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CBN’s cash withdrawal policy is part of a broader strategy to control forex demand

Nigeria’s central bank announced on Tuesday, December 6th, 2022 that it was mandating banks to ensure that over-the-counter cash withdrawals by individuals and corporate entities do not exceed N100,000 and N500,000 respectively, per week. 

The central bank also stated that the revised cash withdrawal policy was pursuant to the launch of the newly redesigned naira notes which aligns with its cash-less policy. 

 As expected, Nigerians have reacted with bewilderment to the news with speculations rife over why the central bank has decided to introduce this revised cash withdrawal policy. Prompting questions such as  

  • Why is the central bank reducing cash withdrawals for Nigerians?  
  • Is it really in line with its cash-less policy?  
  • Is this new policy to support the eNaira initiative or is it just to target politicians? 

To understand the motives for this policy, we will need to circle back to the central bank’s antecedents.  

Our thesis suggests this policy finds its root in the central bank’s fixation on the exchange rate. From the days of banning 41 items to banning cryptocurrency transactions and curbing forex outflows, the focus has been on solving the forex challenges.  

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Financial Inclusion: One of the most important policies of the central bank, is its National Financial Inclusion Strategy (NFIS), which it relaunched in 2018. 

  • Included as part of the goals of the NFIS is “Increased access to finance for MSMEs as a result of financial inclusion (credit made on the back of mobilized savings) will lead to greater productivity, increased non-oil exports, foreign exchange earnings and this will stabilize the value of the Naira.” 
  • It was recognized in 2018, that the policy had not succeeded because of insecurity, costs, preference for mobile money over POS, slow pace of adoption of agent banking, and cultural and religious factors. 
  • This led to a signing of an MOU with the NCC which eventually led to the issuance of licenses to Telcos to start payment service banks. 
  • It then decided to ratchet up its mobile money initiatives, reduce bank charges, push for agent banking and introduce other policies aimed at expanding the adoption of cash-less initiatives.

Demand Side Policies: Over the last two years, the apex bank followed up its NFIS strategy with a slew of policies aimed at managing the demand and supply side of the forex market.  

  • For example, in September 2021, the central bank announced it was no longer going to be making dollars available for the purchase of weapons.  
  • A few months earlier, in July of 2021, the CBN, announced the stoppage of dollar allocation to BDC operators, explaining that they have become a conduit for illegal financial flows working with corrupt people to conduct money laundering in Nigeria. 
  • This year, the central bank has followed up with more supply-side policies such as the introduction of the electronic Form A and Form NCX respectively. The RT 200 policy was also aimed at encouraging exporters to remit their forex in exchange for rebates. 
  • Let’s not also forget the Naira4dollar policy introduced early in 2021 to encourage diaspora remittances via official channels. 
  • The apex bank has also placed limits on inter-bank forex transfers while also requiring strict documentation for intra-bank forex transfers.

eNaira introduction: The central bank’s quest to pursue its financial inclusion strategy aimed at achieving forex stability also led to its creation of the eNaira. 

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  • When the eNaira launched in October 2021, the central bank stated that it would provide “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 again tied to increasing Nigeria’s foreign reserves and attaining forex stability. Suffice it to add that it earns Nigeria an average of $20 billion annually.
  • But since its launch, the eNaira has slowly gained traction with transaction volumes topping N8 billion, but it is far from curbing the currency in circulation and outside the banks which the apex bank estimates at about N2.3 trillion. 
  • In addition, the money supply in Nigeria is about N50 trillion, fueling one of the largest rises in goods and services. However,  the most significant effect of so much cash in circulation is Nigeria’s galloping exchange rate in the black market. 
  • With the disparity between the naira and dollar as high as 80%, the central bank believes it has not done enough to manage the demand side. This is where a combination of the eNaira and new naira notes plays a major role in the CBN’s grand strategy. 

New naira notes: The launch of the new naira notes gives the central bank an opportunity to leverage technology and data mining tools to better understand the velocity and flow of money into the country. 

  • Juxtaposed with eNaira and electronic transfers, the movement of money across the sector will be easy for the apex bank to track if the money is cash-less.
  • When it launched the new notes a few weeks ago, Emefiele, responding to the question of whether the decision to redesign the new notes will impact the value of the naira said, “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.” 
  • Again, another decision attributed to forex stability.

How it all fits: With tools such as BVN, NIN, its NUBAN, and the FIRS TIN, which helps with digital identity and matching payments and deposits, electronic banking allows the central bank to gather significant information about who and what they are spending on. 

  • It can better control money supply, giving it insight into what is driving the demand that is depreciating the exchange rate on the black market. 
  • Through this information, the central bank probably believes it can drastically reduce the impact of the sale of forex on the streets, especially those backed by raw cash. 
  • It can also monitor cash transfers electronically in exchange for forex and control how this impacts demand and supply, a major determinant in pricing. 
  • For transactions done electronically, it can work with tax authorities like the FIRS to clamp down on accounts that facilitate payment of naira in exchange for forex and vice n versa.

Development Finance: In addition to forex, we also believe these policies are part of the apex bank’s quest to drive productivity in the country. 

  • One of its financial inclusion goals is to help the CBN “better able to influence savings, investment and consumption behavior through interest and exchange rate changes, a direct result of increased participation of Nigerians in the formal financial sector” 
  • This is at the core of its development finance activities which the central bank has been driving for years by mopping up liquidity from banks via CRR and utilizing it as part of its sources for its intervention funds. 
  • Whilst the bank’s intervention policies have often been cited as helping get Nigeria out of a recession, the economic growth has not been robust enough. 
  • To make matters worse, inflation is on the rise due to this policy.

Key message: The apex bank is fixated on having greater control and oversight of Nigeria’s money supply throughput in its quest to solve Nigeria’s exchange rate challenges through demand and supply-side management. 

  • It believes it can leverage these coordinated strategies to control demand and incentivize the supply of forex. 
  • Thus, we opine that a coordinated and painstaking implementation of these policies is what the central bank expects to help increase external reserves, maintain exchange rate stability and stimulate the GDP growth rate. 
  • So far, these policies have failed to achieve any of the two goals of price stability and forex management laid out above. 
  • But, is the introduction of the reduction of cash withdrawals the final piece of the puzzle, to achieve these goals, or is there something else it could unleash in the nearest future? 
  • Only time will tell. 










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