Cash limits: Nigeria misdiagnoses currency woes, says Capital Economics

Following the new cash withdrawal limits announced this week in Nigeria, analysts at Capital Economics have said the central bank has misdiagnosed the cause of the inflation and currency problems in the country.

The Central Bank of Nigeria had, in a letter to banks and other financial institutions on Tuesday, slashed the limits on cash withdrawals over the counter and via Automated Teller Machines (ATMs), Point of Sale (PoS) terminals, and cheques.

The CBN set N100,000 and N500,000 as the maximum limits for withdrawal over the counter by individuals and corporates respectively. Individuals’ daily ATM withdrawal limit was slashed to N20,000 from N150,000, while corporates are subject to a weekly limit of N500,000. The maximum cash withdrawal via PoS terminals was set at N20,000 daily.

“The move was pitched as an attempt to increase the use of cashless payments but is no doubt another effort to prevent naira ending up in the parallel FX market,” Capital Economics, a London-based economic research firm, said.

Demonetisation, which begins in earnest next Thursday (15th), forms another element, it said.

“But the CBN’s focus on clamping down on the use of cash misdiagnoses the cause of Nigeria’s inflation and currency woes – the naira is trading at a discount of 40 percent on the black market compared with the official exchange rate,” the firm said. “It would do better to shift away from its unorthodox policies, notably deficit monetisation.”