The World Bank has warned of possible negative economic impact from the redesign of some new naira notes on the poor and small businesses.
The warning was contained in the global lender’s latest Nigeria Development Update (NDU) December 2022, titled: ‘Nigeria’s choice‘.
The Bank is worried that seeing as Nigeria’s economic performance has been weakened by the global economic environment, the redesign of the notes, which came into circulation last Thursday, may further compound the situation given the timing and short transition period.
Commenting on the monetary policy, the World Bank, in its report, said the phasing out of existing naira notes over a short time period may add to the challenges of poor households and small-scale businesses.
“The CBN announced on October 26, 2022, that it planned to redesign, produce, and circulate new series of Nigerian naira (N) 200, 500 and 1,000 notes (equivalent to roughly US$0.5, US$1, and US$2 at the official rate).
“The three notes are the highest denominations out of the eight legal tender notes in Nigeria,” the report reads.
“Following the launch of the new designs on November 23, 2022, the new currency notes are to be circulated from December 15, 2022, with both the new and existing notes considered legal tender until January 31, 2023.
“Thereafter, only the new notes will be legal tender. Bank charges on cash deposits have been suspended to facilitate the transition.
“While periodic currency redesigns are normal internationally and the naira does appear to be due for it, since naira notes have not been redesigned for two decades, the timing of and short transition period for this demonetisation may have negative impacts on economic activity, in particular for the poorest households.
“International experience suggests that rapid demonetisations can generate significant short-term costs, with small-scale businesses, and poor and vulnerable households, potentially being particularly affected due to being liquidity-constrained and heavily reliant on day-to-day cash transactions.
“At present, households and firms already face elevated financial pressures from prolonged, high inflation, recently compounded by external food and fuel price shocks, and the severe floods, and phasing out existing naira notes over a short time period may add to their challenges.”
International experience suggests that rapid demonetisations can generate significant short-term costs, with small-scale businesses, and poor and vulnerable households, potentially being particularly affected due to being liquidity-constrained and heavily reliant on day-to-day cash transactions.
The financial institution also noted that economic activity in most major economies have slowed amid high inflation and central banks shifting toward “contractionary” monetary policies.
The World Bank added that “External financing conditions, particularly for governments and private borrowers in frontier markets such as Nigeria, have tightened, as the US dollar has appreciated sharply against most other currencies to historically strong levels, and global benchmark interest rates have risen.
“Moving into 2023, growth in most regions is expected to weaken further, and uncertainty regarding the outlook remains elevated, partly because of key unknowns such as future developments related to the Russian Federation’s invasion of Ukraine.”
