Flight to dollars a risk as Nigeria replaces high-value currency

Nigeria’s move to replace high-value currency notes from December may exacerbate dollar demand in the country, which rations foreign exchange and put further pressure on the naira, according to an economic adviser to President Muhammadu Buhari.

Africa’s most-populous nation plans to issue redesigned 200-, 500- and 1,000-naira notes and asked residents to change the bills by Jan. 31, when they will cease to be legal tender, Governor Godwin Emefiele said at a briefing in Abuja on Wednesday. That will give citizens of the West African country, where cash dominates transactions, six weeks to exchange their notes.

“The first reaction to the new regulations is likely to be a flight to safety by investors — so we expect some initial speculation against the naira,” Bismark Rewane, member of the Economic Management Team appointed by Buhari in 2019, said in emailed note. “In times of uncertainty, investors, speculators and manufacturers will prefer to be long in dollars and short in domestic currencies.”

The naira plunged both in the official market, where the currency is controlled by the central bank, as well as in unauthorized trade where many citizens obtain the greenback. It weakened 4% to 780 a dollar in Lagos as residents rushed to convert cash into dollars, said Umar Salisu, a bureau de change operator that tracks the data in the commercial capital. The official rate fell 0.6% to 441.75 as of 1.31 p.m. local time.

Emefiele predicts cutting the amount of cash in circulation will help minimize access to large volumes of money outside the banking system and will also make a “positive impact” on the inflation rate, which climbed to a 17-year high in September.

The president’s adviser disagreed. The move may have no effect on the general price level, Rewane said.

Traders, especially women, may decide not to accept old notes from December “and therefore will reduce aggregate demand and affect the supply of goods,” Rewane, who’s also the chief executive officer of Financial Derivatives Co. in Lagos, said. On the positive side, the move may lead to “a sharp increase” in electronic payments and help the nation’s financial inclusion drive.