The introduction of redesigned naira notes and implementation of the cashless policy by the CBN aims to, among other things, fight inflation. The rationale is basically to drastically reduce money in circulation whilst ultimately maintaining healthy economic growth over time.
However, from the standpoint of Nobel Prize winner, Milton Friedman, there may be an inverse relationship between curbing inflation by reducing money in circulation and maintaining healthy economic growth.
According to Friedman’s Quantity Theory of Money, money is needed for transaction purposes only. In other words, it only serves as a medium of exchange. Therefore, according to the theory, “money does matter” because it is used to facilitate trade. It oils transactions.
Relating Friedman’s theory to Nigeria: While commenting on Friedman’s theory in relation to Nigeria’s cashless policy, the Chief Executive Officer of the Center for the Promotion of Private enterprise (CPPE), Dr Muda Yusuf, said there is no need to fix what is not broken. He said the issues about cashless policy and withdrawal limits are not necessary concerns because inflation cannot be curtailed with naira redesign.
He did, however, acknowledge that there is a correlation between money supply and inflation. However, the cash in the system is just about 6% of the money supply in the system.
“So, if you have just 6% of cash outside the system, it means 94% of the money in circulation is still within the banking system,” he said.
He said there is another measure of the adequacy of cash in an economy, which is called cash dominance in an economy, where you compare your cash to your GDP because you need cash to support the economy. He said:
“Cash to GDP in Nigeria is 1.8%, while cash to GDP in many advanced countries is between 5 and 10%. Hence, when you relate the cash in the Nigerian economy to GDP, it is nothing to worry about.”
He stressed that as of today much of the transactions carried out in Nigeria are done by transfer.
He queried the people saying that 80% of cash is outside the banking system. He also noted that it is the money supply that influences monetary policy and inflation.
Cashless policy is the least problem: Yusuf said as of October, the money supply in Nigeria was about N50 trillion and the cash component of the money supply is about N3.3 trillion. He stated that in terms of cashless transactions Nigeria has made more progress than many countries, stressing that the policy is the least of Nigeria’s problems.
He said electronic payment transaction as of October was N272 trillion; POS was over N6 trillion while mobile money transactions were almost N9 trillion.
Yusuf said it’s a non-issue, a distraction, and a waste of the country’s resources and time. He claimed that the vast majority of Nigerians are already doing cashless transactions and that only a small minority of Nigerians using cash, especially in rural Nigeria, should be left alone.
He said it will disrupt the economy of rural Nigeria, as it seems there is a gross underestimation of the rural economy.
Cashless policy will slow economy: He claimed that the cashless policy is not going to improve, but instead, slow down the economy, stressing that it is completely unnecessary because it will affect the velocity of transactions as the informal economy constitutes a large part of the economy.
He said the distribution space of the economy is about 16% of GDP, which is more than N20 trillion, and may be disrupted as a consequence of the cashless policy.
He cited that occasionally there are issues with the transfer of cash due to poor network, stemming from poor infrastructure. He said there is very little value the limited withdrawal and naira redesign will add to the economy. “If anything, it’s going to impede the growth of the economy,” he said.
The policy is important, but…: Also reacting, Professor Murtala Sabo Sagagi of Dangote Business School, Bayero University, Kano, said the cashless policy is a welcome development. However, the following are worth considering:
Bank charges on every transfer: elites will not feel it but it’s a big concern to low-income earners
Account maintenance and alert charges apply in most banks and these reduce people’s balances
Security of accounts: because the yahoo boys are ahead of the banks, not many people will put all their accounts on clouds
In many remote locations, it’ll take time to be covered by e-services.
Therefore, CBN needs to reflect these realities in its approach. Otherwise, people will be forced to keep cash even if they don’t need it.
Rural economy underbanked: The chief executive of Anthill Concepts, Dr Emeka Okengwu, said Nigeria is a transactional economy, not a productive one as many of the goods traded in the country are imported, not produced. He noted that the rural economy is not adequately captured in the banking loop, which may pass to some extent as an underground economy.
He said the CBN did not say they are adopting a 100% cashless policy; and by the mere fact that the apex bank has bulged by increasing the weekly withdrawals to N500,000 per week, it cannot be said that such a system is cashless, which means the purpose of cashless policy has been defeated. He considered the exercise work in progress.
Okengwu averred that he is not against the cashless policy, but against not understanding what needs to be done to get all Nigerians in the loop. He said adopting the new system will take time. For the early stage, he said Nigerians are going to have to live strangely.
On the other hand, he noted that 80% of the time, the best of what one may be able to get off someone is N20,000, except the person, was withdrawing daily in preparation for a particular transaction requiring cash.
Nigeria not ready for cashless policy: Considering the foregoing, Dr Felix Echekoba, who lectures at the Department of Banking and Finance at the Nnamdi Azikiwe University, said the country is not yet ripe for the new withdrawal limit and cashless policy. He cited lag in infrastructure to support the policy.
“Such a development will slow down transaction and trade velocity and ultimately, the economy,” he said.
Echekoba cited that the policy may put Nigerians who trade internationally in a weak position in relation to their international partners. He expressed fear that the development could scare foreign investors away from the country.
Kayode Johnson, a social affairs analyst, told Nairametrics that the only serious impact the policy might have on Nigeria is to curb the excesses of politicians as the 2023 elections approach.