What Good is the CBN Cash Withdrawal Limit?
First, it does not affect people like me. I never go to the bank to collect cash. I do mobile transfers almost all the time. Whenever I have to spend cash, I almost always have it with me from those who withdraw from ATMs. Also, I never say no when someone asks if I want cash in exchange for a mobile transfer.
That’s to say that, as far as I am concerned, it has no effect on me at the moment. At the moment!
One of the main functions of the Central Bank is the implementation of monetary policies. Monetary policies are sets of actions taken to control the amount of money in an economy and how it can be used to help the economy grow.
As far as I can tell, the CBN is trying to control how much physical cash is available in the economy. Theoretically, if you have too much cash in circulation, the prices of goods and services will increase. Think of demand and supply. Too much money is being spent chasing after goods, which will cause prices to rise.
This is the reason central banks all over the world, including the Federal Reserve in the US, are increasing interest rates. The aim is that if the interest rate is high, you will be discouraged from taking out funds from the banking system and instead put your funds in because you want to earn more interest on your savings. A high interest rate encourages savings and discourages borrowing.
Because Nigeria is mainly a cash-based economy, perhaps the thinking is that, apart from fighting corruption, discouraging vote buying, and starving terrorists of funds, it will help to rein in physical cash and reduce inflation. Unfortunately, this thinking is misguided.
Firstly, without improving the banking infrastructure and enhancing trust in online banking, this policy is dead on arrival. The reason a lot of people do not trust bank transfers (internet or mobile) is because of their unreliability. Bank apps are often down. There are reports of transfers made on Tuesday and alerts seen on Saturday. Some failed transfers take over two months to get resolved. A friend of mine has been trying to resolve a bank transfer issue for the past 90 days.
Secondly, Nigeria operates a largely informal sector. The informal sector includes casual day laborers, domestic workers, industrial outworkers, undeclared workers, and part-time or temporary workers without secure contracts, worker benefits, or social protection. The World Bank says 80% of Nigerians are in this sector. 55% of these people are without bank accounts. In over 60% of rural areas across the country, there are no bank branches or ATMs.
What this means is that the CBN is creating more businesses for POS operators. Instead of transfers, the POS agents would race to the bank to withdraw the maximum of N100,000 for the week and ration it to their customers. And the law of demand and supply states that with more people chasing less money, the price of the money will increase. With those in rural areas and the informal sectors chasing less and less available cash, the rate at which they get funds from the POS operators will increase. The other day, I complained of people being charged N100 for collecting N1000 from POS — an incredible 10% charge. With the new policies, the rates are likely to rise.
The consequence of these policies is that less money will be available to buy everyday goods and services. Less demand for goods and services will lead to less sales for businesses, i.e., manufacturers, farmers, etc. Businesses with fewer sales require fewer workers. With fewer workers, productivity suffers even more. Less productivity means a shrinking economy.
Therefore, expect that an economy that has already shrunk from $510 billion in 2015 to $432 billion in 2022 will shrink further.
What disheartens me is that these policies have been tried elsewhere with devastating consequences. In 2016, India worked to rein in its notes. A year later in 2017, India’s GDP grew by 7.1% as compared to 8% in the previous financial year. The economy lost over 1.5 million jobs. More than 105 people died in the post-demonetisation rush for cash across the country. This was due to the attempt by the Indian central bank — called the Reserve Bank of India — to implement a similar policy to Nigeria’s on an economy where 81% of the workers are in the informal sector.
A cashless economy is a good idea, but it shouldn’t be done in a way that hurts the people and shrinks the economy.
