Lessons from last year’s goofed-up currency swap project, By Uddin Ifeanyi

At every stage where the policy folly became obvious, the responsible authority lacked the humility to fess up, cut its losses and run away from the policy direction.

Are there any lessons for the current managers of the domestic economy from this? Three in fact. First is to make sure that qualified persons occupy key functions of the state. Next is to organise the domestic policymaking infrastructure around proven facts. But more important to constantly interrogate policy planks to test for efficacy and goal-relevance.

About this time last year, the domestic economy was headed into a perfect storm. By the time the debris settled, the economy had tanked, social relations were near breaking point, and the lines for health indices trawled the bottom of their respective graphs. The mess had nothing to do with SARS-CoV-2. And unlike the respiratory tract pandemic, this was a self-inflicted malaise. Barely a year after, the Central Bank of Nigeria’s (CBN) maladroit currency swap exercise still hurts. Are there still lessons to be learnt? As with the virus that caused COVID-19, the currency swap exercise, or at least the reasons proffered for it, was mutable.

It morphed, repeatedly. Its origin was unremarkable: a project to replace the over N3 trillion notes in circulation with new and differently designed ones. As at end-December 2022, the currency-in-circulation comprised 1.75 billion N1,000 notes (equal to N1.75 trillion); 1.81 billion N500 notes (N906.6 billion); 1.11 billion N200 notes (N222.9 billion); 0.72 billion N100 notes (N72.3 billion); 0.42 billion N50 notes (N21.08 billion); 1.05 billion N20 notes (N21.08 billion); and N18.1 billion N10 and less notes. All that the CBN had to do was print enough notes in the various categories to replace these. Unfortunately, the approval it obtained from the president was to print locally.

Aware that the Nigerian Security Printing and Minting Company Limited (NSPMC) could only print about N700 billion of these banknotes annually, the CBN began to advertise the currency swap as a monetary policy measure. Take out all the naira pursuing a few goods, and presto, inflation would be vanquished. An argument straight out of the monetary policy boondocks, it flipped monetarism on its head. No longer was the supply of money, because it lent fillip to aggregate demand, an economic positive. This new heterodoxy was going to create new jobs by asphyxiating domestic demand for goods and services. It did not make sense. Few of the unorthodox economic precepts that dominated monetary policymaking in the nine years to 2023 made sense. And as with most of them, this was promptly discarded.

Again, the rationale behind the cash shortage associated with the currency swap transmogrified. The new argument invited Nigerians to bear the temporary inconvenience of not having money to spend as the cost of promoting the country’s financial digitisation, particularly the much-desired transition to a cashless economy. Except that the CBN could not point to any economy in the world that had shrunk its cash base as stringently as it proposed, because economic actors there had embraced electronic transactions instead.

Stripped of its sundry integuments, the CBN’s policies were not fact-based. Unfortunately, across the domestic policymaking space, too much rests on whims, prayers, and — most recently — a worrying proclivity for performances. So, the CBN did not act exactly out of character. And at every stage where the policy folly became obvious, the responsible authority lacked the humility to fess up, cut its losses and run away from the policy direction.

Accordingly, the CBN found a different bête noire — bandits and politicians. The first class of noxious compatriots had clearly become a nuisance. You could even argue that the toll on the economy from their rising activity made this new class of economic actors possible target for monetary policy. By cutting off the bandits’ access to funds, the CBN looked to make their operations less profitable, and eventually drive them out of business. Politicians were a different kettle of awful. Ahead of a forthcoming general election, this new bugbear found great resonance with the people.

If the new monetary policy conversation was to count for anything, this coterie of very wicked persons had apparently salted away huge naira hoards in order to subvert the national will before and during the polls. And the CBN was only patriotic in its bid to change existing banknotes in a way that left these hoards stranded and unusable. As with the initial insistence that it had supplied banks with enough cash, but the banks had opted to hoard their indents, the CBN simply lied on this.

Why would a central bank run a bulldozer over the informal economy, constrain credit creation, squash business investment, and crimp consumer spending as part of a programme to drive domestic economic growth and development? A disquieting unfamiliarity with economics as a field of enquiry and body of settled knowledge is the immediate answer. “Square pegs in round holes” is the shorthand for this problem. Even if one concedes the average Nigerian’s predilection for reinventing the wheel on matters economic, the CBN’s approach to last year’s currency swap still suffered a grievous shortcoming. Stripped of its sundry integuments, the CBN’s policies were not fact-based. Unfortunately, across the domestic policymaking space, too much rests on whims, prayers, and — most recently — a worrying proclivity for performances. So, the CBN did not act exactly out of character. And at every stage where the policy folly became obvious, the responsible authority lacked the humility to fess up, cut its losses and run away from the policy direction.

Are there any lessons for the current managers of the domestic economy from this? Three in fact. First is to make sure that qualified persons occupy key functions of the state. Next is to organise the domestic policymaking infrastructure around proven facts. But more important to constantly interrogate policy planks to test for efficacy and goal-relevance.

Uddin Ifeanyi, journalist manqué and retired civil servant, can be reached @IfeanyiUddin.