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Cash Crunch Expected to Worsen Macroeconomic inStability in Nigeria – NESG

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CEM REPORT, FINANCE | The cash scarcity in Nigeria is expected to exacerbate the macroeconomic instability in the country. The persistent inflationary pressure in the economy may intensify as the economy struggles to access cash and pay premiums to conduct economic activities.

This is the submission of the Nigerian Economic Summit Group (NESG) in a Scenario-Based Outlook for 2023 released Thursday, which became necessary following the expected disruption the cash scarcity will have on macroeconomic projections for 2023

NESG declares that “the measure of immediately phasing out the N1000 and N500 notes, which make up over 88 percent of the total currency in circulation, may appear to be a superficial solution. As a result, the currency shortage will likely persist for an extended period.”

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In concurrence with other commentators, the NESG noted that the currency redesign policy was introduced to address various issues, including banknote hoarding, currency counterfeiting, insecurity, price instability, financial exclusion, and the promotion of a cashless economy in line with global best practices.

However, the poor implementation of the new currency release in relation to short time and lack of proper circulation plan has exacerbated the economic situation, primarily due to the critical role of cash transactions in economic activities and the lack of preparation by economic actors for the rapid changes.

NESG has presented the impact the fallout of the poor implementation would have on the economy in 3 scenarios.

Scenario 1: Quickly normalizes

In this scenario, the successful implementation of the CBN’s plan to provide sufficient cash to ensure liquidity in the economy is crucial. If this is achieved, the economy is expected to return gradually to normalcy, deviating slightly from its projected growth path. The impact of the policy is predicted to ease out by the end of Q1-2023, and the economy will gradually retrace its growth path.

According to the scenario-based outlook, the real GDP growth will slightly decline to 2.7 percent in Q1-2023, 2.9 percent in Q2-2023, 2.8 percent in Q3, and 2.6 percent in Q4-2023, respectively. This represents a deviation of 0.23 percentage points from our Macroeconomic Outlook Report for FY’2023 forecast of 2.98 percent, based on quarterly forecasts of 3.0 percent, 3.2 percent, 2.9 percent, and 2.8 percent.

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As a result, we anticipate a decline in the real GDP growth for FY’2023 to 2.75 percent from the previously projected 2.98 percent. Furthermore, the average inflation rate is likely to remain elevated and rise to 21 percent, slightly above our initial projection of 20.5 percent. However, we do not expect the official exchange rate depreciation to exceed our initial projection of N500/US$, as the shortage in money supply is expected to ease the demand for foreign exchange amid a persistent shortage in foreign exchange inflows.

Scenario 2: Gets worse slightly

In this scenario, managing the current situation amidst worsening cash scarcity will be crucial. The impact of the policy will deepen the strain on the productive sector throughout the year as economic activities continue to be limited by the cash shortage. The scenario projects a lower real GDP growth of 2.0 percent, 2.2 percent, 2.4 percent, and 2.3 percent in Q1, Q2, Q3, and Q4, respectively. As a result, the FY’2023 real GDP growth is expected to decline to 2.23 percent, representing a deviation of 0.75 percentage points from the earlier projected 2.98 percent.

The average inflation rate is also projected to increase to 22 percent as scarcity significantly impacts the supply chain, and low liquidity drives down aggregate output. The official exchange rate is expected to depreciate further to N530/US$ as the investment climate becomes more uncertain and investors take a cautious stance while seeking safer assets across boarder.

Scenario 3: Degenerates

In this scenario, it is assumed that the liquidity shortage will become more severe, amplified by electoral misgivings. As a result, the policy’s impact will significantly affect productivity, and economic activities will become disrupted, leading to chaos and tension. In this scenario, the projection for real GDP growth is a sharp decline to 1.8 percent, 2.0 percent, 2.2 percent, and 2.1 percent in Q1, Q2, Q3, and Q4, respectively. Consequently, the FY’2023 real GDP growth will decline to 2.1 percent, representing a deviation of 0.88 percentage points from the earlier projection of 2.98 percent.

The disruption to productivity will increase the average inflation rate to 24 percent, and the official exchange rate will depreciate to N590/US$ as capital flight intensifies and investment halts.

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