Analysis | How Nigeria’s crackdown on the gray economy led to chaos

1. What had to be done?

The central bank changed the colors of the 200, 500 and 1,000 naira notes and the new notes came into circulation from December 15. The hope was that when people handed over their old money to the bank, many would choose that moment to switch to making electronic payments for their day-to-day finances. Banks hired 1.4 million agents to fan out to markets and rural areas to encourage people to open accounts, hoping to avoid a last-minute rush. The central bank suspended charges for cash deposits at banks and ordered lenders to open their branches on Saturday to encourage people to hand in their old notes.

2. What was the purpose of the exercise?

It was difficult for the central bank to do its job when an estimated 85% of local currency in circulation was outside the banking system and more than 70% of informal transactions were done with cash. The value of banknotes in circulation has more than doubled since 2015 to 3.23 trillion naira ($7 billion). Bank Governor Godwin Emefiele, who announced the currency move in October, said it would help contain runaway inflation. It also had to reduce corruption and organized crime. The country has a thriving kidnapping industry where thousands of Nigerians are kidnapped by bandits every year, with relatives often paying cash for their release.

Recalling 2.7 trillion naira using the country’s underdeveloped banking network would always be a challenge if it were not clear how much old money citizens were likely to turn in and where. Nigeria has only 4.5 bank branches per 100,000 people, one of the lowest rates in the world. According to the country’s statistics agency, only 35% of women and 47% of men have a bank account. Banks were overwhelmed and unable to meet demand for the new banknotes, disrupting day-to-day operations and leaving many people unable to deposit their savings. The digital payment system was pushed to its limits when customers opted for online transfers, with transactions taking hours or outright failure.

4. What were the consequences?

The crisis threatened to backfire on President Muhammadu Buhari, who had supported the crisis despite criticism even from his own government and said it was an important step to tackle corruption. As the money crisis spread, he blamed the “selfishness and greed” of the country’s banks and called for more time to resolve the crisis. Finance Minister Zainab Ahmed insisted the initiative was a success as it brought trillions of naira in cash into the banking system. However, three state governors from Buhari’s own party said their regions were “on the brink of anarchy” and went to court to try to force the federal government to suspend the cash swap plan.

5. What did the central bank say?

Governor Emefiele said the central bank is addressing the issues and the situation is improving. He accused some politicians of cleaning up and storing the new banknotes “for political purposes” and said some Nigerians hoarded the redesigned banknotes, causing long queues at ATMs. He said the country’s digital payment systems would eventually be able to handle the wave of electronic transactions.

6. What does it all mean for the ruling party?

The government’s economic record was a key issue ahead of the February 25 vote to elect Buhari’s successor. His eight years in power were plagued by economic decline, rising unemployment, heightened insecurity and an exodus of the educated elite. By any economic measure, Nigerians are worse off than they were when he came to power. The ruling party’s candidate to succeed Buhari even suggested that the currency replacement plan was a plot to sabotage his electoral prospects or slow down the polls.

7. Did no one see this coming?

Yes. There were warnings that Nigeria could face the same problems as India when it enacted similar policies. The move led to cash shortages, long queues at banks and post offices, and a slowdown in economic activity as farmers had to travel miles to exchange their old notes. It largely failed to reduce the amount of cash circulating outside the banking system or discourage corruption.

–With assistance from Mike Cohen.

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