In the midst of Nigeria’s switch to a cashless economy, the chief executive of the Center for the Promotion of Private Enterprise, Dr. Muda Yusuf has said Nigeria has one of the best cash-to-money supply ratios in the world.
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He said this in a statement to Nairametrics in reaction to Nigeria’s Supreme Court injunction to extend the deadline of the implementation to end the legal tender status of the old naira notes.
The cash-to-money supply ratio is a measure that compares the amount of physical currency in circulation (cash) with the total money supply in an economy. The money supply includes not only cash but also various forms of bank deposits, such as checking accounts and savings accounts.
The ratio is calculated by dividing the amount of cash in circulation by the total money supply. It is also sometimes referred to as the currency ratio or cash ratio.
- Yusuf said, “In Nigeria, the cash to GDP ratio is less than 1.5%; while the cash/money supply ratio is just about 5%. These are some of the best currency ratios globally and the mark of the remarkable progress that has been made in the cash-less policy drive. Cash to GDP in the United States is about 9%; in the Eurozone, it is about 10%.
- “This underlines the fact that cash is not the problem of the Nigerian economy or monetary policy effectiveness. CBN Ways and Means financing of over N22 trillion is a much bigger problem for liquidity management. It is regrettable that a purely monetary policy management issue has been profoundly politicized as witnessed in the past few weeks. This had obscured fundamental economic conversations.”
Yusuf urged the CBN to immediately allow the old and new currency notes to co-circulate, in compliance with the Supreme Court order, until such a time when the old notes are gradually and completely withdrawn. This is global best practice. This should happen within a space of three to six months.
Biggest victims of the policy
He said the small businesses and the ordinary citizens were the biggest victims of the unspeakable disruption and hardship inflicted by the impractical deadline given by the CBN on cash swap. They are the biggest users of cash.
- “We affirm our position that N2.6 trillion currency in circulation is not too much for the Nigerian economy with a GDP of about N250 trillion. Any attempt to arbitrarily cut it will create a crisis. It is unacceptable that citizens are denied access to their cash deposited for purposes of cash swaps. This could undermine the confidence of the citizens in the banking system and pose a major risk to the financial inclusion objective of the CBN,” he stated.
Worthy of note: There is no one “ideal” cash-to-money supply ratio, as the appropriate ratio depends on various factors, such as the size of the economy, the level of economic activity, and the payment habits of the population.
- In general, a higher cash-to-money supply ratio indicates a greater demand for physical currency, which could be influenced by factors such as the level of financial development, the availability of electronic payment methods, and the level of trust in the banking system.
- For most developed economies, the cash-to-money supply ratio typically ranges from 5-10%, meaning that physical currency represents 5-10% of the total money supply. However, this can vary widely depending on the specific economic and social conditions of the country in question.
People will not trust the banking system, customers won’t take deposits to banks until they trust the system.
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