The country’s central bank began issuing new naira notes late last year in an effort to crack down on counterfeit notes and reduce the amount of money circulating outside the banking system. “It is no longer possible to continue business as usual,” central bank governor Godwin Mfiele said in announcing the measure.
But the way the devaluation was done – withdrawing banknotes from circulation – has left Nigerians struggling to pay for food and supplies. The country of over 220 million people was initially given just 1½ months to exchange existing notes for new ones, and demand far outstripped the supply of new notes.
The usually packed streets of Idumota market in Lagos, one of the country’s largest, have felt strangely quiet in recent weeks, vendors said, likening them to the time of the pandemic curfew.
Here’s what you need to know about changing Nigeria’s currency.
What is Nigeria’s demonetization plan?
Nigeria is withdrawing banknotes in denominations of 200, 500 and 1,000 naira (worth between about 40 cents and $2.10). He initially gave residents until January 31 to exchange them for new ones.
The development was criticized for being carried out without sufficient support. The bank then extended the deadline to exchange all the notes until mid-February. Authorities later said the smaller denomination would remain legal tender until the end of April. Nigeria’s highest court is also hearing a legal challenge over how the overhaul was managed.
The Central Bank initially implemented a withdrawal limit of 100,000 naira per week, but increased it to 500,000 naira ($1,085) after criticism. However, the shortage is so significant that banks are rationing their cash and usually disburse only 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 are holding a large cache of cash that falls outside the purview of regulators. Eighty-five percent of the naira is used outside the commercial banking system, Emefiele said in October, adding that the currency in circulation has more than doubled in the last 8 years.
The bank also said the move would help the country shift to digital payments and control organized crime such as kidnapping. The naira has not been redrawn in two decades.
Some experts say the policy is sound in theory. The decision could help manage galloping inflation – at nearly 22 percent – and boost tax revenue, said Ayokunle Olubunmi, an economic analyst at ratings firm Agusto. “However, poor implementation of the policy has eroded all potential benefits. Some businesses we cover have seen revenue drop by up to 40%.
What has been the impact on Nigerians and the country’s economy?
Painful. Nigeria’s cash-dependent informal sector, which by one estimate makes up nearly 58 percent of its economy, has been hit hard by people without access to legal tender. The cash crunch comes amid a bleak economic outlook, with the naira at an all-time low against the dollar.
On a recent evening at a Lagos night market, vendors were preparing to go home at a time when business should have begun. Abiodun Alawiye, who said she usually sells at least 20 pairs of shoes daily, said she had not sold more than a few in the past few weeks.
“The city doesn’t move. It’s not a groove,” said Alawiye, 56, as she sat with her daughter and grandchildren on a stoop. “Now, the business is paralyzed. Everything is paralyzed.”
She needed help transitioning to digital banking, but was afraid to go back to the bank, knowing the line would be hundreds of people long. “We just needed more time,” he said.
Busayo Bamidele, a 30-year-old who sells trinkets and jewelry, said the banking network was so slow that digital transfers often did not go through. He said he has barely made anything recently, with customers opting to spend what little cash they have on essentials.
“I had to borrow money to buy food this morning … and since then, we haven’t eaten anything else,” he said.
Which other countries have struggled with demonetisation?
Countries that have faced challenges in exchanging their currency include Myanmar, Zimbabwe and the former Soviet Union. A notable recent example was Indian Prime Minister Narendra Modi’s decision to declare 86% of his country’s currency defunct in 2016, leading to large-scale job losses in the informal economy.
“India’s rapid demonetization strategy clearly failed because it was unduly abrupt and secretive,” wrote Jeffrey Frankel, a professor of economics at Harvard’s Kennedy School at the time. He added: “More time should have been given to print an ample supply of new banknotes and to help businesses switch to cashless payment methods such as electronic money transfers.”
Chason and Adetayo reported from Lagos, Nigeria.