The world bank said the Nigerian authorities should consider allowing for a longer implementation period, well beyond February 10.
The World Bank Country Office in Nigeria's capital city, Abuja, has said that the hardship being faced by Nigerians due to fuel scarcity and the naira redesign policy could escalate tension in Africa's largest economy ahead of the general elections.
According to an internal document dated February 2, obtained exclusively by PREMIUM TIMES, the bank said that the deadline of 10 February for the phasing out of old naira notes will cause a cash crunch which could be economically and socially damaging to vulnerable people in Nigeria.
"The shortage of cash compounds fuel shortages which have been ongoing for months," the bank said.
"There is a clear risk that cash shortages cause hardship and frustration which could escalate social tensions, especially in a febrile political environment ahead of elections on February 25 (presidential and parliamentary) and March 11 (gubernatorial)."
Prior to the implementation of the new note policy, the World Bank said the latest available data shows that only 45 per cent of Nigerian adults had a bank account, 34 per cent reported paying or receiving money digitally over the past year, and that only nine per cent made an in-store payment by digital means.
Based on this, it said the Nigerian authorities should consider allowing for a longer implementation period, well beyond February 10.
According to the bank, Nigeria is highly unlikely to achieve digital payments increase quickly enough to complement the lingering shortages of new notes across the country within the stipulated deadline.
Naira redesign, Scarcity
The Central Bank of Nigeria on 26 October, 2022, announced the introduction of redesigned 200, 500 and 1,000 naira notes into the financial system. But since the notes were unveiled, Nigerians across different parts of the country have had a hard time accessing it from banks and ATM points.
Last week, amid the chaos caused by the scarcity of the new notes, the CBN extended the deadline for the phasing out of the old notes from 31 January to 10 February.
Despite the extension, many Nigerians working in the informal sector of the economy have had to scramble for the new notes while others lamented their inability to withdraw their hard earned money from their bank accounts.
Deposit Money Banks have equally been accused of hoarding the new notes, while some mobile cash point vendors are said to be exploiting the situation by dispensing the new notes to customers at skyrocketed prices.
The World Bank in its document noted that anecdotal evidence and media reports suggest that the new notes are scarce.
"The annual capacity of the national mint is reportedly 2 billion notes, so even assuming it produces only the highest denomination 1,000 naira notes, it would take a year to produce NGN 2 trillion worth of notes," it said.
Consequently, the bank noted that if existing notes are indeed demonetised on February 10, there will be a major shortage of physical currency.
"Roughly N500 billion worth of new notes may be available, compared with NGN 800 billion worth of old notes outside of banks as of last week and NGN 2.7 trillion outside of banks before this policy began to get implemented," the bank said.
Socio-economic Cost
The World bank said the shortfall in the physical availability of cash seems to stifled economic activities as it is increasingly becoming difficult to transact business.
It said the shortage is likely to affect poor and vulnerable households in rural areas the most, since they have the highest dependency on cash, and the lowest access to banking and mobile money services.
At a minimum, the bank said that the new policy imposes a transaction cost on people by forcing them to deposit their existing notes or exchange them for new ones, potentially at a large premium to traders, which again may be most significant for the poorest and most isolated households.
Digital Payments
As of 2021, the world bank explained that the formal bank account ownership for Nigerian adults was below the average in the Sub-Saharan Africa region, as well as the global average.
It said only 34 per cent of Nigerian adults reportedly made or received digital payments in 2021 and that it appears overly optimistic to expect that the remaining large majority (two-thirds of people) can quickly switch to doing so despite being unfamiliar with the technology and possibly lacking access to mobile phones and digital devices.
"Even in Kenya, which has one of the highest take-ups of mobile money in Africa, 22% of people still report not receiving or using digital payments, showing the continued need for cash even in an environment where digital payments have become the norm," the bank noted.
It said digitisation is a structural challenge that will take time and require a systematic approach, especially to address inclusion challenges.
While the total number of digital transactions in Nigeria has been growing rapidly year over year, the bank said the number of digital transactions per capita is still low compared to developed countries such as Sweden and Finland (where the use of cash is very low) with high levels of digital payments adoption.
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Policy Outlook
In considering the timing of the policy implementation, the World bank recommended that the Nigerian authorities should also take into consideration the level of merchant acceptance of digital payments and adoption of in-store payments in the country.
At about 9 per cent of total transactions, the level of digital payments remains very limited when compared to peer countries, limiting the number of digital use cases for most people's daily transactions, it said.
"Differences in account ownership between urban and rural areas should also be considered, as the account ownership level and the access points distribution tend to differ," the bank said.
The bank noted that data on the size of the informal economy should be considered when promoting a rapid shift to digital payments, as informal businesses might face challenges in digitising their payment acceptance without undergoing a formalisation process.
"Digital infrastructure gaps (i.e., poor connectivity, limited national ID coverage, etc.) and the payment system's operational reliability to absorb a steep increase of transactions from cash to digital in a limited timeframe should be considered," the bank added.
