The world’s largest live central bank digital currency (CBDC) program has so far been a destructive flop. And that is probably the last thing the editors of the New York Times want its readers to know.
Two years ago, Nigeria was Africa’s largest economy and before the COVID-19 pandemic was hotly tipped to become Africa’s first trillion-dollar economy. By the end of this year, it is (according to a recent IMF forecast) expected to have dropped to fourth place in the continental rankings, behind South Africa, Egypt and Algeria. This follows years of slow growth, currency crises, poor governance, fuel shortages (in Africa’s largest oil producing country) and double-digit inflation. In recent months, citizens have resorted to looting food warehouses as almost half the population of Africa’s most populous nation suffer from hunger.
A new piece in the New York Times, titled “Nigeria Faces Its Worst Economic Crisis in Decades”, paints a vivid picture:
People in Africa’s most populous nation are suffering as the price of food, fuel and medicine has skyrocketed out of reach for many…
The pain is widespread. Unions strike to protest salaries of around $20 a month. People die in stampedes, desperate for free sacks of rice. Hospitals are overrun with women wracked by spasms from calcium deficiencies…
A nation of entrepreneurs, Nigeria’s more than 200 million citizens are skilled at managing in tough circumstances, without the services states usually provide. They generate their own electricity and source their own water. They take up arms and defend their communities when the armed forces cannot. They negotiate with kidnappers when family members are abducted.
But right now, their resourcefulness is being stretched to the limit…
More than 87 million people in Nigeria, Africa’s most populous country, live below the poverty line — the world’s second-largest poor population after India, a country seven times its size. And punishing inflation means poverty rates are expected to rise still further this year and next, according to the World Bank.
So, what are the root causes of Nigeria’s constantly worsening crisis? According to the “Gray Lady”, there are two main drivers, both of which can be blamed on the country’s relatively new President Bola Tinubu: his government’s partial removal of fuel subsidies and the floating of Nigeria’s already weak naira currency, which together have caused major price rises, particularly for basics such as food. From the Times‘ article:
Until recently, the government subsidized [largely imported] petroleum, to the tune of billions of dollars a year.
Many Nigerians said the subsidy was the only useful contribution from a neglectful and predatory government. Successive presidents have pledged to remove the subsidy, which drains a hefty chunk of government revenue — and later backtracked fearing mass unrest.
Bola Tinubu, who was elected Nigeria’s president last year, initially followed through.
“It was a necessary action for my country not to go bankrupt,” Mr. Tinubu said in April, at a meeting of the World Economic Forum in Saudi Arabia.
Instead, many Nigerians are going bankrupt — or working multiple jobs to stay afloat…
The government has twice devalued the naira in the past year, trying to enable it to float more freely and attract foreign investment. The upshot: It’s lost nearly 70 percent of its value against the dollar.
Nigeria cannot produce enough food for its growing population; food imports rise 11 percent annually. The currency devaluation caused those imports — already expensive because of high tariffs — to explode in price.
“A Dead Economy”
On the one hand, this is a pretty accurate depiction of recent developments in Nigeria. But it ignores everything that happened before Tinubu came to office 15 months ago. As a government spokesman said in response to the Times article, Tinubu inherited a “dead economy,” which is also largely true. Inflation was already above 20% and economic growth was stalling. One reason for that is the central bank’s disastrous flirtation with central bank digital currency (CBDC), which culminated in a demonetisation program that upended economic activity for almost the entire first quarter of 2023.
In mid-December 2022, the Central Bank of Nigeria began calling in old 200-, 500- and 1,000-naira notes in a bid to mop up excess cash, rein in inflation, combat rising insecurity, curb vote buying and further “entrench” a cashless economy. But the central bank failed to print nearly enough new high-denomination notes to replace the old ones, leading to an acute shortage of cash in a still heavily cash-based economy. In the space of just two months (Dec 2022–Feb 2023), cash in circulation declined by almost 70%, per official data from the CBN.
As in India’s 2016 demonetisation program, businesses went bust. Lives were ruined. But as we noted at the time, the resulting economic pain was seen by the central bank as a necessary evil, a wee psychological nudge to push Nigerians into finally abandoning cash and embracing digital payment options:
Demonetisation may well break some public resistance toward the CNB’s eNaira but it will be at huge social and economic cost. As in India, that cost will be borne disproportionately by the poor and vulnerable. As even the Associated Press reports, analysts worry the initiative will “hurt” daily transactions that people and businesses make, particularly given that Nigeria’s digital payment systems, including the eNaira, are often unreliable:
“The policy is intended to cause discomfort, to move you from cash to cashless because they (the central bank) have said they want to make it uncomfortable and expensive for you to hold cash,” economic analyst Kalu Aja said. “That is a positive for the CBN (because) the more discomforting they are able to achieve, the more people can move.”
The CBN’s prime objective in culling cash was to leave people with little choice but to use digital payment methods — ideally the CBN’s floundering digital currency, the eNaira. Among its list of reasons for pursuing demonetisation, published in October 2022, the CBN said the redesign of the currency will “help deepen our drive to entrench a cashless economy as it will be complemented by increased minting of our eNaira.” Also in October, the central bank’s governor, Godwin Emefiele, said: “The destination, as far as I am concerned, is to achieve a 100% cashless economy in Nigeria”.
That didn’t happen, for a number of reasons: first, tens of millions of Nigerians cannot even use digital payments since they do not own a smart phone or have access to the Internet. Roughly half of the country is unbanked. In other words, many, if not most, Nigerians had no possible means of using digital payment methods even if they had wanted to. They were given an impossible choice from day-one. Many of them took to the streets to protest the restrictions and cash shortages. Banks were vandalised; some were even burnt to the ground.
Those that could switch to digital payments ended up swamping the limited digital payment networks available. Put simply, the infrastructure, including the eNaira itself, was not ready to take up the slack. Many digital payments failed, fuelling even more chaos, frustration and resentment. In February, Nigeria’s Supreme Court ruled the demonetisation program unconstitutional, calling for it to be postponed due to the amount of chaos and hardship it was generating. A month later, the CBN finally obeyed the court order and put back into circulation the old high denomination bills.
But the damage had already been done, both at the micro and macro level…
Read the full article on Naked Capitalism
Nick Corbishley 