The Central Bank of Nigeria has two key job descriptions, and they are to keep the Naira stable (or strengthened) by managing inflation, and to boost employment through interest rate management. Over the last few years, the apex bank has largely forgotten the second role of boosting employment!
Of course, inflation and interest rates are entwined in many Western economics textbooks. Why? Most are credit-driven economies which make it easier to use interest rates to modulate consumer demand. In other words, if you increase rates, credit card usage becomes more expensive, and many people will pause on spending. That correlation works when people live through credits.
But in Nigeria, as I have noted, it cannot work, because people are not living on credits. Consequently, the apex bank’s monetary tools may not be effective when rates are hiked. How do we know?
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From Nairametric: “Nigerians have increased their hoarding of cash, with as much as 94% of the currency in circulation held outside banks by March 2024. An analysis of the latest money and credit statistics data from the Central Bank of Nigeria (CBN) shows that while currency in circulation was N3.87 trillion, currency outside banks was N3.63 trillion. Also, the percentage of cash hoarding has been on the rise. January 2024 saw 90% of the currency in circulation being held outside the banking system, climbing to 92% in February, and reaching 94% by March.”
Simply, Nigerians have 94% of cash in circulation in the family vaults, pillows, piggy banks, etc, and not in bank vaults. With cash, there is really nothing the central bank can apply that will work since cash is immuned from those rate hikes. The CBN’s only playbook is to encourage people to send the money to banks. Unfortunately, that is not happening since keeping your money in the bank costs you money with those fees, and the citizens have figured out that with cash, they can live fee-free.
As I have noted here, we need to look at our banking services to make sure we do not use fees to scare citizens away from joining. While many of us here may not care for those N2,00, N600, here and there, some of our fellow citizens are sensitive to fees. And if they do not join the banking sector, it would be harder for the apex bank to use its tools to shape policies.
The CBN must find a solution, at least, to make its tools effective for the nation. Otherwise, it will continue to struggle to control anything.
The Central Bank of Nigeria has two key job descriptions, and they are to keep the Naira stable (or strengthened) by managing inflation, and to boost employment through interest rate management. Over the last few years, the apex bank has largely forgotten the second role of… pic.twitter.com/wtBCxL640C
— Ndubuisi Ekekwe (@ndekekwe) May 13, 2024
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The cash is with the real owners, and they are circulating it amongst themselves, the banks have been cut off. This did not happen suddenly, but overtime, it became apparent that the CBN and DMBs are incapable of guaranteeing seamless withdrawals, and in decent quantities too. So the owners of the cash reasoned that it did not make sense to keep sending the money to the banks.
When the inflation was much less, you could walk into a bank or use the ATM to get a decent amount of cash, but with higher inflation, rather than getting more cash that could pay for things, you are getting less. So, whose fault is it? It cannot be that of money owners, because the custodians failed them first. You go to ATM, you get only N20k, you walk into a bank hall, some pay you N5k, some N10k. Are these what you are going to run routine transactions with?
To get more cash into the banking system, you will have to make it cheaper to run transactions via banking and electronic channels, but as long as doing so via raw cash is cheaper, you are never getting more cash in there. It was a deliberate slaughtering by our economic and financial managers. They are no good.
Dear Sir, thanks for you v3ry interesting article.
Id like to chip in that the NBS reports that as at Q4 of 2022, unemployment was at the lowest in Nigerian history at 4.4%.
This ties into CBN interventions aimed at job creation. So actually Nigerias CBN has been involved in job creation. Thanks
In this same Nigeria where over 70% of the populace are the youth most of whom are without jobs? We are talking about the current situation in Nigeria where Unemployment is at an all time high. Meaning that between 2022 & now, we have seriously decline & underperformed when it comes to unemployment. I say this respectfully sir. God bless