization obviously fell short because it was unnecessarily abrupt and secretive,” wrote Jeffrey Frankel, then an economics professor at Harvard’s Kennedy School. He added: “More time should have been allowed to print a large volume of new banknotes and to help companies switch to cashless payment methods such as e-transfers.”
Chason and Adetayo reported from Lagos, Nigeria.
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