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Motives for CBN’s most recent cash withdrawal policy
In addition, the central bank said that the amended cash withdrawal policy was in response to the introduction of the freshly redesigned…
The central bank of Nigeria declared on Tuesday, December 6, 2022, that it would be instructing banks to make sure that weekly over-the-counter cash withdrawals by individuals and business entities did not exceed N100,000 and N500,000, respectively.
In addition, the central bank said that the amended cash withdrawal policy was in response to the introduction of the freshly redesigned naira notes, which are in line with its cashless policy goal.
As might be expected, the news has been met with confusion by Nigerians, who are speculating as to why the central bank opted to implement this amended cash withdrawal policy. asking provocative questions like:
- Why is the central bank restricting Nigerians’ ability to withdraw cash?
- Does it actually follow its cashless policy?
- Is the goal of this new policy to attack politicians or to help the eNaira initiative?
We must go back to the origins of the central bank in order to comprehend the motivations behind this approach. Our argument contends that the central bank’s obsession with the exchange rate is the cause of this policy. The emphasis has been on resolving the forex difficulties, from the era of the ban on 41 products through the restriction on cryptocurrency transactions and the reduction of forex outflows.
1. Economic and Financial Inclusion
The central bank’s National Financial Inclusion Strategy (NFIS), which it reintroduced in 2018, is one of its most significant measures.
“Increased access to finance for MSMEs as a result of financial inclusion (loans made on the back of mobilized savings) will lead to improved productivity, increased non-oil exports, and foreign exchange profits, and this will stabilize the value of the Naira,” is one of the objectives of the NFIS.
In 2018, it was acknowledged that the program had failed due to a lack of security, high expenses, a preference for mobile payments over physical cash registers, a slow rate of agent banking acceptance, and cultural and religious considerations.
As a result, an MOU was signed with the NCC, and finally, Telcos received licenses to launch payment service banks. Then, it made the decision to step up its mobile money programs, lower bank fees, promote agent banking, and implement other regulations targeted at boosting the uptake of cashless projects.
2. The supply and demand sides of the FX market
The central bank has implemented a number of policies over the past two years to complement its NFIS policy and control both the supply and demand sides of the foreign exchange market. For instance, the central bank said in September 2021 that it would no longer make dollars accessible for the purchase of weapons.
A few months earlier, in July 2021, the CBN made the decision to stop allocating dollars to BDC operators, explaining that they had turned into a conduit for shady financial transfers and collaborated with unscrupulous individuals to carry out money laundering in Nigeria.
The central bank continued its supply-side initiatives this year by introducing the computerized Form A and Form NCX, respectively. The RT 200 strategy also sought to entice exporters to send their foreign currency in return for rewards.
Let’s not forget the Naira4dollar initiative, which was started early in 2021 to promote remittances from the diaspora through authorized channels.
The apex bank has also imposed restrictions on intra-bank currency transactions and severe verification requirements on inter-bank currency transfers.
3. New naira notes redesigns
The introduction of the new naira notes presents the central bank with a chance to make use of technology and data mining capabilities in order to analyze better the velocity and flow of foreign currency into the nation.
If there is no cash involved in the transaction, the apex bank will have no trouble tracking the money’s transit across the industry when compared to eNaira and electronic transfers.
In response to the query of whether the choice to redesign the new notes will affect the value of the naira, Emefiele stated when it introduced the new notes a few weeks ago, “well, I do not want just easily to admit that that will happen, but we suspect that this will happen and that it will positively impact the value of the naira because we don’t want to do any speculation.”
4. eNaira introduction
The eNaira was established by the central bank as part of its efforts to implement its financial inclusion plan, which aims to achieve FX stability.
The central bank announced that it will offer support for the eNaira when it launched in October 2021, “a secure and cost-effective process for remittances and ultimately boost remittance flows. It would also reduce the number of remittances flowing through informal channels as the cost of remittance will be significantly low. Ultimately, the eNaira will make remittances easier, faster, and cheaper.”
Remittances are once more correlated with boosting Nigeria’s foreign exchange reserves and achieving currency stability. It is sufficient to note that Nigeria receives an average of $20 billion annually from it.
Although transaction volumes have topped N8 billion since the eNaira’s inception, the apex bank estimates that there is still roughly N2.3 trillion worth of dollars in circulation outside of banks, so the currency is far from being controlled.
Additionally, Nigeria’s money supply, which is around N50 trillion, is what’s driving one of the biggest increases in goods and services. However, Nigeria’s soaring black market exchange rate is the most important result of so much cash in circulation.
The central bank feels it hasn’t done enough to control the demand side given the significant dollar/naira differential of up to 80%. Here, the CBN’s grand strategy heavily relies on the combination of the eNaira and new naira notes.
5. Growth and productivity Financing
The CBN will be “better able to influence savings, investment, and consumption behavior through interest and exchange rate changes, a direct effect of increasing participation of Nigerians in the formal financial sector,” according to one of its financial inclusion goals.
The central bank has been driving these development finance initiatives for years by snatching up bank liquidity via CRR( cash reserve ratio) and using it as one of the sources for its intervention funds.
Although the bank’s intervention policies have frequently been credited with aiding Nigeria is emerging from a recession, the country’s economic expansion has not been strong enough.
How everything ties together
Electronic banking enables the central bank to amass enormous data about who and what they are spending on thanks to tools like BVN, NIN, its NUBAN, and the FIRS TIN, which aids with digital identity and matches payments and deposits.
Because it has more control over the money supply, it has a greater understanding of the factors influencing demand, which is what causes the black market exchange rate to decline.
With the help of this information, the central bank likely thinks it can significantly lessen the effects of the sale of foreign exchange on the streets, particularly those backed by raw cash.
Additionally, it has the ability to control how electronic cash transfers in exchange for foreign currency affect supply and demand, two key factors that affect pricing.
It can collaborate with tax officials like the FIRS to crack down on accounts that enable the payment of naira in exchange for foreign currency and vice versa for electronic transactions.