Nigerian President Muhammadu Buhari in a broadcast to the nation this morning directed the Central Bank of Nigeria (CBN) to allow only the old N200 notes to remain as legal tender until April 10, 2023.
The President also said the old N500, and N1,000 notes ceased to remain legal tender in the cuntry.
The president, who addressed the nation in a speech counted the gains of the Naira redesign to include drop in inflation, reduced insecurity and improved monetary policy.
However MoneyCentral identified one major dilemma in a speech by a President who is clearly determined that the Naira redesign would be a major legacy policy for his administration.
President Buhari in his speech said gains of the Naira redesign policy include:
“Reduction of broad money supply leading to a deceleration of the velocity of money in the economy which should result in less pressures on domestic prices.”
What Is the Velocity of Money?
The velocity of money is a measurement of the rate at which money is exchanged in an economy. It is the number of times that money moves from one entity to another.
The velocity of money also refers to how much a unit of currency is used in a given period of time. Simply put, it’s the rate at which consumers and businesses in an economy collectively spend money.
The velocity of money is usually measured as a ratio of gross domestic product (GDP) to a country’s M1 or M2 money supply. The word velocity is used here to reference the speed at which money changes hands.
- Velocity of money is a measurement of the rate at which money is exchanged in an economy.
- The velocity of money equation divides GDP by money supply.
- The velocity of money formula shows the rate at which one unit of money supply currency is being transacted for goods and services in an economy.
- The velocity of money is typically higher in expanding economies and lower in contracting economies.
Implication for Nigerian economy
What this implies is that the President and his CBN counterparts are facing a major dilemma and are willing to tolerate or accept lower economic growth as a trade-off to help ease consumer prices, through the use of the Naira redesign policy.
There is no doubt that inflation is a major macroeconomic issue challenging monetary authorities.
Nigeria’s inflation soared to 21.82 per cent in January 2023, according to the National Bureau of Statistics.
However low economic growth and high unemployment has also been a major challenge for the Buhari administration.
We believe the policy path chosen by the administration will work in the short term (i.e. lower velocity of money will slow inflation), however it is unsustainable in the long term for an economy which has such a huge output gap (growing at much below its potential), as this will lead to increased poverty, unemployment and hunger.
Perhaps it is safe to say that whoever is elected as President in the next election will have no choice but to review the Naira redesign policy to better reflect their respective economic growth outlooks.