“No cash, no treatment." The aforementioned mantra has gained prominence in many of the nation's primary and secondary healthcare centers; the semi-urban and rural lifesavers on which the majority of the country’s population depends. The consequence? Rows of unattended patients. Two months on, a well-intentioned policy has turned out differently than expected, with real-life consequences (immediate and long-term) for the informal economy, Nigeria’s attractiveness to foreign investors, the digital economy, and the body politic. This article discusses the Naira redesign policy outside the armchair of economic analysis.
The Informal Sector
A walk through Madalla market, located on the outskirts of the nation’s capital, gives a glimpse into the real-world impact of the CBN’s Naira redesign policy. Traders who only accept the new notes risk having low (or no) sales by the end of the market day; an economically-suicidal outcome for sellers of perishable goods. Those who accept the old notes risk economic loss, notwithstanding the Supreme Court’s repeated rulings on the validity of the old notes. Finally, traders who choose to accept transfers risk not receiving payments as some transactions take days (maybe more) to complete. The combination of uncertainty surrounding the old notes, scarcity of new notes, and the unpredictability of bank networks has dealt a terrible blow to the country’s informal sector; a sector that accounts for more than one-third of the country’s GDP and over 80% of her employment.
The woman in the market is hardly alone in her anxiety over the current state of affairs. As Buffett would advise, the number one rule of investing is “Don’t lose money”. And number two? Don’t forget rule number one. For investors, especially cross-border investors, risk and capital preservation are front and center in their analysis of opportunities. In response, recipient countries have taken steps in the last two decades with a view to assuaging investor fears by putting in place predictable guardrails. An integral part of this partnership is the role of the rule of law (or the semblance of it). For the investor, the judiciary's role in protecting property rights, and having its rulings enforced and/or respected provides much-needed assurance on investments thousands of miles away from home. This Naira saga and the handling of the Supreme Court’s rulings are hardly lost on existing and potential investors. Notwithstanding Nigeria’s wealth of opportunities and attractive market, Nigeria is in direct competition with other African countries. Sending the wrong message on the rule of law helps only one group; our competitors.
The Digital Economy
The sudden spike in the volume of transactions caused a jolt to the country’s digital banking infrastructure, with multiple downtimes on mainstream banking networks. Transactions took days (even weeks) to be completed, leading to the rejection of transfers as a method of payment in instant exchanges such as taxi transportation and other exchanges between strangers. This in turn led to missed profit opportunities for traders and their banks. Figures from the Interbank settlement system show that notwithstanding a 41% rise in transaction volume in February, the value of transactions fell by 4.1%, thereby signaling a significant number of failed transactions. Combined with higher staff outlays for the provision of in-person services at local branches, banks fared terribly in the past month. On their part, fintech companies faced similar scalability challenges, with only a few (especially Moniepoint and Opay) performing relatively well and earning increased brand trust even among non-tech-savvy users. Looking into the future, the current challenges hint at the necessity of upgrading the existing infrastructure to accommodate what is likely to be higher transaction volumes, regardless of what happens to the Naira in the coming months. This is likely to increase CAPEX costs for financial services firms as well as provide new investment opportunities for telecom and technology investors.
The Body Politic
While still early, numbers are fast emerging on the impact of the Naira redesign and the drama that followed it. The Center for Promotion of Private Enterprise estimates the economic cost of the saga at 20 trillion Naira. As more figures emerge, one thing is sure; the impact of the policy on the country’s performance in this quarter is terrible. Already, some stakeholders predict low to negative economic performance figures for the first quarter. With no clear end in sight, the policy (and its impact) could directly (or indirectly) affect the second quarter too. Thus, by midyear, the country may be staring at two successive quarters of lackluster economic performance, thanks to self-inflicted policies. Beyond Nigeria, uncertainties over the near-term health of the global economy remain. The recent strings of bank failures in the US further raise concerns over possible contagion. Thus, could Nigeria end up with a double whammy of self-inflicted economic slowdown and external recession?
Is this all gloom? Clearly not. A recent walkthrough of local markets shows the resilience and adaptability of various actors. POS agents remain in business (against earlier predictions), and some fintech brands are fast becoming local favorites thanks to the speed of transactions through their channels. Overall, the policy has helped spur an increase in the volume of digital transactions, a development that might be maintained if infrastructure bottlenecks are addressed. Nonetheless, the damage to the informal sector poses significant threats to the larger economy. And the continued disobedience of court orders poses threats to investor confidence and our ability to attract much-needed investments as the new administration prepares to take the helm.
Notwithstanding the complexity of the current state of affairs, we at Kwakol are well-equipped to help our clients navigate the risks investors are likely to face. Contact us today at email@example.com