Nigeria’s Plan to Change the Naira Could Depreciate the Exchange Rate
The Central Bank of Nigeria’s governor, Godwin Emefiele, in the middle of October 2022, announced the redesigning of the N200, N500, and N1000 naira denominations. According to the CBN governor, this move to make the monetary policy more effective has been consented to by President Mohammadu Buhari.
With this development, the new notes will be released into the system on December 15, 2022. It will be used along with the old notes until January 31, 2023.
He said, “Timeline for moping up: I will say today is the 26th, so we have 6 or 7 days to the end of October, till January 31, 2023, which is almost 100days. I think that is adequate to mop up the currency in circulation back to the vaults of the CBN.”
Emefiele further explained that the decision is intended to control the fake currency and reduce the high number of naira in circulation. He said, “Statistics show that 85% of the currency in circulation is outside the vaults of our commercial banks. This indicates that N2.73 trillion out of the N3.23 trillion currency in circulation was outside commercial banks’ vaults across the country as of September 2022.
CBN has also recorded significantly higher counterfeiting rates, especially the high denominations of N500 and N1000 bank notes. So, first of all, we want to mop all the N3.23 trillion back into the CBN so we can retake control of the money supply and see how this will help rein in inflation.
No doubt, we believe it has a positive impact on inflation”. Despite this, the decision of the CBN has raised the question: will this devalue Nigeria’s naira?
Don’t Redesign the Naira: Experts Disagree With the CBN
What to know about Nigeria’s new naira notes
According to the CBN governor, the redesign of the currency is simply a change in the currency’s appearance and security features. The redesign would have no impact on the face value of the naira. He further said that the new development would make it difficult for terrorists to access ransom.
For easy circulation of the new currency, he urges Nigerians to start depositing their old notes to enable the withdrawal of new ones. From the CBN, a waiver of deposit charges has been placed on deposits below N150,000. Above N150,000 will attract charges which serve as a means for the government to generate revenue.
Although the decision to redesign is happening now, Godwin Emefiele, during the announcement, said it was long overdue. He said, “Our existing series of banknotes -the naira, has not been re-designed in the last 20 years. The bank reasonably determined to achieve the objective of its mandate as enshrined in Section 2B of the CBN act of 2007 to ensure a strong and effective legal tender”.
How can it devalue the Naira?
Though the notes redesign is long overdue, some experts believe this move might affect the value of the naira when paired with the dollar. These reactions stem from the current state of the naira and the prediction made by the Bank of America. The bank believes that Nigeria’s local currency is expected to decline more next year because the dollar exchange rate is currently higher than it should be.
Also, Tatonga Rusike, an economist, said, “Three indicators: the widely-used black-market rate, the central bank’s real effective exchange rate, and our own currency fair value analysis shows the naira is 20% overvalued.
We see scope for it to weaken by an equivalent amount over the next six to nine months, taking it to as high as N520 to a dollar.” As of October 26, CBN sells naira at N438.16 and on the black market at N765. This shows a wide gap between the two.
To the question of the devaluation of the naira when redesigned, Godwin Emefiele said, “Well, I do not want just easily to admit that that will happen, but we suspect that this will happen and that it will positively impact the value of the naira because we don’t want to do any speculation.”
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