Will the CBN’s plan to issue new banknotes work?
Nigerians to expect new bank notes in 2023. Source: USAID via Flickr

At the start of the hawkish era (period of rising interest rates), I raised that we often look to central banks to shoulder the burden of economic management and post-crisis adjustment. With good reason too. Central banks have proven to be effective with their independent and swift decision-making. Take quantitative easing (QE), for example. Central banks have used this unconventional tool to spur economic activity during periods of economic distress (see the pandemic and the global financial crisis). While the bold and innovative moves are laudable, we must also apply some caution.

Key takeaways:

  1. The CBN’s recently announced policy to issue new banknotes in January 2023 has caused quite a stir. Through this exercise, the apex bank hopes to reduce counterfeits, the unbanked, and the money supply and inflation.

  2. However, if the policy is not organised properly, it can lead to a cash shortage, and money supply might not even change. This was the case in India back in 2016.

  3. The Naira and the Nigerian economy could suffer, particularly the informal sector. So, the CBN must pay attention to timing, improve its credibility, and include alternative channels for unbanked Nigerians to exchange their old notes for new ones.

As history has shown, when central banks experiment their way out of a crisis, we never know the full impact of their policies until after the fact. For example, some might agree that the easing of monetary policy during the pandemic supported small businesses and households adversely affected by lockdown measures. While others believe this also contributed to the rising and persistent inflation pressures we are seeing today. Essentially, central banks are so integral to how our economies function that their decisions must be well-planned and thought through.

It is this particular point that has motivated today’s piece.

You see, on Wednesday afternoon, the central bank of Nigeria (CBN) held a special announcement. While the apex bank has been

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Fadekemi Abiru

Fadekemi Abiru

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