It has not been thoroughly stated why this step by the CBN, an autonomous organization, will be advantageous to Nigeria or its economy; some have even criticized the notion as a poor choice of priority, arguing that Nigeria has more pressing Economical issues than the introduction of a new currency.
Several individuals have proposed analogies that appear to be valid. Some say that the CBN’s action will reveal corruption, requiring unscrupulous persons to explain how they obtained so much cash while depositing at the bank to acquire more money or exchanging it for real currencies. Others contend that it will assist the government in limiting the financing of terrorists and bandits who hold on to old cash. These comparisons are not implausible, and I would not expect the CBN to be completely forthcoming about the motivations for such a bold step.
After carefully examining several comparisons and conducting research on what would be the motive for such a daring step, I concluded that it is a move aimed to restrict money supply and combat corruption at the same time, and that it is merely the tip of the iceberg for future movements. Why would I say this? Follow along as I describe how this occurs.
The Contractionary Monetary Policy is a macroeconomic instrument used by the Central Bank to battle growing inflation. Its purpose is to slow the economy by reducing the money supply, often known as limiting the amount of currency in circulation.
Inflation is defined as the rise in prices of goods and services in an economy, where, as the general price level rises, each unit of money buys fewer goods and services, hence decreasing the Purchasing Power of Money (currency). For example, if the inflation rate for Year (X) was 12.4% and it rises to 13.7% in Year (Y), the following year, particularly if it occurs on all products, this indicates a 1.3% increase on each unit of a good or service during the entire year.
The continuous neglect of inflation can cause a country to enter a recession (temporary decline in trade and industrial activity leading to a decline in the GDP of a country over two consecutive quarters), there is also a chance of an inflation in recession which is known as Stagflation, so as not to bore you with all this babbles and save the CBN the trouble of getting the country’s economy out of the mess, they find a way to implement policies like the Contractionary monetary policy.
To accomplish this, the CBN must:
To do this, the CBN must:
1) Increase the interest rate charged by banks on consumer loans.
2) Increase Reserve Requirements/Ratio of Reserves.
3) The CBN should raise the discount rate for commercial banks.
In conclusion, it is reasonable to state that the CBN’s plan to switch to new notes is both helpful and timely for the economy of this country, especially given the upcoming elections. We will experience a massive influx of cash into the economy over the next few months, which will have a negative impact on the value of the naira on the Exchange Rate Market, as we are currently observing. However, if the government refrains from interfering, the situation will improve.
DADA Abayomi