Manufacturers and Unintended Consequences of a Laudable Monetary Policy

A well-intentioned monetary policy designed to pull in money into the banking systems is faced with unforeseen setbacks and sabotage that could jeopadise the fortunes of Nigeria’s manufacturing sector, writes Dike Onwuamaeze

When the Governor of the Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, announced on October 26, 2022, that the apex bank would issue newly redesigned banknotes for N1000, N500 and N200 and fixed January 31, 2023, as the deadline for phasing out old notes of these redesigned denominations of the Naira, he did so with the best of intentions for the Nigerian economy.

However, when the deadline arrived it was discovered that a lot of unforeseen circumstances, including deposit money banks’ unwillingness to make the new Naira notes available to their depositors, have combined to hinder its effective take-off on February 1, 2023. Therefore, the CBN was constrained to extend the deadline to February 10.

Since the extension of the deadline, an acute shortage of the Naira notes has been unleashed on Nigerian businesses, individuals and households. The severity of the cash crunch was so much that many households could not find cash to meet their daily needs, thereby bringing their purchasing powers next to zero.

The effects of the cash crunch were so severe that some individuals, including adult men and women, who were driven by desperation, striped themselves naked, even stark naked, in the banking hall just to return home with some cash to put food on the table for their families.

As the cash crunch continued to linger, the manufacturing sector of the Nigerian economy is also writhing in pains arising from poor sales due to the shortage of cash for individuals to make purchases and meet their needs. This is understandable since production is not yet complete until goods manufactured get to the hands of final consumers.

On Friday, February 3, the Manufacturers Association of Nigeria (MAN), told THISDAY that the fortunes of its members could be jeopadised if urgent measures were not taken to halt the current scarcity of Naira notes in the economy.

Reacting to the current cash crunch in the economy, the Director General of MAN, Mr. Segun Ajayi-Kadri, said: “To be clear and I want to put this first, there is no doubt that the currency redesign is desirable. There are socioeconomic and political imperatives for the change. It is a critical element of the CBN cashless economy policy that should have far reaching positive results for our economic.

“However, the continued scarcity of redesigned new Naira notes is quite worrisome. With our growth prospects heading further south, we can ill afford a downturn in our GDP. The negative impact it portends for local producers, the agricultural and distributive segments of our economy is huge and may worsen the bashing our economy has received from both external and internal shocks in recent times.”

Ajayi-Kadri further stated: “I would put a rough estimate of 25 per cent drop on monthly sales of domestic goods if the situation should persist for the next three weeks.

“As the purchases from the retail end that is mostly transacted in cash dries up, you will immediately notice a sharp drop in wholesale purchases and instant buildup of unsold inventory in your industries.

“This situation is not good for anyone, the industry, the government and the ordinary citizen. You will have a compounded crippling lack of patronage for the domestic manufacturer; the denial of government revenue that would have accrued from consumption taxes and the disruption of the daily life and need of the average Nigerian.

“I had expected that the CBN and the banks should be engaging at the highest level at this time. There is need for strategic communication and joint operations to ensure widespread and sustained availability and circulation of the redesigned Naira notes.

“It is baffling to approach a bank only to be told that there is neither the old nor the new Naira notes!

“We hope that the resumption of payment across the counter in the banks and the intensification of the CBN special cash swap arrangement in remote areas may yield positive results.” 

He hoped that what the country is experiencing would be a temporary pain and that government would do well to bring the hardship to an end immediately, adding that “it is evident that the desperation is heading for a boiling point. Visible and far-reaching steps should be taken to redress the situation. We must make haste to ensure that the price to be paid for this otherwise laudable policy does not outpace the gains.”

Similar concern was also expressed by the Lagos Chamber of Commerce and Industry (LCCI) last week when it asked the CBN to “enlighten the public on grey areas about the scarcity of the new Naira notes.” It also urged the apex bank to strengthen its policy implementation capacity.

The Director General of LCCI, Dr. Chinyere Almona, in a public statement that was titled “LCCI Statement on the Phasing Out of Old Naira Notes,” lamented that, “businesses are suffering the consequences of the CBN’s currency management policy lapses.”

Almona also stated clearly that the chamber did not see any value in the CBN’s extension of the deadline for phasing out old notes as long as the “scarcity of the new Naira notes persist.”

She said: “With the launch of the redesigned Naira notes last December, expectations were high for the smooth transition to the use of the new notes for business transactions across the country.

“However, we regret to note that expectations have been dashed, business deals impeded, and loss of time and value experienced by many.

“The central bank needs to enlighten the public on grey areas about the scarcity of the new Naira notes in addition to strengthening its policy implementation capacity. This is the minimum expectation in the face of a currency crisis in which we find ourselves.”

The LCCI stated that the new Naira redesign has triggered varied reactions and feedback that suggested that related issues like the phasing of old currency notes, withdrawal limit, and the scarcity of new notes might have started to impact businesses and social livelihood beyond intentions.

“While we support the drive toward a cashless economy, redesigning the Naira and phasing out old currency notes could have been better planned and implemented with no hardship for businesses and individuals,” the LCCI said.

According to the Director General of the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), Mr. Sola Obadimu, it should be necessary to urge the CBN, government and all policy makers to always engage in adequate consultations with the private sectors as well as ordinary Nigerians before announcing and/or implementing any policy that is likely to significantly impact on businesses as well as the lives of the general public.

Obadimu said that this “will help government and all policy makers to feel the pulse of the nation first” in order to “make policies that will further enhance improved welfare of the citizenry.”

He also said that the country’s policy makers should be more concerned with seeking solutions on “issues that have kept the masses perpetually impoverished over the years” rather than punishing everyone because the government wanted to discourage vote selling and buying during elections.   

The Nigerian economy remains significantly cash transactions-based and most small businesses depend almost entirely on cash-based transactions.

He added: “While creating and maintaining a cashless economy is highly desirable and progressive, particularly with the advantageous ability to track transactions (with particular reference to criminal and money laundering activities, etc.), all over the world, cash-based transactions remained an option, but never the only option. This applies even in advanced countries where the infrastructure is more robust and reliable.

“The CBN should not be rationing cash. In fact, it behooves on the CBN to ensure that there is enough cash in circulation for people’s needs. Cash in circulation is not equal to available money and it remained, at most, just about 6.0 per cent of available money in circulation as most monies are stored up in banks and other electronic systems.

“Let’s deal with the basic issues, including massive concentration in improvement of infrastructure, particularly power supply. If people are constructively engaged, they wouldn’t be waiting for four years to collect N5,000 only (or even less) from politicians at election times!”

Speaking in the same vein, the Chief Executive of Officer of the Centre for the Promotion of Public Enterprises (CPPE), Mr. Muda Yusuf, expressed concern that the failure to extend the deadline of the currency swap for at least six months could put N100 trillion component of the national GDP at risk. 

Two critical sectors, according to Yusuf, are particularly vulnerable. These sectors are trade and commerce and agriculture. “The crippling of business transactions at the distributive trade end amid the currency swap crisis would not only undermine the trade and agricultural sectors but would have a knock-on effect on manufacturing value chain and the services sectors. This is because whatever that is produced has to be sold.  The trading end of the chain has been greatly disrupted by this currency swap crisis,” he said.

He added that the trade sector contributes about 14 per cent of the GDP valued at an estimated N35 trillion; agricultural sector contributes 25 per cent, valued at an estimated N62 trillion. 

“Most of the activities in these sectors are either in the rural areas or in the informal sector of the economy.  These are the sectors that have been driving the resilience of the Nigerian economy amid numerous domestic and global headwinds.  Any policy measure that would negatively disrupt these sectors should be avoided. 

“Given the size of the Nigerian economy, our large population of over 200 million people, the dominance of the rural economy, the huge informal sector, the literacy level, and the over 30 million Nigerians that are unbanked, a minimum of six months window ought to have been given for the currency swap exercise,” Yusuf said. 

The good news, however, is that the CBN and the federal government have started to address the cash crunch and would soon bring it to an end. The central bank’s unscheduled visits to the deposit money banks have revealed that some banks are deliberately hoarding the new currency notes.  It has also taken the currency swap exercise to rural areas where there are no banking facilities to ensure that rural dwellers have cash in their pockets.   

In addition, President Muhammadu Buhari, on Friday urged Nigerians to give him seven days to resolve the cash crunch that has become a problem across the country.   

President Buhari said the currency re-design will give a boost to the economy and provide long-term benefits. But “some banks are inefficient and only concerned about themselves and even if a year is added, problems associated with selfishness and greed won’t go away,” he said.

He said that the balance of seven of the 10-day extension would be used to crackdown on whatever stood in the way of successful implementation.

“I will revert to the CBN and the Minting Company. There will be a decision one way or the other in the remaining seven days of the 10-day extension,” the president assured.