Anatomy of an insidious cash squeeze 

Nigeria’s second cash squeeze in 12 months has refused to go away. The troubling aspect of the new cash squeeze is that no one knows precisely why and how the money in circulation evaporated into thin air.

Petrol retail outlets and supermarkets are known as the two biggest sources of cash. Ironically, cash has mysteriously dried up in the two big sources. Consumers now consummate transactions through electronic transfers. Banks have placed excruciating limits on cash withdrawals.

Several arguments are now being flaunted as reasons for the strange cash squeeze.

The Central Bank of Nigeria (CBN), issuer of Nigeria’s currency, believes that new notes are hoarded by some Nigerians to pre-empt a stampede when the apex bank eventually decides to withdraw the old notes from circulation.

Very few believe the CBN’s argument. Many dismiss the apex bank’s argument on grounds that the CBN had announced some weeks ago that the old and new currencies would be used simultaneously till further notice. That suggests that the old notes would remain legal tender for a fairly long time.

There is no economic logic in hoarding the new currencies as the apex bank contends when the old and new would remain in circulation for a fairly long time. The CBN contends that people are hoarding the new currencies and carrying out transactions with the old ones to avoid a situation where they would have to queue up in banks to change into the new ones when the old notes cease to be legal tender.

Those who dismiss the CBN’s contention as mere speculation are convinced that the apex bank’s announcement a few weeks ago that the legal tender life span of the old notes had been extended indefinitely was enough assurance to consumers to fend off currency hoarding.

However, if the CBN’s contention of hoarding as reason for the cash squeeze is the truth, it could therefore be concluded that the apex bank has lost credibility with the currency users apparently because of the way the currency redesign of 2022 was grossly mismanaged under the alleged corrupt leadership of Godwin Emefiele as CBN governor. Many are not convinced that CBN can ease out the old notes without the chaos that crippled the economy in the first quarter of 2023.

The loss of confidence on CBN is so profound that the cash squeeze has spread across the whole country. PoS operators have hiked fees by 200 per cent as they now get cash from fuel stations and super markets rather than banks. 

Another school of thought on the cause of the mysterious cash squeeze is that the CBN’s decision to ban the 33 on-line financial institutions from accepting deposits or even using their platforms for electronic fund transfers has stampeded consumers into massive cash withdrawals from banks to pre-empt failures from banks networks. 

The electronic financial firms stepped in at the appropriate time to cushion the effect of the cash squeeze during the failed currency redesign which saw the CBN withdrawing N3 trillion in old notes from circulation only to replace them with just N1 trillion in new notes.

The cash squeeze was so devastating that banks’ clumsy electronic networks were overwhelmed to the extent that it took weeks for some transactions to be consummated.

OPay, Moniepoint and other online financial firms gained popularity as their networks which had less pressures could consummate electronic transfers within seconds.

That was how many consumers started depositing money with the electronic financial firms. By the time the Supreme Court compelled the CBN to extend the legal tender life span of the old notes to ease the cash squeeze the electronic financial firms had gained the confidence of depositors and drew considerable deposits from banks.

The distressed managing directors of banks pressured the apex bank to halt the massive patronage that the electronic financial firms were enjoying. CBN cowered and ordered their withdrawal from the transfer network. 

Many believe that CBN’s spontaneous response triggered the depositors’ reaction that caused the current cash squeeze. Like the CBN’s contention about hoarding, that again remains speculative.   

The third speculation about the cause of the horrendous cash squeeze sounds incongruous. Some believe that the cash squeeze was triggered by CBN as it mopped up money in circulation to reduce the pressure on the naira in the foreign exchange market and tame surging inflation rate through the process.

That argument stands monetary economic logic on its head. There is a world of difference between money in circulation and money supply. No one fights inflation by mopping up money in circulation.

CBN fights inflation by controlling money supply not cash in circulation. The apex bank controls money supply by issuing federal government debt instruments and hiking banks’ cash reserve ratio (CRR).

CRR for commercial banks is 32.5 per cent. It means that if a bank mobilises the sum of N100 billion as deposit, it can only lend out N67.5 billion while the remaining N32.5 billion is tied down in CBN coffers to curtail money supply, reduce the pressure on the naira in the foreign exchange market and tame inflation through the process.

In an electronic fund transfer era where people do not need raw cash to consummate transactions, people can use their money in the banks to do what CBN intended to achieve by mopping up cash. That argument is simplistic and incongruous.

The worrisome aspect of the insidious cash squeeze is that no one knows precisely why it happened and how it happened. Everyone including the CBN is just speculating. The CBN must avoid speculation, get to the root of the cash squeeze and halt it. 

We cannot afford two artificial cash squeeze in the economy in less than 12 months. If the CBN fails to determine the cause of the cash squeeze and promptly fixes it, the phenomenon would simply constrain the country’s economic growth and make it extremely difficult for the federal government to attain the ambitious economic growth rate set out in the 2024 Appropriation Bill.