Currency outside banks up by 300% as economy slips into cash hoarding

·• 92% of currency in circulation outside banking system
·• Banks continue to ration cash disbursement

Data sourced from the Central Bank of Nigeria (CBN) suggest the economy may be relapsing to cash hoarding again a year after the chronic currency scarcity even as the proportion of currency in circulation that is held outside the banking system has returned to the pre-naira redesign level.

As of the end of February, the most recent time the CBN’s money and credit data were updated, over N3.41 trillion was held by the public outside the traditional monetary policy regulation.

The value is 92.4 per cent of the total volume of currency in the economy, which the apex bank pegged at N3.7 trillion.

This suggests that over N9 out of every N10 issued by the authority is held by non-bank agents in homes, offices and market stores.

Significantly high cash outside the banking system could lead to an extremely high velocity of money, a challenge that could render monetary policy ineffective.

Nigeria has had an extended elevated inflation run that hit 33.2 per cent last month, with the projection that it would break 35 per cent in a few months.

The inflation has grown neck-in-neck with the policy rate, which was taken up to as far as 24.75 per cent at the recent Monetary Policy Committee (MPC) meeting.

Nigeria has witnessed a reverse of the theoretical trade-off between interest and inflation rates in the last two years, a trend, experts have attributed to the low penetration of the financial market and largely informal economic activities.

The return of ultra-high currency outside banks implies the monetary authority would need to be more innovative in its policy application.

At over N3.41 trillion, the domestic economy is seeing its second-highest cash holding outside financial intermediation. The volume spiked to N3.43 trillion in December, and slowed to N3.28 trillion in January before the February uptick.

Matched against January last year when millions of Nigerians were directed to return the old banknotes for unavailable new ones, currency outside banks has grown by 330 per cent. On a year-on-year basis, the figure has increased by 300 per cent.

It was N843 billion in February last year but crawled to N1.44 trillion in March as protests over the botched naira redesign began to force the hand-reluctant Central Bank to revise its radical migration of the economy to a cashless culture.

The rising hoarding of cash may be unconnected with the restrictive handling of cash by many banks. For many, the trend is a sign of mistrust among the banking public.

While the cash hoarding has ballooned, the majority of banks are still rationing available cash, with circulation yet to return to the pre-naira redesign era.

There are no official positions on what customers are entitled to but findings suggest that some bank branches do not disburse above N50,000 per transaction.

A few bankers who volunteered information said disbursement is based on availability and suggested that is a natural course the financial market would necessarily go through after a cash crisis that grounded the economy for months a year ago.