One Year In, The First Ever Large-Economy CBDC, Nigeria’s eNaira, Is a Gigantic Flop

The Central Bank of Nigeria is undeterred. To deepen its drive to “entrench a cashless economy” and boost take-up of the eNaira, it is launching a demonetization process not too dissimilar from India’s.

This is, in essence, an update of a story first covered on Naked Capitalism back in July. As I remarked in that piece, Sub-Saharan Africa has proven to be a fertile testing group for live experiments in both cashless economics and digital identity, which essentially go hand in hand with one another. The region has led the way on P2P mobile phone payments. As part of that general trend, Nigeria, with the help of the IMF, became the first large country on planet Earth to launch a central bank digital currency (CBDC), the so-called eNaira. That was just over a year ago, in October 2021.

Disappointing Results

Central banks and financial institutions around the world have been watching developments closely ever since. Both Nigeria’s central bank and government have pulled out all the stops to boost the eNaira’s chances, including banning financial institutions from enabling cryptocurrency transactions seven months before its roll out. The Central Bank of Nigeria (CBN) also received technical assistance and policy support from the IMF, one of the main driving forces behind the roll out of CBDCs globally.

Yet the results of the project, now in its second year, have been dismally poor. The eNaira recorded just 700,000 transactions worth ₦8 billion ($18 million) in its first year. By August only 905,588 people had downloaded an eNaira wallet — a thoroughly underwhelming number in a country with an estimated population of 225 million people. Worse still, only 282,600 of those accounts were currently active. Meanwhile interest in cryptocurrencies has continued to rise despite the ban, as Bloomberg reports:

While the eNaira uses similar distributed ledger technology to Bitcoin or Ethereum and can be saved in digital wallets, Nigerians’ passion for cryptocurrencies doesn’t extend to the central bank offering.

Virtual currencies have lured residents of Africa’s top oil producer as a hedge against inflation and currency depreciation, but eNaira is seen as a proxy for the challenges facing the continent’s biggest economy and a symbol of distrust in the ruling elite.

Educating Nigerians about the digital currency is a key task for both the central bank and the government. As the largest economy to fully launch, it’s also being scrutinized by the more than 100 nations considering their own CBDCs, according to Josh Lipsky, senior director of the Atlantic Council’s GeoEconomics Center.

“Nigeria’s project is hugely important to the world,” he said. “My bottom line on Nigeria is the jury is still out, but the world is paying close attention to what they’re doing.”

Lipsky’s definition of the word “world” is extremely narrow. It includes central bankers and other influential stakeholders (governments, fintechs, private wealth foundations and think tanks like the Atlantic Council) that would like to see CBDCs become a reality. This is the world that matters. Most other people in the world are not even aware what CBDCs are, or how their imminent roll out could transform their lives, for one simple reason: there is no public debate on the matter.

The Sinister Side of CBDCs

The launch of the eNaira had many ostensibly laudable objectives — at least according to the Washington-based think tank Atlantic Council. They include (remarks in brackets my own): enhancing the availability and access to central bank money; encouraging financial inclusion (by extending exploitative and abusive financial services to those formerly excluded (h/t Jomo Kwame Sundaram)); facilitating direct welfare disbursement to Nigerian citizens; boosting the government’s revenue and tax collections; facilitating diaspora remittances and reducing the cost of cross-border payments. It was also supposed to take the shine off cryptocurrencies, which are widely used in Nigeria.

But CBDCs also have a very sinister side. They would grant yet more centralized power to central banks — institutions that are already dangerously unaccountable, conflicted and opaque, and which have played a leading role in stoking the financial bubbles and resulting crises of recent times. They could be used to track our spending or even “program” our spending behavior, as the Bank of England has already hinted at. They could be used to prevent people from even being able to transact. They could also deliver the final death blow to physical cash, one of the last remaining vestiges of privacy and anonymity.

At the same time, CBDCs are wholly unnecessary, a solution in search of a problem. At a recent bash in Miami, even the central bank officials gathered there failed to reach a consensus on whether there was an actual need for them.

“Everybody’s trying to identify concepts. There’s still not a clear business happening,” said a central banker. We’re in a stage of figuring out ‘what is what’,” they said.

It is not just central bank officials that are unconvinced by the business case for CBDCs; so too are the overwhelming majority of Nigerian citizens.

Two Major Stumbling Blocks

Besides a general lack of enthusiasm among the general public, the eNaira has come up against two major stumbling blocks: first, it can’t yet be used for cross-border payments. This is largely due to concerns, including from the IMF, that the prospective expansion of eNaira use to cross-border fund transfers and agency bank networks may lead to new money-laundering and financing of terrorism risks.

It hardly helps that the Central Bank of Nigeria has absolved itself from any liability should users of the eNaira suffer any loss or data breach on the platform. The website’s ‘terms of service’ section reads like a Pfizer vaccine contract. Per the newspaper Punch:

It stated, “In no event will the CBN or its directors, officers, employees, independent contractors, affiliates or agents, or any of its or their respective service providers, be liable to you or any third party for any use, interruption, delay or inability to use the eNaira website, lost revenues or profits, delays, interruption or loss of services, business or goodwill, loss or corruption of data, loss resulting from system or system service failure, malfunction or shutdown, failure to accurately transfer, read or transmit information, failure to update or provide correct information, system incompatibility or provision of incorrect compatibility information or breaches in system security, or for any consequential, incidental, indirect, exemplary, special or punitive damages, whether arising out of or in connection with the use of the eNaira website.”

Another major stumbling block is that the eNaira derives its value from the physical Naira, which has done nothing but crumble in value since the eNaira’s launch. At around 439 to the dollar, the currency is at its lowest point ever — and that is based on the official exchange rate! According to Bloomberg, the black market exchange rate, which is the rate at which most Nigerians have to convert the local currency into hard currency, is around 785 Naira to the dollar — also a record low. The plunging currency is exacerbating inflation, which is already at a 17-year high.

Yet for all of that, Nigeria remains a predominantly cash-based economy. According to the 2022 edition of the FIS Global Payments Report, physical cash accounted for 63% of point-of-sale (POS) transactions — compared to an average of 44% across the Middle East and Africa. The central bank wants to change that.

Demonetization 2.0

A couple of weeks ago, the governor of the CBN, Godwin Emefiele,  unveiled a controversial plan to redesign and reissue high-value currency notes in an ostensible bid to mop up excess cash liquidity, and stay ahead of counterfeiters. It also wants to take greater control of Nigeria’s money in circulation, more than 85% of which is currently outside the vaults of the country’s banking system. The plan has now received the backing of Nigeria’s President Muhammadu Buhari, which means that residents will have until Jan. 31 to change all of their high-denomination Naira bills.

It all bears an uncanny resemblance to India’s disastrous demometization debacle. Demonetisation began in India in early November, 2016. From one day to the next Indian Prime Minister Narendra Modi announced the immediate cancellation of Indian Rupees (Rs) 500 and Rs 1000 notes. Those notes accounted for 86% of all the cash in circulation in what is predominantly a cash-based economy. The immediate result was widespread chaos, as millions of people struggled — and in many cases failed — to exchange their cancelled banknotes for new currency.

Lives were ruined and businesses destroyed (for more granular detail, I recommend reading Jerri Lynn’s extensive reporting on the subject). At least 100 people died as a direct consequence. The resulting drainage of liquidity from the financial system is estimated to have hobbled India’s economic growth significantly. All the while, most of the large sums of illicit money in India, which were ostensibly the main target of the government and central bank’s shock initiative, were simply exchanged for new currency.

But there was one silver lining among the dark clouds, as PWC noted in 2017:

“Post demonetisation, there [was] a marked reduction in the resistance towards digital payments, and this medium should continue to see sustained adoption going forward.”

This end, in and of itself, more than justified the means, said everybody’s favorite billionaire philanthropist, Bill Gates. In mid-November 2016, as the fallout was just beginning, he told the Times of India that all the pain was worth it:

“Government transitions are never managed perfectly and never easy. India is pushing toward digitization in a big way. The scale of the country means that once India gets there, the amount of digital innovation here will be greater than anywhere else in the world.”

Nigeria’s demonetization process is unlikely to be quite as chaos-inducing as India’s, or as painful as its first brush with demonentization, in 1984 when current President Buhari ran a ham-fisted military junta. For a start, residents will now have a little more time to exchange their banknotes. But the risks are still high, especially given the current economic and political backdrop. Some experts, including the Minister of Finance Zainab Ahmed, have cautioned that the move risks further weakening the currency at a time of record inflation. With general elections slated for late February, political turbulence is also on the rise.

“There will be some benefits, but there will also be some challenges,” Ahmed said. “I do not think if (sic) the monetary authorities have looked very closely at what the consequences are and how they will mitigate it (sic)”.

Suspicious Timing

The CBN has published a list of eight reasons why it is taking this dramatic step, some of which are entirely justifiable. But the timing is suspicious, coming just one year after the launch of the eNaira, which has proven to be a complete dud so far. In fact, in its reason #7, the CBN admits (emphasis my own) that the “redesign of the currency will help deepen our drive to entrench a cashless economy as it will be complemented by increased minting of our eNaira.”

As with India’s demonetization, the brunt of the resulting economic pain will be borne by the poorest. As Jibrin Ibrahim, the Director of the Centre for Democracy and Development (CDD), writes in the online newspaper Premium Times, enterprising criminals and corrupt politicians will simply change their Naira into forex or cryptocurrencies, which will further depress the value of the local currency. Meanwhile, the masses will be left holding the tab:

Nigeria is still a substantially cash economy and the majority of Nigerians, we all know, have no bank accounts. Most people engaged in subsistence farming and petty commerce and services keep their small amounts of money in cash. We are over 200 million, as such small amounts of cash can cumulatively be a considerable amount of money. When you order all Nigerians to place all their cash in their bank accounts, knowing fully well that most don’t have these, I say that it is financial and economic vandalism by the state against innocent citizens. The masses will suffer. They will lose money as they seek ways to bribe and get access to the new currency notes.

Meanwhile, central banks around the world and the Bretton Woods institutions continue to watch on as the world’s first large-economy CBDC flounders. Rest assured they will be taking notes.