Nigeria’s CBDC transactions surge 63% amid cash shortages. Will it last?

On Tuesday, Bloomberg reported that the value of Nigeria’s digital currency (eNaira) transactions jumped 63% year-on-year as the amount of cash in circulation has been recently cut to a third. Last year, the government began replacing old banknotes to reduce cash hoarding, black market activity and counterfeiting. Yet cash payments still make up almost 90% of Nigeria’s informal economy. As the country’s cash crunch may soon end, will Nigeria be able to sustain the increased adoption of its central bank’s digital currency (CBDC)?

In October 2021, the Central Bank of Nigeria (CBN) became one of the first to launch a large-scale CBDC pilot, the eNaira. Since then, the value of digital currency transactions in Nigeria has risen steadily to almost 22 billion naira ($47.7 million), according to Bloomberg, with more than 13 million e-wallets opened in the past six months alone. By contrast, the amount of cash in circulation has dropped from nearly 3.3 trillion naira ($7.1 billion) in December 2022 to less than 1 trillion naira ($2.1 billion) in February 2023, according to the latest CBN statistics.

CBN Governor Godwin Emefiele argues that this has been part of a sustained effort to bring the informal economy under control and discourage people from circumventing the formal banking system.

eNaira products and services can help increase participation in the digital economy and promote the growth of the Fintech ecosystem, observers point out, as well as accelerate SME growth, facilitate cross-border trade, and improve interbank market efficiency. However, a November 2022 report by the IMF on the progress of the eNaira indicated a lukewarm reception at best.

Last year, the government decided to enable eNaira CBDC services on special feature phones to boost financial inclusion, which stands at around 70%. In 2021, it also issued a ban on cryptocurrencies to discourage the adoption of alternative private forms of money.

While these measures have likely contributed to the rise in CBDC adoption, others argue that the reduction of cash, compounded by recent failures in electronic banking transactions, might have also exaggerated the effect. The withdrawal of old 200, 500 and 1,000-naira notes has hurt commercial banks and disrupted conventional channels, sparking protests among Nigerian workers and trade unions.

However, Nigerian newspapers report that the cash crunch might soon be resolved, as the central bank agreed today to release mopped-up naira notes to banks amid an upcoming hike in commodity prices during the season of Ramadan. One of the questions is whether the injection of liquidity will have any impact on the recent acceleration in the adoption of the eNaira.