Currency History and Political situation
Before colonization, various cultures in Nigeria used a wide range of objects for commercial trade, including shells, manilas, beads, bottles, and salt. In 1880, the Colonial Ordinance introduced Shillings and Pence as legal tender in British West Africa. Initially, the West African Currency Board (WACB) issued a first set of banknotes in 1900 in Nigeria, Ghana, Sierra Leone, and Gambia. These banknotes were printed in British pounds and circulated together with British coins in the colony.
Subsequently, in 1959, Nigeria gained independence from the United Kingdom, and the national government introduced its own national currency, the "Naira". The Central Bank of Nigeria (CBN) issued banknotes in Nigerian currency, while banknotes and coins issued by the WACB were withdrawn. In the interest of monetary and commercial stability, Nigeria decided to anchor its currency, the Naira, to the US dollar in 1973. Over the years, however, the country has faced numerous economic difficulties, including heavy debt due to a strong reliance on oil, whose price fluctuations caused severe economic crises in the 1980s and 1990s. Additionally, Nigeria has had to deal with inflation problems and ineffective exchange rate management.
In an attempt to solve these problems, the Central Bank of Nigeria decided to abandon the dollar peg in 2016, allowing the Naira to float freely on the currency market. This decision has allowed the Central Bank to adopt more flexible monetary policies to manage inflation and other economic issues. However, abandoning the dollar peg has caused numerous fluctuations and devaluations of the Naira, due to economic and political problems in the country.
On October 26, 2022, Godwin Emefiele, Governor of the Central Bank of Nigeria (CBN), announced the need to renew the higher denomination banknotes of the Nigerian currency (N200, N500, and N1000 banknotes). The new currency was put into circulation in November, while the new banknotes were introduced on December 15, 2022. The CBN has set a deadline of January 31, 2023, to exchange all old banknotes with the new ones, after which the old currency will no longer be accepted.
The amount of money in circulation has more than doubled since the beginning of 2015, going from 1.46 trillion Naira in December 2015 to 3.23 trillion Naira in September 2022, causing multiple problems. This was the reason that prompted the CBN to redesign the currency. Although central banks around the world usually renew, issue, and introduce a new legal tender every five to eight years, the Naira had not been renewed for over 20 years.
The Governor mentioned several reasons for the redesign of the currency, such as the scarcity of clean and suitable banknotes, the threat of counterfeiting reported by various security reports, as well as the latest developments in photography and printing technology that have made counterfeiting easier. The CBN is convinced that the new banknotes can help to combat corruption, money laundering, and address the growing practice of kidnappings for ransom. In addition, the Central Bank also has the need to more efficiently manage the amount of money in circulation. Depositing money in banks can contribute to strengthening central banks' monetary policies and help maintain balance in the circulation of money and inflation control.
Furthermore, the CBN has ordered banks to only pay out the new currency through automated teller machines (ATMs), but each ATM can only hold up to 8 million naira, and most of them were emptied in less than an hour. On January 30th, one day before the initial deadline, the Governor of the Central Bank of Nigeria announced that, at the order of the President, the deadline would be extended by exactly ten days. However, the situation became even more tense and confusing afterward, as cash became harder to come by, and there were riots in the streets, with many banks destroyed, especially in the Ibadan area. Most of those who obtained the new currency were slow to spend it, as the new currency was seen as a precious asset rather than a medium of exchange, and when scarcity developed, panic ensued.
Furthermore, the political shift has added further complications to the situation, as the President, aiming to leave a legacy of free and fair elections, has declared his hope to deprive politicians of liquidity for the upcoming elections.
Finance Minister Zainab Ahmed hailed the initiative as a "success" during her speech, as it brought trillions of Naira in cash into the banking system, which, according to the government, will boost digital payments, reduce inflation, and curb corruption. "However, we regret the pain it has caused citizens," Ms. Ahmed stated. On March 13, positive news was announced for the Nigerian people: through a press release, the CBN revealed that the old N200, N500, and N1,000 notes will remain legal tender alongside the newly redesigned banknotes until December 31, 2023.
Since its independence in 1960, Nigeria has experienced a tumultuous political history, marked by a series of military coups, ethnic tensions, and political violence.
The first coup took place in 1966, and it was followed by several more in the years that followed. The military regimes were characterized by authoritarian rule, human rights abuses, and corruption. The country's first civilian government was established in 1979, but it was short-lived, as a military coup took place in 1983.
Nigeria returned to civilian rule in 1999, following several years of military dictatorship. Since then, the country has had relatively stable democratic governance, with peaceful transfers of power between political parties. However, the country's political scene remains highly contentious, with accusations of electoral fraud, political violence, and deep-seated political and economic inequalities.
One of the major challenges facing Nigeria's political system is corruption. Nigeria has a long-standing problem with corruption in its political elections. Vote rigging, ballot box snatching, and violence during elections have become commonplace. Politicians have been known to bribe officials and intimidate voters to manipulate election outcomes in their favor. The government has made some efforts to tackle the issue, such as setting up anti-corruption agencies and increasing security measures during elections, but progress has been slow. The lack of political will to prosecute corrupt politicians has allowed the problem to persist. The corruption in Nigerian political elections undermines the credibility of the democratic process and erodes public trust in the government. It is essential for the Nigerian government to take concrete steps to address this issue and restore confidence in the electoral system.
Another challenge facing Nigeria's political system is insecurity. The country has been plagued by a series of violent conflicts, including the Boko Haram insurgency in the northeast, clashes between farmers and herders in central Nigeria, and separatist movements in the southeast. These conflicts have claimed thousands of lives and displaced millions of people, posing a serious threat to the country's stability and development.
The last President of Nigeria, Muhammadu Buhari has led the fight against corruption in his country since taking office in 2015. He made anti-corruption a key priority of his administration, launching several initiatives to tackle the problem head-on. Under his leadership, several high-profile individuals have been arrested, prosecuted and convicted for various acts of corruption, including embezzlement of public funds and abuse of office. Buhari has also implemented measures to improve transparency and accountability in government. He introduced two important policies: the Treasury Single Account (TSA), which requires all government revenue, including taxes, fees, and other sources of income, to be collected into a single account maintained by the Central Bank of Nigeria, and the Whistleblower policy, encouraging individuals to report corruption, fraud, or other illegal activities within government agencies or private organizations. Despite facing criticism and challenges, Buhari remained committed to rooting out corruption and ensuring that public funds were used for the benefit of the Nigerian people.
In the February 2023 elections Nigeria experienced the closest-run vote in country’s democratic era. From a total of 18 candidates, only three had a realistic chance of winning, according to opinion polls. Mr. Tinobu won the elections with just over 44% of the votes, but the opposition parties have called for the presidential election to be scrapped, describing it as a sham. The People’s Democratic Party (PDP) and the Labour Party said results had been manipulated, and they wanted a new election to be organised; in particular, they were critical of the Independent National Electoral Commission (Inec) and its handling of the electronic voting system. These parties are attempting to get a court to overturn the outcome of the elections, but till today (23rd March) there is no written result from the court and it is highly unlikely that the tribunal will reach a decision before 29th May, when Mr Tinubu is due to be sworn in as president.
Before colonization, various cultures in Nigeria used a wide range of objects for commercial trade, including shells, manilas, beads, bottles, and salt. In 1880, the Colonial Ordinance introduced Shillings and Pence as legal tender in British West Africa. Initially, the West African Currency Board (WACB) issued a first set of banknotes in 1900 in Nigeria, Ghana, Sierra Leone, and Gambia. These banknotes were printed in British pounds and circulated together with British coins in the colony.
Subsequently, in 1959, Nigeria gained independence from the United Kingdom, and the national government introduced its own national currency, the "Naira". The Central Bank of Nigeria (CBN) issued banknotes in Nigerian currency, while banknotes and coins issued by the WACB were withdrawn. In the interest of monetary and commercial stability, Nigeria decided to anchor its currency, the Naira, to the US dollar in 1973. Over the years, however, the country has faced numerous economic difficulties, including heavy debt due to a strong reliance on oil, whose price fluctuations caused severe economic crises in the 1980s and 1990s. Additionally, Nigeria has had to deal with inflation problems and ineffective exchange rate management.
In an attempt to solve these problems, the Central Bank of Nigeria decided to abandon the dollar peg in 2016, allowing the Naira to float freely on the currency market. This decision has allowed the Central Bank to adopt more flexible monetary policies to manage inflation and other economic issues. However, abandoning the dollar peg has caused numerous fluctuations and devaluations of the Naira, due to economic and political problems in the country.
On October 26, 2022, Godwin Emefiele, Governor of the Central Bank of Nigeria (CBN), announced the need to renew the higher denomination banknotes of the Nigerian currency (N200, N500, and N1000 banknotes). The new currency was put into circulation in November, while the new banknotes were introduced on December 15, 2022. The CBN has set a deadline of January 31, 2023, to exchange all old banknotes with the new ones, after which the old currency will no longer be accepted.
The amount of money in circulation has more than doubled since the beginning of 2015, going from 1.46 trillion Naira in December 2015 to 3.23 trillion Naira in September 2022, causing multiple problems. This was the reason that prompted the CBN to redesign the currency. Although central banks around the world usually renew, issue, and introduce a new legal tender every five to eight years, the Naira had not been renewed for over 20 years.
The Governor mentioned several reasons for the redesign of the currency, such as the scarcity of clean and suitable banknotes, the threat of counterfeiting reported by various security reports, as well as the latest developments in photography and printing technology that have made counterfeiting easier. The CBN is convinced that the new banknotes can help to combat corruption, money laundering, and address the growing practice of kidnappings for ransom. In addition, the Central Bank also has the need to more efficiently manage the amount of money in circulation. Depositing money in banks can contribute to strengthening central banks' monetary policies and help maintain balance in the circulation of money and inflation control.
Furthermore, the CBN has ordered banks to only pay out the new currency through automated teller machines (ATMs), but each ATM can only hold up to 8 million naira, and most of them were emptied in less than an hour. On January 30th, one day before the initial deadline, the Governor of the Central Bank of Nigeria announced that, at the order of the President, the deadline would be extended by exactly ten days. However, the situation became even more tense and confusing afterward, as cash became harder to come by, and there were riots in the streets, with many banks destroyed, especially in the Ibadan area. Most of those who obtained the new currency were slow to spend it, as the new currency was seen as a precious asset rather than a medium of exchange, and when scarcity developed, panic ensued.
Furthermore, the political shift has added further complications to the situation, as the President, aiming to leave a legacy of free and fair elections, has declared his hope to deprive politicians of liquidity for the upcoming elections.
Finance Minister Zainab Ahmed hailed the initiative as a "success" during her speech, as it brought trillions of Naira in cash into the banking system, which, according to the government, will boost digital payments, reduce inflation, and curb corruption. "However, we regret the pain it has caused citizens," Ms. Ahmed stated. On March 13, positive news was announced for the Nigerian people: through a press release, the CBN revealed that the old N200, N500, and N1,000 notes will remain legal tender alongside the newly redesigned banknotes until December 31, 2023.
Since its independence in 1960, Nigeria has experienced a tumultuous political history, marked by a series of military coups, ethnic tensions, and political violence.
The first coup took place in 1966, and it was followed by several more in the years that followed. The military regimes were characterized by authoritarian rule, human rights abuses, and corruption. The country's first civilian government was established in 1979, but it was short-lived, as a military coup took place in 1983.
Nigeria returned to civilian rule in 1999, following several years of military dictatorship. Since then, the country has had relatively stable democratic governance, with peaceful transfers of power between political parties. However, the country's political scene remains highly contentious, with accusations of electoral fraud, political violence, and deep-seated political and economic inequalities.
One of the major challenges facing Nigeria's political system is corruption. Nigeria has a long-standing problem with corruption in its political elections. Vote rigging, ballot box snatching, and violence during elections have become commonplace. Politicians have been known to bribe officials and intimidate voters to manipulate election outcomes in their favor. The government has made some efforts to tackle the issue, such as setting up anti-corruption agencies and increasing security measures during elections, but progress has been slow. The lack of political will to prosecute corrupt politicians has allowed the problem to persist. The corruption in Nigerian political elections undermines the credibility of the democratic process and erodes public trust in the government. It is essential for the Nigerian government to take concrete steps to address this issue and restore confidence in the electoral system.
Another challenge facing Nigeria's political system is insecurity. The country has been plagued by a series of violent conflicts, including the Boko Haram insurgency in the northeast, clashes between farmers and herders in central Nigeria, and separatist movements in the southeast. These conflicts have claimed thousands of lives and displaced millions of people, posing a serious threat to the country's stability and development.
The last President of Nigeria, Muhammadu Buhari has led the fight against corruption in his country since taking office in 2015. He made anti-corruption a key priority of his administration, launching several initiatives to tackle the problem head-on. Under his leadership, several high-profile individuals have been arrested, prosecuted and convicted for various acts of corruption, including embezzlement of public funds and abuse of office. Buhari has also implemented measures to improve transparency and accountability in government. He introduced two important policies: the Treasury Single Account (TSA), which requires all government revenue, including taxes, fees, and other sources of income, to be collected into a single account maintained by the Central Bank of Nigeria, and the Whistleblower policy, encouraging individuals to report corruption, fraud, or other illegal activities within government agencies or private organizations. Despite facing criticism and challenges, Buhari remained committed to rooting out corruption and ensuring that public funds were used for the benefit of the Nigerian people.
In the February 2023 elections Nigeria experienced the closest-run vote in country’s democratic era. From a total of 18 candidates, only three had a realistic chance of winning, according to opinion polls. Mr. Tinobu won the elections with just over 44% of the votes, but the opposition parties have called for the presidential election to be scrapped, describing it as a sham. The People’s Democratic Party (PDP) and the Labour Party said results had been manipulated, and they wanted a new election to be organised; in particular, they were critical of the Independent National Electoral Commission (Inec) and its handling of the electronic voting system. These parties are attempting to get a court to overturn the outcome of the elections, but till today (23rd March) there is no written result from the court and it is highly unlikely that the tribunal will reach a decision before 29th May, when Mr Tinubu is due to be sworn in as president.
Future outlook
The political situation outlined above, combined with its huge potential (a population of more than 200 million people) and the fact that it is a net exporter of oil, makes Nigeria a fascinating country from the perspective of policy decisions. In this brief outlook of the macro-trends in the Nigerian economy, we will closely follow the Nigeria Development Update (NDU) by the World Bank of December 2022, entitled “Nigeria’s choice”. This will highlight the broader economic context and implications of Nigerian monetary policy.
Overall, the economy of Nigeria has weakened over the past decade due to rising inflation and sluggish growth, as a decline in macroeconomic stability and policy predictability has reduced growth potential. In Nigeria, as in most developing countries, economic performance over time is directly linked to the rate of reforms, which is related to the strength of institutions.
High inflation has been persistent in Nigeria for the past two decades, but since 2019 it has risen substantially, with the rate of consumer price inflation currently being one of the highest globally. The Central Bank of Nigeria has been expanding the money supply to cover federal finance budget deficits and inefficient interventions in the economy. However, rising interest rates since 2022 have had little effect on the price level in the economy. The consumer price index, already increasing at a high rate, speeded up in 2022 and reached 21.8 percent year over year in January 2023. Considering these facts, on 27 January 2023, Moody downgraded Nigeria’s long-term issuer rating from B3 to Caa1.
Inflation is the result of the combined effect of shocks and policy decisions. On one hand, exogenous global issues such as the Covid-pandemic and the Russia-Ukraine war played, or still play, a major role. The war in Ukraine has increased global food, fuel, and fertilizers prices. Moreover, flooding in farming areas has impacted the harvest of crops and will reduce agricultural production in 2023. Also, agriculture has been suffering from insecurity, with severe impacts on food inflation and employment.
However, Nigeria’s economic difficulties are mostly self-inflicted, as monetary and fiscal policies have been largely misled. Recent fiscal policy has been characterized by a significant lack of responsibility. A costly fuel subsidy system, which is expected to cost about US$15bn in 2023, has weighed significantly on the budget, preventing Nigeria from reaping the benefits of rising oil prices. Also, import and FX restrictions reduce the supply of food and staple products, causing a rise in their prices and those of associated goods. Furthermore, a suboptimal exchange rate management fuels inflation by constraining FX supply, complicating the operating environment for businesses, and pushing up the parallel exchange rate which is closely associated with inflation.
Nigerian authorities must make robust efforts to make the economy start converging toward its huge potential. A growth of 3%, despite being above population growth, is not enough to be inclusive or job-creating.
The increase in the monetary policy rate is a step in the right direction, but the impact of monetary policy is compromised by subsidized interest rates and the monetization of the federal government fiscal deficit, which in turn is in part caused by the fiscal burden imposed by the petrol subsidy.
In the short term, Nigeria will need to broaden the tax base, raise taxes, decrease waste in government expenditure, reduce costs, open the foreign exchange market, and implement growth- and job-oriented policies. However, Nigeria will likely need to seek an IMF program before end-2023. Restoring macroeconomic stability should be a priority to address the vulnerability of the economy to crises, and a prerequisite for speeding growth, reducing poverty, and increasing job creation. Three directions are indicated by the NDU. First, Nigeria should increase oil and non-oil revenues. This can be done by bringing back oil production to pre-2020 levels, removing the petrol subsidy, building on recent progress that has started to broaden the non-oil tax base, and rationalizing tax expenditures. Second, inflation should be reduced via a sequenced and coordinated combination of trade, monetary and fiscal policies to restore conditions favorable to private investment and growth and to protect Nigerians’ welfare. Third, a single, market-responsive exchange rate should be implemented.
The choice to redesign the naira should be assessed in this context. In the words of NDU, “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 demonetization may have negative impacts on economic activity, in particular for the poorest households. International experience suggests that rapid demonetizations 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.”
The political situation outlined above, combined with its huge potential (a population of more than 200 million people) and the fact that it is a net exporter of oil, makes Nigeria a fascinating country from the perspective of policy decisions. In this brief outlook of the macro-trends in the Nigerian economy, we will closely follow the Nigeria Development Update (NDU) by the World Bank of December 2022, entitled “Nigeria’s choice”. This will highlight the broader economic context and implications of Nigerian monetary policy.
Overall, the economy of Nigeria has weakened over the past decade due to rising inflation and sluggish growth, as a decline in macroeconomic stability and policy predictability has reduced growth potential. In Nigeria, as in most developing countries, economic performance over time is directly linked to the rate of reforms, which is related to the strength of institutions.
High inflation has been persistent in Nigeria for the past two decades, but since 2019 it has risen substantially, with the rate of consumer price inflation currently being one of the highest globally. The Central Bank of Nigeria has been expanding the money supply to cover federal finance budget deficits and inefficient interventions in the economy. However, rising interest rates since 2022 have had little effect on the price level in the economy. The consumer price index, already increasing at a high rate, speeded up in 2022 and reached 21.8 percent year over year in January 2023. Considering these facts, on 27 January 2023, Moody downgraded Nigeria’s long-term issuer rating from B3 to Caa1.
Inflation is the result of the combined effect of shocks and policy decisions. On one hand, exogenous global issues such as the Covid-pandemic and the Russia-Ukraine war played, or still play, a major role. The war in Ukraine has increased global food, fuel, and fertilizers prices. Moreover, flooding in farming areas has impacted the harvest of crops and will reduce agricultural production in 2023. Also, agriculture has been suffering from insecurity, with severe impacts on food inflation and employment.
However, Nigeria’s economic difficulties are mostly self-inflicted, as monetary and fiscal policies have been largely misled. Recent fiscal policy has been characterized by a significant lack of responsibility. A costly fuel subsidy system, which is expected to cost about US$15bn in 2023, has weighed significantly on the budget, preventing Nigeria from reaping the benefits of rising oil prices. Also, import and FX restrictions reduce the supply of food and staple products, causing a rise in their prices and those of associated goods. Furthermore, a suboptimal exchange rate management fuels inflation by constraining FX supply, complicating the operating environment for businesses, and pushing up the parallel exchange rate which is closely associated with inflation.
Nigerian authorities must make robust efforts to make the economy start converging toward its huge potential. A growth of 3%, despite being above population growth, is not enough to be inclusive or job-creating.
The increase in the monetary policy rate is a step in the right direction, but the impact of monetary policy is compromised by subsidized interest rates and the monetization of the federal government fiscal deficit, which in turn is in part caused by the fiscal burden imposed by the petrol subsidy.
In the short term, Nigeria will need to broaden the tax base, raise taxes, decrease waste in government expenditure, reduce costs, open the foreign exchange market, and implement growth- and job-oriented policies. However, Nigeria will likely need to seek an IMF program before end-2023. Restoring macroeconomic stability should be a priority to address the vulnerability of the economy to crises, and a prerequisite for speeding growth, reducing poverty, and increasing job creation. Three directions are indicated by the NDU. First, Nigeria should increase oil and non-oil revenues. This can be done by bringing back oil production to pre-2020 levels, removing the petrol subsidy, building on recent progress that has started to broaden the non-oil tax base, and rationalizing tax expenditures. Second, inflation should be reduced via a sequenced and coordinated combination of trade, monetary and fiscal policies to restore conditions favorable to private investment and growth and to protect Nigerians’ welfare. Third, a single, market-responsive exchange rate should be implemented.
The choice to redesign the naira should be assessed in this context. In the words of NDU, “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 demonetization may have negative impacts on economic activity, in particular for the poorest households. International experience suggests that rapid demonetizations 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.”
COMPARISON WITH ZIMBABWE
Comparison Overview
The practice of demonetization is a trend across Africa in recent years, as many nations find themselves in similar socioeconomic problems, resulting in the struggle with high inflation levels. Just like Nigeria, Zimbabwe too recently demonetized its domestic currency in an attempt to stabilize the economy. However, despite similar intentions, the root causes of inflation and thus the process of demonetization and its outcome greatly differ.
Root Causes of Inflation
Nigeria
Nigeria’s level of inflation has been higher than the Central Bank’s desired rate of 9%, with the actual rate reaching almost 30% as its maximum within the last 25 years. The causes of such high inflation are long-lasting civil unrest across parts of Nigeria, including violent action, which overall contributes to the instability within the country. On top of that, the economic policies implemented by the Nigerian Central Bank have only worsened the inflation rates, injecting too much money into the economy and driving up the prices of goods and services, thus forcing Nigerians to demand higher wages. Yet, this only worsens the situation as higher wages result in more purchasing power, so even more money would be pumped into the economy, creating a greater surplus in circulation.
Additionally, the volatile food supplies, rising costs of imports, oil and hence costs of production, and persisting currency depreciation all contribute to rising inflation. Many Nigerians are discouraged from working, thus reducing their productivity, which reflects in the decreasing level of output.
Comparison Overview
The practice of demonetization is a trend across Africa in recent years, as many nations find themselves in similar socioeconomic problems, resulting in the struggle with high inflation levels. Just like Nigeria, Zimbabwe too recently demonetized its domestic currency in an attempt to stabilize the economy. However, despite similar intentions, the root causes of inflation and thus the process of demonetization and its outcome greatly differ.
Root Causes of Inflation
Nigeria
Nigeria’s level of inflation has been higher than the Central Bank’s desired rate of 9%, with the actual rate reaching almost 30% as its maximum within the last 25 years. The causes of such high inflation are long-lasting civil unrest across parts of Nigeria, including violent action, which overall contributes to the instability within the country. On top of that, the economic policies implemented by the Nigerian Central Bank have only worsened the inflation rates, injecting too much money into the economy and driving up the prices of goods and services, thus forcing Nigerians to demand higher wages. Yet, this only worsens the situation as higher wages result in more purchasing power, so even more money would be pumped into the economy, creating a greater surplus in circulation.
Additionally, the volatile food supplies, rising costs of imports, oil and hence costs of production, and persisting currency depreciation all contribute to rising inflation. Many Nigerians are discouraged from working, thus reducing their productivity, which reflects in the decreasing level of output.
Inflation in Nigeria in the last 25 Years
Zimbabwe
Zimbabwe, on the other hand, is facing hyperinflation, with the highest inflation rate reaching 837.53% in 2020. The main cause of hyperinflation has been the government’s practice of printing money in response to numerous socioeconomic issues. However, it all dates back to the 1990s when land redistribution policies from the white to the black population were implemented to promote racial equality. As the land turned over to less experienced farmers, they struggled to match the previous level of output, pushing the economy into its bust cycle and collapsed the entirety of the bank lending operations.
At the same time, the Central Bank began printing more currency in order to increase the money supply and fund the war in Congo, as well as increase military salaries. However, this was only a short-term solution, which ultimately worsened the economic crisis. Government debt was rising to very high levels, and to finance it Zimbabwe chose to print even more money, which caused a further increase in inflation. At the same time bond value fell, so selling debt was no longer an option for the Central Bank. Declining output reflected in the shortage of goods, which respectively drove up the overall price level. In short, the shortage of goods increased prices. But combined with the excess printing of currency, prices increased very quickly.
Worse than that, the inadequate implementation of price controls significantly increased the shortage. While the intention was to maintain basic goods affordable, the rising costs of inputs combined with the price controls would leave little to no profits for producers, if not leave them at a loss, thus completely disincentivizing production.
Under such conditions, inflation was abnormally high, to the extent that is has been classified as hyper-inflation, with maximum daily levels reaching 98%. With these statistics, Zimbabwe has reached the highest rates of inflation in history, qualifying it as the biggest ever monetary collapse.
Zimbabwe, on the other hand, is facing hyperinflation, with the highest inflation rate reaching 837.53% in 2020. The main cause of hyperinflation has been the government’s practice of printing money in response to numerous socioeconomic issues. However, it all dates back to the 1990s when land redistribution policies from the white to the black population were implemented to promote racial equality. As the land turned over to less experienced farmers, they struggled to match the previous level of output, pushing the economy into its bust cycle and collapsed the entirety of the bank lending operations.
At the same time, the Central Bank began printing more currency in order to increase the money supply and fund the war in Congo, as well as increase military salaries. However, this was only a short-term solution, which ultimately worsened the economic crisis. Government debt was rising to very high levels, and to finance it Zimbabwe chose to print even more money, which caused a further increase in inflation. At the same time bond value fell, so selling debt was no longer an option for the Central Bank. Declining output reflected in the shortage of goods, which respectively drove up the overall price level. In short, the shortage of goods increased prices. But combined with the excess printing of currency, prices increased very quickly.
Worse than that, the inadequate implementation of price controls significantly increased the shortage. While the intention was to maintain basic goods affordable, the rising costs of inputs combined with the price controls would leave little to no profits for producers, if not leave them at a loss, thus completely disincentivizing production.
Under such conditions, inflation was abnormally high, to the extent that is has been classified as hyper-inflation, with maximum daily levels reaching 98%. With these statistics, Zimbabwe has reached the highest rates of inflation in history, qualifying it as the biggest ever monetary collapse.
Inflation in Zimbabwe in the last 25 Years
Process of Demonetization
Both Nigeria and Zimbabwe ended up with high levels of inflations and thus a monetary crisis. To combat the situation, respective Central Banks decided to demonetize the national currency and replace it with a new one, in an attempt to restore stable economic conditions.
Nigeria
Besides the high inflation, Nigeria has another big issue with its currency. According to the Central Bank, many Nigerians hold significant amounts of cash outside of the control of regulators. Calculation state that as much as 85% of the naira is being used outside the commercial banking system. Thus, the demonetization would also help transition the economy towards a higher degree of transparency, reduce black market activities, and increase the use of digital banking. Such a shift could help reduce crime and political instability in the region, which is another big goal for the Nigerian government.
To begin the demonetization, the Nigerian Central Bank has announced that it is withdrawing bank notes worth 200, 500 and 1,000 naira (between approximately $0.40 and $2.10) and swapping them out for new ones, giving residents the deadline of January 21st of 2023.
However, there has been great criticism regarding the manner in which the Central Bank has been carrying out the currency swap, as Nigerians claim that they have lacked support through the demonetization process. In response, the Central Bank has pushed the deadline to mid-February; while the government later announced that the smallest denomination of the naira would remain legally valid until April 10th of 2023.
Initially, the Central Bank declared a cap on the cash withdrawal amount of 100,000 naira per week but later increased it to 500,000 naira ($1,085) in response to the criticism. Still, the shortage of cash is large enough that banks are forced to ration their supplies, disbursing only between 2,000 and 5,000 naira per person at both counters and ATMs.
Nigerians have taken the issue of the naira crisis to top court, pleading for a favorable outcome, given that their monetary needs and not being met. Furthermore, the country has already experienced a similar currency swap in 1984, which was poorly managed at the time. Perhaps, history is also influencing the current worries, and hence actions, of the Nigerians.
Zimbabwe
At first, the demonetization in Zimbabwe was slow. In 2007, the government declared inflation illegal and set a price freeze, declaring that anyone who raised the prices for goods and services was subject to arrest. However, this was an ineffective practice which led to the arrest of many executives for changing prices.
Then, in December 2008, the Reserve Bank of Zimbabwe allowed approximately 1,000 shops to deal in foreign currency instead of the Zimbabwe Dollar. At that point, many citizens had already been using foreign currency as part of their daily purchases, since shops refrained from declaring prices in Zimbabwe Dollars, referring to foreign currency, which was also needed to import goods from abroad. Even those without an official license engaged in the first “unofficial” phase of the demonetization.
In January 2009, the Finance Minister Patrick Chinamasa removed the restriction to use only Zimbabwean Dollars and allowed the use of the US Dollar, the euro and South African Rands – a practice already implemented by most citizens. Still, salaries of public servants would remain to be paid in Zimbabwean Dollars in trillions per month, amounting to just about US$1. At the same time, a cash withdrawal limit had been limited to $Z500,000, or approximately US$0.25.
Still, some shops and restaurants still operated using the Zimbabwean Dollar, adjusting prices multiple times per day. Yet, this meant that owners would be forced to exchange the national currency for a foreign one multiple times per day, otherwise suffering a significant drop of value. Of course, it was hardly impossible to exchange currency at official points both due to logistics and availability issues. Hence, a black market arose, allowing the evasion of the price freeze set by the government. Nonetheless, the black market drastically contributed to the rising levels of inflation, as it was meeting the demands for basic goods.
In 2009, the government completely stopped printing Zimbabwean dollars, allowing people to use foreign currencies, with the dominant one being the US dollar. In 2014, the Reserve Bank of Zimbabwe confirmed that 80% of Zimbabweans use the U.S. dollar, and presented an issue where the lack of local coins was incentivizing retailers to round up prices to the next nearest dollar. Hence, more coins were introduced into the economy, while citizens had been assured that the coins were an extension to the US dollar, with no plans to fully return to the old national currency. Still, later down the line again some Zimbabwean dollars had been printed, the value of the currency continued to fall, and inflation continued to rise.
It was in June 2015 when the Reserve Bank of Zimbabwe officially began the demonetization process. Originally it was planned to have fully switched to the US dollar by the end of September of the same year. But by December, the Minister of Finance announced that the Chinese yuan will be the main currency of the bank’s reserves, following China forfeiting US$40 million in debt. Such a commitment would highlight Zimbabwe’s dependency on the rising global hegemon, which as a country has implemented a program, Belt and Road Innitiative, in support of African infrastructure and debt restructuring projects. In January of 2016, the Chinese yen plan was denied by the Reserve Bank of Zimbabwe and by June nine currencies were legal, with around 90% of transactions being carried out in US dollars and 5% in South African rand. In 2019, the new Finance Minister, Mthuli Ncube, decided to shift away from foreign currency to a new Zimbabwean currency, which resulted in the return of hyperinflation, which remains persistent today.
Both Nigeria and Zimbabwe ended up with high levels of inflations and thus a monetary crisis. To combat the situation, respective Central Banks decided to demonetize the national currency and replace it with a new one, in an attempt to restore stable economic conditions.
Nigeria
Besides the high inflation, Nigeria has another big issue with its currency. According to the Central Bank, many Nigerians hold significant amounts of cash outside of the control of regulators. Calculation state that as much as 85% of the naira is being used outside the commercial banking system. Thus, the demonetization would also help transition the economy towards a higher degree of transparency, reduce black market activities, and increase the use of digital banking. Such a shift could help reduce crime and political instability in the region, which is another big goal for the Nigerian government.
To begin the demonetization, the Nigerian Central Bank has announced that it is withdrawing bank notes worth 200, 500 and 1,000 naira (between approximately $0.40 and $2.10) and swapping them out for new ones, giving residents the deadline of January 21st of 2023.
However, there has been great criticism regarding the manner in which the Central Bank has been carrying out the currency swap, as Nigerians claim that they have lacked support through the demonetization process. In response, the Central Bank has pushed the deadline to mid-February; while the government later announced that the smallest denomination of the naira would remain legally valid until April 10th of 2023.
Initially, the Central Bank declared a cap on the cash withdrawal amount of 100,000 naira per week but later increased it to 500,000 naira ($1,085) in response to the criticism. Still, the shortage of cash is large enough that banks are forced to ration their supplies, disbursing only between 2,000 and 5,000 naira per person at both counters and ATMs.
Nigerians have taken the issue of the naira crisis to top court, pleading for a favorable outcome, given that their monetary needs and not being met. Furthermore, the country has already experienced a similar currency swap in 1984, which was poorly managed at the time. Perhaps, history is also influencing the current worries, and hence actions, of the Nigerians.
Zimbabwe
At first, the demonetization in Zimbabwe was slow. In 2007, the government declared inflation illegal and set a price freeze, declaring that anyone who raised the prices for goods and services was subject to arrest. However, this was an ineffective practice which led to the arrest of many executives for changing prices.
Then, in December 2008, the Reserve Bank of Zimbabwe allowed approximately 1,000 shops to deal in foreign currency instead of the Zimbabwe Dollar. At that point, many citizens had already been using foreign currency as part of their daily purchases, since shops refrained from declaring prices in Zimbabwe Dollars, referring to foreign currency, which was also needed to import goods from abroad. Even those without an official license engaged in the first “unofficial” phase of the demonetization.
In January 2009, the Finance Minister Patrick Chinamasa removed the restriction to use only Zimbabwean Dollars and allowed the use of the US Dollar, the euro and South African Rands – a practice already implemented by most citizens. Still, salaries of public servants would remain to be paid in Zimbabwean Dollars in trillions per month, amounting to just about US$1. At the same time, a cash withdrawal limit had been limited to $Z500,000, or approximately US$0.25.
Still, some shops and restaurants still operated using the Zimbabwean Dollar, adjusting prices multiple times per day. Yet, this meant that owners would be forced to exchange the national currency for a foreign one multiple times per day, otherwise suffering a significant drop of value. Of course, it was hardly impossible to exchange currency at official points both due to logistics and availability issues. Hence, a black market arose, allowing the evasion of the price freeze set by the government. Nonetheless, the black market drastically contributed to the rising levels of inflation, as it was meeting the demands for basic goods.
In 2009, the government completely stopped printing Zimbabwean dollars, allowing people to use foreign currencies, with the dominant one being the US dollar. In 2014, the Reserve Bank of Zimbabwe confirmed that 80% of Zimbabweans use the U.S. dollar, and presented an issue where the lack of local coins was incentivizing retailers to round up prices to the next nearest dollar. Hence, more coins were introduced into the economy, while citizens had been assured that the coins were an extension to the US dollar, with no plans to fully return to the old national currency. Still, later down the line again some Zimbabwean dollars had been printed, the value of the currency continued to fall, and inflation continued to rise.
It was in June 2015 when the Reserve Bank of Zimbabwe officially began the demonetization process. Originally it was planned to have fully switched to the US dollar by the end of September of the same year. But by December, the Minister of Finance announced that the Chinese yuan will be the main currency of the bank’s reserves, following China forfeiting US$40 million in debt. Such a commitment would highlight Zimbabwe’s dependency on the rising global hegemon, which as a country has implemented a program, Belt and Road Innitiative, in support of African infrastructure and debt restructuring projects. In January of 2016, the Chinese yen plan was denied by the Reserve Bank of Zimbabwe and by June nine currencies were legal, with around 90% of transactions being carried out in US dollars and 5% in South African rand. In 2019, the new Finance Minister, Mthuli Ncube, decided to shift away from foreign currency to a new Zimbabwean currency, which resulted in the return of hyperinflation, which remains persistent today.
By Anastasia Larionova, Emanuele Sanvito, Federico Tita, Francesco Doga
Sources:
- https://www.cbn.gov.ng/Out/2023/CCD/CBN%20Old%20Notes.pdf
- https://www.premiumtimesng.com/business/business-news/581036-day-of-decision-nigerians-to-know-fate-as-currency-scarcity-bites-harder.html
- https://www.cbn.gov.ng/Currency/historycur.asp
- https://www.bbc.com/news/world-africa-64626127
- https://www.premiumtimesng.com/business/business-news/581036-day-of-decision-nigerians-to-know-fate-as-currency-scarcity-bites-harder.html
- https://www.ispionline.it/en/publication/slow-growth-high-inflation-nigerias-economy-needs-vital-reforms-117517
- https://documents1.worldbank.org/curated/en/099305012142215802/pdf/P179906004b7c80340a74d0ee7862953b8f.pdf