Amid scarcity of naira notes, orchestrated by the newly-introduced currency redesign policy of the Central Bank of Nigeria (CBN), Fitch Ratings, a global credit ratings agency, has warned that the situation may aggravate Nigeria’s forex crisis.

Fitch, in its report titled: ‘Nigeria’s Economic Challenges Highlight Importance of Post-Election Policies’, said the cash scarcity emanating from the naira redesign policy may trigger frugal reaction from Nigerians that will impact the economy. The organization said the policy may reduce consumer spending and boost demand for foreign currency.

The CBN said the naira redesign policy initiative is aimed at boosting its cashless policy among others. But Fitch said it was not yet clear whether there would be long-term economic benefits of the policy, such as greater use of the formal banking system or enhanced use of digital payment systems.

“The Nigerian Supreme Court’s suspension of a 10 February deadline for exchanging old banknotes into new eases, at least temporarily, the risk of intensifying cash shortages,” the agency said, adding the demonetization drive is still likely to be disruptive in the near term.

“Associated cash shortages may hit consumer spending and boost demand for foreign currency, aggravating foreign-exchange shortages,” it added.

The CBN’s move to replace the old N200, N500 and N1,000 notes with the redesigned notes within a short period of few months, unleashed unprecedented currency scarcity that has heavily impacted many sectors of the economy, especially the informal sector. This came along as Nigeria grapples with insufficient forex liquidity that has seen international organizations operating in the country struggle with repatriation of funds.

The forex crisis which is largely tied to fuel subsidy payments and insufficient oil output has significantly weakened the naira, compounding inflation as Nigeria takes to borrowing to fill revenue shortfalls. With inflation at over 21%, declining consumer spending was expected to see a boost during the election period.

Given its current economic situation, Fitch said that Nigeria is faced with major economic challenges ahead of elections due on 25 February, and policy choices by the incoming administration could have a significant impact on the country’s credit profile.

Nigeria’s growing public debt profile has scuttled its debt-service to revenue ratio, put at 80.7% by the Minister Finance Zainab Ahmed in January. Fitch said it downgraded Nigeria’s rating to ‘B-’ from ‘B’ in November 2022, with a stable outlook, as a reflection of the country’s continued deterioration in debt servicing costs and external liquidity.

The agency added that Nigeria’s fiscal profile is expected to remain weak in the medium term due to poor revenue growth and rising debt.

“General government interest/revenue is extremely high (47 percent in 2022 by Fitch’s estimate) and we expect it will remain so given constraints on revenue mobilization, increasing debt and high interest rates,” the agency said.

It added structurally low non-oil revenue; spending pressures and weak economic growth imply substantial fiscal financing needs as other factors contributing to Nigeria’s poor credit rating.

“The government faces external debt amortizations of $2.5 billion in both 2023 and 2024, an increase on recent years, although the majority is bilateral and multilateral debt service,” it said.

Fitch lays emphasis on Investor and Exporter window, Nigeria’s official exchange rate as key to the country’s positive credit rating. It said the prospects for the “overvalued” exchange rate reform would be influenced by the outcome of the presidential election, and could increase under a new central bank governor.

“The incumbent’s term ends in 2024, but an incoming administration could push for earlier change,” the agency said.

“A more flexible exchange-rate regime would likely be a long-term positive for Nigeria’s credit profile, although the initial economic adjustment could present macro-fiscal risks.”

However, President Muhammadu Buhari, in his broadcast on Thursday, directed the CBN to allow old N200 note to co-circulate with the new one until April 10. The move is expected to cushion the shortage of the new naira notes and ameliorate its impact on the economy.

President Muhammadu Buhari has directed the Central Bank of Nigeria (CBN) to extend the use of old N200 notes beyond the earlier February 10 deadline issued for the phasing out of the old N200, N500 and N1,000 notes.

The CBN had late last year, announced the redesign of the above naira notes as part of its monetary policies geared toward the fight against inflation, corruption, terrorism financing and as the general elections draw near – vote-buying.

Buhari gave the directive during his national address on the challenges of implementing the policy on Thursday morning.

“To further ease the supply pressures particularly to our citizens, I have given approval to the CBN that the old N200 bank notes be released back into circulation and that it should also be allowed to circulate as legal tender with the new N200, N500, and N1000 banknotes for 60 days from February 10, 2023 to April 10 2023 when the old N200 notes ceases to be legal tender,” Buhari said.

The central bank fumbled the implementation of the naira redesign policy as scarcity of the new notes stalled circulation, forcing Nigerians to rely largely on the old notes for transactions. The situation, which has significantly affected economic activities, resulted in lawsuits, protests and attacks on commercial banks as cash-strapped Nigerians besieged banks for money.

About 10 states have dragged the federal government to the Supreme Court in a bid to have the policy reversed. Although the apex court had in an ex parte order last week, asked the federal government to allow both the old and new notes to coexist pending the determination of the matter, which has now been adjourned to February 22, the CBN insists that the old notes are no longer a legal tender.

While acknowledging the suffering the policy has brought upon Nigerians, Buhari appealed for their “understanding and patience during this transient phase of implementation.” He said the evaluation and feedback mechanism set up has revealed that gains have emerged from the policy initiative.

“I have been reliably informed that since the commencement of this program, about N2.1 trillion out of the banknotes previously held outside the banking system, had been successfully retrieved,” he said.

Buhari had pointed at excess money in circulation as part of critical points underpinning the naira redesign policy decision. He noted that in 2015, when his administration commenced its first term, Currency-in-Circulation was only N1.4 trillion, but has grown to about 100%, distorting the government’s effort to tame inflation.

“The proportion of currency outside banks grew from 78% in 2015 to 85% in 2022. As of October 2022, therefore, currency in circulation had risen to N3.23 trillion; out of which only N500 billion was within the Banking System while N2.7 trillion remained permanently outside the system; thereby distorting the financial policy and efficient management of inflation,” he said.

The president added that the huge volume of Bank Notes outside the banking system has proven to be practically unavailable for economic activities and by implication, retard the attainment of potential economic growth, an assertion that PwC Nigeria chief economist, Andrew Nevin, described as “absolute economic nonsense.”

Buhari further stated that in addition to assisting the CBN in mopping up excess money in circulation, the new policy has also contributed immensely to the minimization of the influence of money in politics. He urged Nigerians who still have old naira notes to redeem them at the CBN and designated points.

“Considering the health of our economy and the legacy we must bequeath to the next administration and future generations of Nigerians, I admonish every citizen to strive harder to make their deposits by taking advantage of the platforms and windows being provided by the CBN,” he said.