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Riots have erupted in Nigeria in recent weeks due to the country's economic problems. There is high inflation, but at the same time there is also a shortage of money. The new president Bola Tinubu therefore faces a major challenge. How did this chaos come about?
In November, the Nigerian government announced that it would issue new banknotesintroduce. The old banknotes were easy to copy. As a result, there was a lot of counterfeit money in circulation. This led to high inflation and a break in confidence in the naira, Nigeria's currency. By introducing new banknotes, the central bank gains more control over the circulation of money and hopes to prevent both the counterfeiting of money and inflation .counteract.
Although the government assures that the new notes have many new features, according to economists, there is too much to be done.Little has changed on the notes. According to critics, the new notes are very similar to those that were already in circulation. Only the colour seems to have been changed on some banknotes. This would make the banknotes as easy to counterfeit as ever and it would not seem sufficient to remedy the problems.
The introduction of the new banknotes has not been smooth at all. The deadline to return old notes to the bank was initially set at February 10, but that deadline was met with resistance, including from the Supreme Court. Millions of people stood in front of the ATMs to withdraw the new notes, but there were not yet enough new notes available to replace the old notes. This was a major problem, because the government had planned to withdraw the old banknotes from circulation in the short term. Also, the old notes would become worthless from then on.
Limits were set on the amount one could withdraw. Much of Nigeria is still very dependent on cash. As a result, people did not have enough money to buy food, fuel, and other resources. It resulted in long queues at the banks and ATMs and caused a lot of criticism of the government.
On top of that, there is a high inflation that is plaguing the country. The inflation rate in January was 21.82 percent, mainly caused by an increase in prices for food and problems in the country's infrastructure. Now that inflation is high and there has been a shortage of food, fuel and therefore even cash, there have beenriots in the African country.
Inflation remains high in Nigeria (Source; CBN)
Recently, the Nigerian Court that the old notes should continue to act as legal tender, a great relief for many Nigerians. At least until 2024, the old notes can continue to be used and that decision gives Nigeria a little more room to introduce the new notes. Also, Nigerians do not have to fear that the old notes are worthless.
The Government of Nigeria has indicated its intention to move to so-called Cashless Society, which means that in the end there is no cash circulating at all. With this, Nigeria wants to modernize the payment system and offer more people a bank account. The current shortage of cash is therefore seen by critics as a deliberate tactic. Bloomberg already called the current situation 'Demonetisation'. Also on blckbx an episode was devoted to this topic.
In addition to the Nigerian government's desire to transition to a cashless society, Nigeria was also one of the first countries to introduce Central Bank Digital Currency (CBDC). As of the end of 2021, people in Nigeria could store tokens issued by the central bank, called eNairas, in a wallet and then make transactions with them.
The introduction of eNaira has not yet been a great success. Bloomberg reported at the end of 2022 that a year after its introduction, only 0.5 percent of the population was still using digital central bank money. In contrast, a much higher percentage of the population owns cryptocurrencies. Nigeria was on the Eleventh place on the Chainalysis 2022 Global Crypto Adoption Index.
To boost the use of CBDC, the Nigerian government took action. For example, 5 percent discounton taxi rides if paid with the eNaira. Despite this, the preference for cash remains. Economist Tatonga Rusike expect a further depreciation of the naira next year and together with high inflation, this makes the eNaira not an attractive option.
The situation in Nigeria makes crypto proponents yearn for the Transition to Bitcoin. Not only is Bitcoin not tied to a government that sometimes causes chaos, it also avoids the sky-high inflation of more than 21 percent. The main advantage of Bitcoin is that it does not depend on a local banking system. On the other hand, the price of the cryptocurrency is volatile and can sometimes fall sharply.
It's true that Bitcoin can be a good weapon against high inflation, depending on when you got in. Also in Turkey, where high inflation is also a problem, gold and Bitcoin can be an attractive alternative.
An argument that can be made against the introduction of Bitcoin or gold as a standard is that the money supply cannot breathe with the economy and thus there may also be a 'shortage' of money.
The central banks normally allow the money supply to grow in line with the economy and aim for an inflation rate of 2 percent. But since Bitcoin has a limited supply, the money supply is not elastic by a so-called Bitcoin standard, with the result that deflation occurs. The number of goods and services then increases faster than the amount of money, causing the price level to fall. This is beneficial for people who own Bitcoin or gold, but at the same time makes it very risky to borrow. Proponents of using a standard say it leads to more prudence in investing, more productive investments, and less bubble formation in an economy.
This makes the situation in Nigeria very difficult. The country's people are not yet ready for a cashless society, but the government does not seem convinced yet and continues to frustrate the use of cash. It is to be hoped that a new president will be able to solve some of the problems and that the country will enter a more stable phase.
