The Washington PostDemocracy Dies in Darkness

Africa’s largest economy is running out of cash. Here’s why.

Nigeria has been hit with a scarcity of cash. (Patrick Meinhardt/AFP/Getty Images)
5 min

Nigeria’s decision to replace high-denomination currency with new notes has caused a massive cash crunch in Africa’s largest economy. The shortages have led to protests and riots in parts of the country as millions stand in line for hours at ATMs and banks to try to access their funds.

The country’s central bank started issuing newly designed naira notes late last year, in an effort to crack down on counterfeit notes and reduce the amount of money circulating outside the banking system. It is “no longer tenable to continue with business as usual,” central bank governor Godwin Emefiele said while announcing the measure.

But the way demonetization — withdrawing notes from circulation — has been carried out has left Nigerians struggling to pay for food and supplies. The country of over 220 million people was initially given just 1½ months to exchange existing notes for new ones, and demand far outstripped the supply of new notes.

The usually jam-packed streets of Idumota market in Lagos, one of the largest in the country, have felt oddly quiet in recent weeks, vendors said, likening them to the time of pandemic curfews.

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Here's what to know about Nigeria’s currency change.

What is Nigeria’s demonetization plan?

Nigeria is withdrawing bank notes circulating in 200-, 500- and 1,000-naira denominations (worth between about 40 cents and $2.10). It originally gave residents until Jan. 31 to swap them for new ones.

The rollout was criticized for being carried out without sufficient support. The bank then extended the deadline for exchanging all the notes to mid-February; authorities later said the smallest denomination would remain legal tender until late April. Nigeria’s top court is also hearing a legal challenge to how the overhaul was managed.

The central bank initially implemented a withdrawal restriction of 100,000 naira per week but raised it to 500,000 naira ($1,085) after criticism. Still, the shortage is so significant that banks are rationing their cash and usually disbursing only between 2,000 and 5,000 naira to each person at counters and ATMs.

The country attempted a similar currency swap in 1984, which critics say was also poorly managed.

Why is Nigeria changing its currency?

The central bank says that Nigerians hold a large stash of cash that is outside the purview of regulators. Eighty-five percent of naira are being used outside the commercial banking system, Emefiele said in October, adding that the circulating currency has more than doubled in the past eight years.

The bank also said the move would help the country shift to digital payments and check organized crime such as kidnapping. The naira has not been redesigned for two decades.

Some experts say the policy is sound in theory. The decision could help manage galloping inflation — at nearly 22 percent — and boost tax revenue, said Ayokunle Olubunmi, a financial analyst at ratings firm Agusto. “However, the poor implementation of the policy has eroded all the potential benefits. Some businesses that we cover have recorded up to a 40 percent decline in revenue.”

What has been the impact on Nigerians and the country’s economy?

Painful. Nigeria’s cash-dependent informal sector, which by one estimate makes up almost 58 percent of its economy, has been badly hit by people not having access to legal tender. The cash crunch comes amid a grim economic outlook, with the naira at an all-time low against the dollar.

On a recent evening at a Lagos night market, vendors were preparing to head home at a time when business activity should have been kicking off. Abiodun Alawiye, who said she usually sells at least 20 pairs of shoes daily, said she hadn’t sold more than a few in recent weeks.

“The town is not moving. It’s not grooving,” said Alawiye, 56, as she sat with her daughter and grandchildren on a stoop. “Now, the business is paralyzed. Everything is paralyzed.”

She needed help transitioning to digital banking but dreaded returning to the bank, knowing the line would be hundreds of people long. “We just needed more time,” she said.

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Busayo Bamidele, a 30-year-old who sells trinkets and jewelry, said that the banking network was so slow that digital transfers often didn’t go through. She said she has barely earned anything recently, with customers choosing to spend what little cash they have on essentials.

“I had to borrow money to buy food this morning … and since then, we have not eaten anything else,” she said.

What other countries have struggled with demonetization?

Countries that have met challenges while swapping out their currency include Myanmar, Zimbabwe and the former Soviet Union. One notable recent instance was Indian Prime Minister Narendra Modi’s decision to declare 86 percent of his country’s cash defunct in 2016, which led to large-scale job losses in the informal economy.

“India’s strategy of rapid demonetization has obviously fallen short, because it was unnecessarily abrupt and secretive,” wrote Jeffrey Frankel, an economics professor at Harvard’s Kennedy School at the time. He added: “It should have allowed for more time to print an ample supply of new notes, and to help businesses switch over to non-cash payment methods, such as electronic funds transfers.”

Chason and Adetayo reported from Lagos, Nigeria.