The latest policy by the Central Bank of Nigeria is the planned introduction of digital currency, a digital form of fiat currency (e-Naira) which will be launched on the 1st of October to coincide with the Independence Day celebration.
Recall, on the 5th of February, CBN issued a circular prohibiting commercial banks from dealing with entities trading cryptocurrency. The policy which generated uproar.
The CBN had said the opacity in cryptocurrency has become well suited for conducting many illegal activities including money laundering, terrorism financing and purchase of small arms.
The apex bank recently disclosed it had concluded plans to launch the Central Bank Digital Currency (CBDC), otherwise known as e-naira.
The digital currency by the CBN is different from cryptocurrency, as the latter is more or less like fiat money to be issued by the Central Bank and will be pegged to the Naira. This is completely against the principle of crypto, which is not regulated by any authority.
However, CBN has explained why its digitised money, e-naira, is better than cryptocurrencies.
“CBN would focus on low amount payments at the introductory stage, instant settlement with low cost. CBDC would be legal tender with one e-naira equivalent to one naira, which shows fundamental differences between CBDC and cryptocurrencies,” the CBN Director Of Information Technology, Rukiya Mohammed.
Reacting to the digital currency move , an economist, Wasiu Adekunle, a Research Analyst with the Nigeria Economic Summit Group (NESG) told DAILY POST that the e-currency by CBN is not an alternative to cryptocurrency, rather a digital substitute to the Naira, which will only aid the cashless policy of the government.
He stated that despite attempts by the Central Bank to unify the market through the I&E window, the parallel market is the true reflection of the value of the Naira.
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“The issue is not about defending the Naira or not. What we are supposed to do to stabilize the naira, we are not doing it. If you ask an economist what determines the exchange rate, they are Inflation, interest rate and output (how much you produce as a country?)
“If you take inflation, if inflation is 5 percent in the US, and inflation in Nigeria is 17% as it is. The relative purchasing power parity of naira to a dollar will depreciate by 12%, which is the difference between the two inflation rates. That is if the exchange rate in Nigeria follows that relative purchasing power parity.
“How does it work? When inflation is high in Nigeria, it is an indication that our production cost is high in Nigeria. People will not want to buy from us, it is called imported inflation.”
Speaking on the call by some Nigerians that the CBN should float the Naira, he stated that almost all the options have been experimented by Nigeria, rather the country has adopted the managed float policy, of having the pegged and float FX policy existing side by side.
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“We have experimented with all the options, floating and pegging. We have experimented with peg, which is the fixed exchange rate, we experimented float during SAP (Structural Adjustment Programme), now we have managed fooat exchange rate, which is a combination of both.
“Official rate, don’t forget, CBN stopped the fixed-rate, by adopting the NAFEX window, which is the I&E rate. We don’t have an official rate, which is one of the ways Emefiele is trying to unify the rates. There has been pressure from the IMF that Nigeria should unify the rates, that multiple exchange rates are creating problems.
“What Emefiele is trying to do by devaluing the naira 3 times in the past year, and by adopting NAFEX, is stylishly unifying the rates. The parallel rate is the realistic rate. They are more of an underground.