The world’s largest live central bank digital currency (CBDC) program has so far been a destructive flop. And that is probably the last thing the editors of the New York Times want its readers to know.
Two years ago, Nigeria was Africa’s largest economy and before the COVID-19 pandemic was hotly tipped to become Africa’s first trillion-dollar economy. By the end of this year, it is (according to a recent IMF forecast) expected to have dropped to fourth place in the continental rankings, behind South Africa, Egypt and Algeria. This follows years of slow growth, currency crises, poor governance, fuel shortages (in Africa’s largest oil producing country) and double-digit inflation. In recent months, citizens have resorted to looting food warehouses as almost half the population of Africa’s most populous nation suffer from hunger.
A new piece in the New York Times, titled “Nigeria Faces Its Worst Economic Crisis in Decades”, paints a vivid picture:
People in Africa’s most populous nation are suffering as the price of food, fuel and medicine has skyrocketed out of reach for many…
The pain is widespread. Unions strike to protest salaries of around $20 a month. People die in stampedes, desperate for free sacks of rice. Hospitals are overrun with women wracked by spasms from calcium deficiencies…
A nation of entrepreneurs, Nigeria’s more than 200 million citizens are skilled at managing in tough circumstances, without the services states usually provide. They generate their own electricity and source their own water. They take up arms and defend their communities when the armed forces cannot. They negotiate with kidnappers when family members are abducted.
But right now, their resourcefulness is being stretched to the limit…
More than 87 million people in Nigeria, Africa’s most populous country, live below the poverty line — the world’s second-largest poor population after India, a country seven times its size. And punishing inflation means poverty rates are expected to rise still further this year and next, according to the World Bank.
So, what are the root causes of Nigeria’s constantly worsening crisis? According to the “Gray Lady”, there are two main drivers, both of which can be blamed on the country’s relatively new President Bola Tinubu: his government’s partial removal of fuel subsidies and the floating of Nigeria’s already weak naira currency, which together have caused major price rises, particularly for basics such as food. From the Times‘ article:
Until recently, the government subsidized (largely imported) petroleum, to the tune of billions of dollars a year.
Many Nigerians said the subsidy was the only useful contribution from a neglectful and predatory government. Successive presidents have pledged to remove the subsidy, which drains a hefty chunk of government revenue — and later backtracked fearing mass unrest.
Bola Tinubu, who was elected Nigeria’s president last year, initially followed through.
“It was a necessary action for my country not to go bankrupt,” Mr. Tinubu said in April, at a meeting of the World Economic Forum in Saudi Arabia.
Instead, many Nigerians are going bankrupt — or working multiple jobs to stay afloat…
The government has twice devalued the naira in the past year, trying to enable it to float more freely and attract foreign investment. The upshot: It’s lost nearly 70 percent of its value against the dollar.
Nigeria cannot produce enough food for its growing population; food imports rise 11 percent annually. The currency devaluation caused those imports — already expensive because of high tariffs — to explode in price.
“A Dead Economy”
On the one hand, this is a pretty accurate depiction of recent developments in Nigeria. But it ignores everything that happened before Tinubu came to office 15 months ago. As a government spokesman said in response to the Times article, Tinubu inherited a “dead economy,” which is also largely true. Inflation was already above 20% and economic growth was stalling. One reason for that is the central bank’s disastrous flirtation with central bank digital currency (CBDC), which culminated in a demonetisation program that upended economic activity for almost the entire first quarter of 2023.
In mid-December 2022, the Central Bank of Nigeria began calling in old 200-, 500- and 1,000-naira notes in a bid to mop up excess cash, rein in inflation, combat rising insecurity, curb vote buying and further “entrench” a cashless economy. But the central bank failed to print nearly enough new high-denomination notes to replace the old ones, leading to an acute shortage of cash in a still heavily cash-based economy. In the space of just two months (Dec 2022–Feb 2023), cash in circulation declined by almost 70%, per official data from the CBN.
As in India’s 2016 demonetisation program, businesses went bust. Lives were ruined. But as we noted at the time, the resulting economic pain was seen by the central bank as a necessary evil, a wee psychological nudge to push Nigerians into finally abandoning cash and embracing digital payment options:
Demonetisation may well break some public resistance toward the CNB’s eNaira but it will be at huge social and economic cost. As in India, that cost will be borne disproportionately by the poor and vulnerable. As even the Associated Press reports, analysts worry the initiative will “hurt” daily transactions that people and businesses make, particularly given that Nigeria’s digital payment systems, including the eNaira, are often unreliable:
“The policy is intended to cause discomfort, to move you from cash to cashless because they (the central bank) have said they want to make it uncomfortable and expensive for you to hold cash,” economic analyst Kalu Aja said. “That is a positive for the CBN (because) the more discomforting they are able to achieve, the more people can move.”
The CBN’s prime objective in culling cash was to leave people with little choice but to use digital payment methods — ideally the CBN’s floundering digital currency, the eNaira. Among its list of reasons for pursuing demonetisation, published in October 2022, the CBN said the redesign of the currency will “help deepen our drive to entrench a cashless economy as it will be complemented by increased minting of our eNaira.” Also in October, the central bank’s governor, Godwin Emefiele, said: “The destination, as far as I am concerned, is to achieve a 100% cashless economy in Nigeria”.
That didn’t happen, for a number of reasons: first, tens of millions of Nigerians cannot even use digital payments since they do not own a smart phone or have access to the Internet. Roughly half of the country is unbanked. In other words, many, if not most, Nigerians had no possible means of using digital payment methods even if they had wanted to. They were given an impossible choice from day-one. Many of them took to the streets to protest the restrictions and cash shortages. Banks were vandalised; some were even burnt to the ground.
Those that could switch to digital payments ended up swamping the limited digital payment networks available. Put simply, the infrastructure, including the eNaira itself, was not ready to take up the slack. Many digital payments failed, fuelling even more chaos, frustration and resentment. In February, Nigeria’s Supreme Court ruled the demonetisation program unconstitutional, calling for it to be postponed due to the amount of chaos and hardship it was generating. A month later, the CBN finally obeyed the court order and put back into circulation the old high denomination bills.
But the damage had already been done, both at the micro and macro level.
A Policy Without a “Human Face”
“Nigeria’s economic growth slowed to just 2.3% y/y in Q1 as the damaging effects of a botched demonetisation process more than offset an easing of the drag from the oil sector,” noted the UK-based independent economic research firm Capital Economics in May 2023. “With the rise in oil output likely to have run its course and fuel subsidy cuts as well as a likely devaluation of the naira set to hurt activity elsewhere, the economy will continue to struggle over the coming quarters.”
In other words, while the new Tinubu government’s devaluation and fuel subsidy cuts massively exacerbated economic conditions in Nigeria, the role played by the central bank’s demonetisation program in destabilising the already fragile economy should not be ignored.
As in India, the hardest hit were the country’s poorest communities and smallest businesses. Nigeria’s roughly 39 million micro, small and medium-size enterprises, contributing 46% of national GDP, depend on cash from sales. When 70% of the country’s cash flow suddenly dried up, they struggled to stay afloat. Many had no choice but to allow customers to “Buy Now, Pay Later” to maintain their operations. A leading macro indicator, the Stanbic IBTC Bank PMI for Nigeria, fell to its worst level since the pandemic, signalling a sharp deterioration in country-wide business activity in the first quarter of 2023.
The following words by Yakubu Maikyau, the president of Nigeria’s Bar Association, vividly capture the extent of the damage:
The manner in which the CBN proceeded with the implementation almost without regard for the apparent sufferings of the people as could be seen across the country began to raise questions as to the true motive of the cash redesign policy. Nigerians did not have to die and neither should there be any loss of properties on account of the implementation of a Naira redesign policy if properly undertaken.
Unfortunately, and sadly so, that was our experience. Nigerians died. Properties were destroyed and lost. There is hunger in many homes as people are unable to use their hard-earned funds which they deposited in the banks because of the apparent high handedness of the policy. The rural economy was stifled. Economic activities have dwindled, many farmers engaged in dry season farming have not been able to cultivate their farmlands – only about one out of every ten hectares of rice fields have been cultivated in most parts of North-western States. Food security has come under threat as the cash crunch has affected the ability of rural farmers to engage in farming activities. Simply put, the implementation of the policy appears not to have a human face.
Another legacy of the Nigerian central bank’s demonetisation program is increased distrust in both the banking system and the central bank itself. Which is ironic given that lack of trust was one of the biggest obstacles to take-up of the eNaira in the first place. Indeed, in early January this year — nine full months after the demonetisation program was suspended — Bloomberg reported that Nigerians were once again hoarding cash “amid memories of the failed official campaign around this time last year to demonetize high-value naira notes.”
Another largely ignored legacy of this saga was the sacking, arrest and imprisonment of the man behind both the eNaira and the demonetisation program, the CBN’s governor, Godwin Emefiele. Although he was eventually released on bail after spending roughly half a year in a real-life Nigerian jail, Emefiele faces a host of charges including misuse of authority, receiving bribes, accepting gifts via intermediaries, engaging in corrupt practices, obtaining property fraudulently, and providing improper benefits to his associate.
Not a single shred of this story gets a mention in the New York Times article. Neither the acronym “CBDC” nor the word “demonetisation” make an appearance. It is almost as if all of the problems now affecting Nigeria’s economy began the moment the new government took over. While Tinubu’s reckless energy and currency reforms are probably the two main catalysts for Nigeria’s latest economic woes, there are other factors that certainly deserve a mention — and none more so than the central bank’s adoption of the eNaira and its decision just over a year later to remove 70% of the cash from the economy.
Imagine an alternative article title:
“First Large Country to Fully Adopt a CBDC Is Now Suffering Its Worst Economic Crisis in Decades.”
That is not a headline you are likely to see in the New York Times, The Economist or The Financial Times, or any other major Western media. But it is true. Nigeria was the first large country to fully adopt a CBDC at the national level. And its economy is now suffering its worst crisis in decades. The spectacular rise and fall of the eNaira and the damage inflicted by the CBN’s demonetisation program have been studiously ignored by the mainstream press in the West, while other central banks are presumably watching and learning.
As in India, the broad economic results of demonetisation were disastrous — though in both cases use of digital payments did surge afterwards, albeit much more so in India. And that was probably the main underlying goal behind both programs anyway. Witness the Reserve Bank of India’s casual advice to the more than a billion people caught up in the chaos after it had nullified 86% of the country’s currency from one day to the next (emphasis my own):
While these efforts are afoot, (the) public are encouraged to switch over to alternative modes of payment, such as pre-paid cards, Rupay/Credit/Debit cards, mobile banking, internet banking. All those for whom banking accounts under Jan Dhan Yojana are opened and cards are issued are urged to put them to use. Such usage will alleviate the pressure on the physical currency and also enhance the experience of living in the digital world.
This prompted a seething rebuke from Indian economist Jayati Ghosh:
Statements like this make one wonder whether the RBI is living only in the digital world. Surely the worthies in that institution have some idea of the conditions under which banking and money exchange occur for most Indians?… The facile assumption that moving to e-banking is just a matter of personal choice, which appears to underlie some of these arguments, is completely mistaken.
Central bankers may not inhabit an exclusively digital world just yet, but it does seem to be the general direction of travel they have us moving in. CDBCs are being developed and piloted in dozens of countries around the world with the help and support of global banks, the IMF, the Bank for International Settlements, payment card companies, BlackRock and even the SWIFT payment system. As we have noted a number of times and as a new op-ed in Forbes by the Cato Institute’s Norbert Michel echoes, CBDCs are ultimately intended as instruments of centralised control:
As my colleague Nick Anthony points out, 10 countries and the Eastern Caribbean Currency Union have already launched their own CBDC. Hong Kong and 39 other countries have official CBDC pilot programs, and at least 65 other countries are now researching CBDCs.
CBDCs are very real, and very dangerous.
No think tank has done more than the Cato Institute to explain the risks and supposed benefits of CBDCs, and nobody at Cato has done more than Nick. In fact, he just returned from the Oslo Freedom Forum, where he demonstrated the new Human Rights Foundation CBDC tracker.
Nick also has a new CBDC book that will be released this Tuesday, titled Digital Currency or Digital Control? Decoding CBDC and the Future of Money.
…
CBDC advocates love to talk about putting money directly into people’s wallets, but few like to talk about the flip side, where central bankers stop people from spending money. If you don’t believe me, here’s a clip of an assistant governor of the Malaysian central bank trying like crazy to avoid answering whether the central bank would “frustrate” individuals’ payments. (For the record, some government officials boast about having this power.)
In Nigeria, the eNaira, now in its third year of existence, is still floundering. “Slow” is the word the IMF — which helped roll out the eNaira — recently used to describe the CBDC’s adoption rate to date. “Since the eNaira’s launch, the volume of executed transactions has reached 854,512 transactions, mostly from consumers to merchants, with a total value of N29.3 billion,” the Washington-based fund said in its 2024 country report for Nigeria. That works out as a paltry $61 million.
In May 2023, the IMF disclosed that 98.5% of the 13 million eNaira so far downloaded wallets are inactive and the average value of transactions was 923 million naira per week. That’s around $622,000. The world’s largest live CBDC program (to date) has so far been a complete dud despite the harmful efforts of the central bank and former Buhari government to impose it on the populace. Even after all that has happened, most Nigerians still either cannot or do not want to use the eNaira. And that is probably the last thing the editors (and board) of the New York Times want its readers to know.
