Banknotes swap and the challenge of good governance

Command-and-control measures, as we are beginning to discover, by sucking the very lifeblood (as it were) from the economy injure the informal sector, first. In our case, this sector is a significant contributor to domestic output and the biggest employer of labour. So it matters that it remains always in fine fettle. Yet, the organised private sector, too, is bleeding red ink. The non-availability of cash has choked consumer spending…

In the past three weeks, the economics of the ongoing banknotes swap has been extensively argued over. Regarding its costs, benefits, and the relationship between these, much disagreement remains, though. At about 6%, the ratio of cash in circulation in the country to its gross domestic product (GDP), using the most recently reported data, is not large enough to explain the effort we have expended on disrupting the former. Compared with economies where cash is supposedly not the dominant means of transaction, you could describe our ratio as measly. Yes, over the period that the Buhari government has been in office, the quantity of cash outside the vault of banks has risen markedly. Spend a little more time considering this fact, however, and it is obvious how the growth in cash in circulation simply mirrors the trajectory of the economy’s expansion. Add to that growth the rapid price increases that we have experienced over the same period, and the much-advertised increase in absolute terms of cash outside the banking sector is far from remarkable.

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What to make of the attempt to prioritise cash held in banks’ vaults over cash in peoples’ pockets? Doubtless, each constituent of the domestic money supply meets different needs. The fact that in economies as diverse as the United States, Germany, and India, cash in circulation as a proportion of GDP is higher than it is here means (in spite of the new domestic narrative), there is a role for cash in every economy ― all those boxes in fancy emporiums “abroad” into which customers are invited to drop their loose change for charity are as key to those economies as any other sector. But this question could still be posed differently ― at a level of debate that makes sense to kindergarteners. Why mint banknotes and coins if the intention is to have them reside in bank vaults?

Who determines the relative roles that cash ― as bank deposits and as content of citizens’ wallets ― should play in an economy? The markets, obviously. The aggregation of decisions made by discrete economic entities acting discretely is far more efficient than the one big decision made by bureaucrats ensconced in their air-conditioned glass-façade offices. Nonetheless, governments could try. If for no other reason but that cash transactions could be used to avoid and evade tax obligations. As well as fuel/conceal criminal activities. Even then, governments are better off acting through markets, rather than against them. Longer-term, what has to be done, though, is to mainstream the informal sector. Trim bureaucracies. Bring down business costs. Make the adjudication of commercial and trade disputes equitable, faster and cheaper. And, above all, reduce incentives to businesses remaining small.

The politics of the policy is a different conversation entirely. On one hand, it resembles in its immediate outcomes, the economics of it all. The streets have become restive. There is unmistakable tension across the land… Weeks to a general election, whose outcomes threaten to challenge national voting traditions; even if the policy makes sense, is it time-expedient?

In other words, the transition from a cash-based economy to a relatively cashless one can only happen efficiently on the back of a rearrangement of the structure of domestic incentives.

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Command-and-control measures, as we are beginning to discover, by sucking the very lifeblood (as it were) from the economy injure the informal sector, first. In our case, this sector is a significant contributor to domestic output and the biggest employer of labour. So it matters that it remains always in fine fettle. Yet, the organised private sector, too, is bleeding red ink. The non-availability of cash has choked consumer spending, even as the national infrastructure for electronic transactions appears to collapse under the weight of a spike in transaction volumes.

The politics of the policy is a different conversation entirely. On one hand, it resembles in its immediate outcomes, the economics of it all. The streets have become restive. There is unmistakable tension across the land. Barely recovered from the injuries to the social fabric from the activities of kidnappers-for-ransom, Islamist non-state actors bent on levying war against the state, and the rift between nomadic pastoralists and farmers, one wonders if this policy makes sense. Weeks to a general election, whose outcomes threaten to challenge national voting traditions; even if the policy makes sense, is it time-expedient?

…good governance is set back when the populace loses confidence in government. It is worsened when key institutions of government lose all credibility. Additionally, one benefit from good governance is the multiplication of options across an economy ― a role that in our current example, access to cash for transactions neatly fulfils.

Against all this, we are invited to think through the gains to the country from the extent to which the policy will curtail vote-buying in the run-up to the elections. Alas, good governance is Nigeria’s main problem. In truth, one could argue that as a key for accessing the hallowed halls of governance, vote-buying is implicated in this problem. But good governance is set back when the populace loses confidence in government. It is worsened when key institutions of government lose all credibility. Additionally, one benefit from good governance is the multiplication of options across an economy ― a role that in our current example, access to cash for transactions neatly fulfils.

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If nothing else, the latter are several of the unintended outcomes of the ongoing banknotes swap. On balance, therefore, we do not seem to have a policy on our hands whose benefits compensate for its costs ― near-, medium-, or long-term.

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