Many factors influence a country’s strength, but one of the most important is its economy. The likes of America, Britain, China, Japan, and Germany are dubbed wealthy nations primarily because of the strength of their economy. To achieve this status, central banks, often called the apex bank, have a cardinal role to play.
In Nigeria, the Central Bank of Nigeria (CBN) is saddled with the responsibility to issue legal tender (naira), maintain external reserves to safeguard the international value of the naira, ensure a resilient financial system, and provide economic and financial advice to the federal government. Besides these core functions, the apex bank also plays a prime role in critical sectors of the economy with the aim of expediting growth. This, it often does, by creating and implementing policies it deems beneficial.
Last year, the bank suspended the sale of dollars to Bureau De Change operators to curb the rapid depreciation of the naira and conserve forex reserves. And this year, like previous years, the CBN revisited past policies and introduced new ones in attempts to stabilise Africa’s largest economy. Here’s an exhaustive list of these policies, and their impact on the Nigerian economy and citizens.
CBN raises the interest rate to 15.5%
This year alone, the policy-setting committee of the CBN raised the monetary policy rate (MPR) three times. The initial change was effected earlier in May from 11.5% to 13% to tame inflation. In July, the rate was increased from 13% to 14 per cent for a similar reason. In September, the CBN added a 1.5% increase making it 15.5%. The intent was to aggressively curtail the gravity-defying inflation and ease pressure on the naira. Headline inflation during this time had risen 20.77%. In October, it accelerated to 21.09%. The naira also became more volatile than ever before, depreciating in value to as low as $800+ /$1 at the parallel market in November.
How did this policy affect Nigerians or help the economy? An increased interest rate reduces borrowing, consequently, people spend less since they can not borrow to meet their needs. A drop in the demand for goods and services would eventually lead to a drop in inflation. How? When there is less demand for goods and services, vendors are less likely to raise prices.
But there are some pitfalls, one of them being a potential rise in the number of loan defaulters, which could lead to bad debts for banks. Also, the development puts Nigeria at the risk of slow economic growth, stifling the ability of businesses to stretch their operations and scale.
Naira re-design
Last month, the CBN redesigned some naira notes – N200, N500 and N1000, which have now been pushed into the market. By January 31, 2022, the apex bank said old naira denominations would cease to be legal tender. But why is the CBN doing this now?
The apex bank has concerns about the management of the current series of banknotes in circulation, especially those outside the banking system. For example, N2.73 trillion out of the N3.23 trillion (80 per cent) of the currency in circulation is outside the vaults of commercial banks.
The effects of this development on Nigeria and its citizen is double-edged. On a positive note, it helps the government curtail the circulation of illicit funds. For instance, the currency re-design could curb the counterfeiting of old currency notes that have been tools for fraudsters. Also, corrupt politicians and public servants with stashed banknotes outside banks would have their illicitly acquired money rendered useless. Additionally, the Economic and Financial Crimes Commission (EFCC) recently promised financial rewards for information on persons hoarding naira notes.
However, this development would see people with questionable wealth seek alternative ways to dispose of money without raising a red flag. And one of the most probable ways is the purchase of luxurious assets, which would consequently fuel inflation in the economy.
Cash withdrawal limit
The apex bank restricted the maximum cash withdrawals over the counter (OTC) by individuals and corporate organisations per week to N100,000 and N500,000 respectively. It also pegged the ATM cash withdrawal limit at a maximum of N20,000 per day.
Additionally, the policy states that withdrawals above the thresholds would attract processing fees of 5% for individuals and 10% for corporate organisations. Third-party cheques above N50,000 shall also not be eligible for OTC payments. Although the policy is expected to take effect nationwide from January 9, 2023, it has stirred concerns amongst Nigerians.
The CBN argues the policy will not only regulate the amount of cash outside the banking system but also boost the cashless policy. However, many Nigerians expressed their dissatisfaction because of its negative effect on daily businesses that is cash-dependent in the country. For example, the policy will strain the operations of POS businesses that rely on cash to render their services.
Following public outbursts, the bank increased the maximum weekly limit for cash withdrawals across all channels by individuals and corporate organisations to N500,000 and N5 million, respectively. In compelling circumstances where cash withdrawal above the limits is required such requests are subject to a processing fee of 3% and 5% for individuals and corporate organisations, respectively.
Nigerian banks cut dollar spending limit for naira debit cards
Early this year, some commercial banks reduced limits on international transactions using naira debit cards to $20 or $50 per month. It was yet another move to check naira shortages and help the economy.
Formerly, Nigerians could conduct and pay for international online transactions billed in US dollars using their naira-denominated debit cards. This means the cost of any purchase made via this medium is debited from their naira account at the official exchange rate. The reviewed naira card limit for international transactions is a massive cut from the initial $100 offering.
Interestingly, in April 2015, the spending limit on naira-denominated cards for international transactions was $50,000 per person per annum or $4,166.7 per month. Before 2015, the international transaction limit was $150,000. But the economic realities of 2015 are far from the current reality.
First Bank said that international transactions would not be available for customers on their naira credit card, virtual card and visa prepaid naira card. But its customers can still use its Visa Debit Multicurrency Card, Visa Prepaid (USD) Card and Visa Gold Credit Card for transactions abroad with limits of up to $10,000 dollars. The limit for some banks is even as low as $1000 monthly. Fintech firms like Flutterwave, Eversend and others have also paused virtual card services for international transactions.
Now, Nigerians who pay for services over $20/$50 on foreign platforms like Youtube, Spotify, Netflix, and Amazon are stuck or have to seek longer alternatives to pay for these services, which often includes asking friends in the diaspora to help with payment.
CBN to stop dollar sales to banks
Going by the CBN governor’s comment earlier in the year, the apex bank would soon stop foreign exchange sales to banks. There are lofty intentions to make the naira regain its value, and one of them is the introduction of the bank’s race to $200 billion in FX repatriation into Nigeria (RT200 FX). It is a set of policies and programmes to boost the country’s foreign exchange inflow through non-oil exports over the next three to five years.
By ending the era of dollar sales to banks, banks would be contributing their quota to achieving the RT200 FX. But how would banks generate FX? They would have to generate export proceeds from exporters to give their customers (importers).
To put into context, the CBN is saying that should a customer need $100 million in foreign exchange to acquire goods, banks would have to help such a customer generate export proceeds from the exporter rather than come to the CBN. However, the CBN promises not to cast the entire burden on the bank or the agent, so when export proceeds are generated, the CBN would fund them at ten per cent.
If properly handled, there is optimism this would attract foreign exchange to the country, reduce pressure on the naira, expand exports, and create job opportunities for the people. Under Value-Adding Export Facility, one of the programme’s five components, the apex bank will provide concessionary and long-term loans for businesses interested in scaling existing plants or building new ones for the purpose of adding significant value to the non-oil commodities before exportation.
