The apex bank had imposed a weekly limit of N100,000 and N500,000 withdrawals on individuals and organisations, starting from January 9, 2023.
A report by the Washington Post titled, ‘Why Nigeria Is Clamping Down on Its Vast Cash Economy’ which was published on Thursday morning has explained how the country’s Central Bank policy on cash withdrawal limits may hinder Nigerian economic growth.
The apex bank had imposed a weekly limit of N100,000 and N500,000 withdrawals on individuals and organisations, starting from January 9, 2023.
The policy, according to the US-based media organisation, has a high likelihood of repeating what happened in India in 2016.
“Nigerians have until the end of January to exchange their highest-value banknotes for freshly-issued bills. The aim is to bring an estimated 2.7 trillion naira ($6 billion) that circulates in informal channels into the regular banking system.
“But cash is the lifeblood of Africa’s biggest economy and there’s concern that the switchover could trigger the kind of chaos that broke out when India tried something similar in 2016,” the report stated.
According to the report, the policy's implementation will be difficult due to the country's high rate of informal transactions.
The report continued: “The central bank is changing the colors of the 200, 500 and 1,000 naira notes and the new bills will go into circulation from Dec. 15. The hope is that when people drop off their old notes, many will choose that moment to switch to making electronic payments via a bank account for their day-to-day finances.
“It’s harder for the central bank to do its job when an estimated 85% of local currency doesn’t go through the banking system and well over 90% of transactions are made using cash. Announcing the currency move in October, bank Governor Godwin Emefiele said it would help to control runaway inflation. It could also reduce corruption and organized crime. The country has a thriving kidnapping industry that sees thousands of Nigerians abducted by bandits each year, with relatives often paying cash to secure their release.
“The amount of cash in circulation has more than doubled since 2015 to 3.23 trillion naira. Yet almost half of the population of 220 million don’t have bank accounts. Nigeria has just 4.5 bank branches for every 100,000 people, one of the lowest ratios in the world. The risk is that banks are overwhelmed with new customers trying to open accounts to deposit their old cash as the deadline approaches.
“They’ve begun ad campaigns and hired 1.4 million agents to fan out to markets and rural areas to encourage people to open accounts, hoping to avoid a last-minute rush. The central bank suspended charges on cash deposits at banks and directed lenders to open their branches on Saturdays to encourage people to turn in their old banknotes.
“Many have rushed to buy dollars, causing a temporary shortage of the US currency and sending the naira briefly to a record low on the black market. Finance Minister Zainab Ahmed has questioned the policy, arguing that it could weaken the currency and slow economic growth. But it was upheld by President Muhammadu Buhari, who backed it as a way to tackle corruption. Grain and gold traders in the northern city of Kano have said their business has been booming as some people try to stay off the authorities’ radar by converting cash into hard assets.
“India implemented a similar demonetization policy that forced farmers to trek for miles to exchange their old banknotes. The move led to cash shortages, long lines at banks and post offices and a slowdown in economic activity. It largely failed to reduce the amount of cash circulating outside the banking system or discourage corruption. Emefiele insisted that Nigeria can avoid India’s fate as banks have taken measures to ease distribution of the new notes and extend access to banking services.”
Human rights lawyer, Femi Falana, SAN, had also described the policy as unlawful, asking President Buhari to immediately overrule the policy.
Falana explained that the policy breached Section 2 of the Money Laundering Act and as a result, he urged President Buhari to direct the immediate withdrawal of the policy.