How naira redesign policy could impact inflation

Nigeria's House of Representatives are considering reconvening before the elections if the scarcity of new Naira notes persists, while credit rating agency S&P has affirmed Nigeria's credit rating at B/B with a negative outlook, citing increasing risks to the country's short-term debt servicing capacity. Johnson Chukwu, the CEO of Cowry Asset Management, provided insights on the challenges facing the Nigerian economy in a recent interview on CNBC Africa. The focus was on the scarcity of Naira notes and the implications of the redesign of the local currency. Some concerns have been raised about the potential dollarization of the economy, stoking inflationary pressures, and hindering e-payment alternatives. Chukwu addressed these concerns by emphasizing that dollarization occurs when citizens lose confidence in the local currency due to hyperinflation, which is not the case in Nigeria. He also highlighted that the volume of Naira in circulation is not significant enough to drive inflation. The main issue lies in the Central Bank's failure to supply enough new currency to meet transaction demands, leading to challenges in cash payments and e-payment alternatives. The constraints on currency withdrawal and circulation have created bottlenecks, with banks reportedly hoarding new currency notes. Chukwu stressed the need for the Central Bank to address these fundamental problems by ensuring an adequate supply of new currency notes. The scarcity has led to unethical practices, such as POS operators increasing charges and banks hiding cash. While discussing the legal challenges faced by Kogi, Kaduna, and Zamfara States regarding the Naira redesign, Chukwu dismissed their claims as a waste of resources, citing clear regulations on currency management. He also commented on the S&P rating downgrade, attributing it to high debt servicing obligations, weak revenue due to low oil production, and the government subsidizing petrol. Chukwu emphasized the need for proactive measures to improve the country's economic situation, given the challenging fiscal environment. The negative outlook from rating agencies reflects the stark realities of Nigeria's economic landscape, necessitating urgent action to prevent potential default.