Nigeria’s Cash Squeeze: A Growing Crisis Demanding Urgent Action by Dr Kenny Odugbemi

Nigeria’s Cash Squeeze: A Growing Crisis Demanding Urgent Action

Nigeria is grappling with a severe cash squeeze that is causing rippling effects across the economy, impacting businesses and households alike. With cash supply dwindling and inflation skyrocketing, experts are calling for immediate measures to address the crisis and drive financial inclusion.

The Current Landscape

The cash crisis in Nigeria has escalated dramatically in recent months, with banks reporting a strikingly low cash supply of just 15%. Meanwhile, the demand for cash continues to surge, creating a perfect storm of financial hardship for many Nigerians. Prices have seen staggering increases, ranging from 200% to 300%, intensifying the burden on consumers already struggling with limited access to financial services.

Key statistics paint a stark picture of the situation:

• Cash Turnover: Approximately ₦4 trillion in circulation.
• Point of Sale Transactions: A 30% uptick in usage, indicating a shift towards digital payments amid cash scarcity.
• Cash Outside the Banking System: An alarming 95% of cash is now held outside formal banking channels.

Implications for the Economy

The implications of this cash squeeze are profound and multifaceted:

• Severe Cash Scarcity: Businesses face challenges in daily operations, hindering transactions and growth.
• Rising Inflation: Increased prices further strain household budgets, reducing purchasing power.
• Economic Instability: Heightened uncertainty may deter investment, stalling economic recovery.
• Financial Exclusion: Vulnerable populations, particularly low-income households and small businesses, find themselves largely cut off from essential financial services.

A Call for Action

To combat the ongoing cash squeeze, several urgent recommendations have emerged from economic experts:

1. Increase Bank Cash Supply: The Central Bank of Nigeria (CBN) must take decisive action to boost the cash supply available in financial institutions, responding to the high demand.

2. Implement Inflation-Reducing Policies: Government intervention, including monetary policy adjustments and price controls, is vital to temper inflation.

3. Promote Financial Inclusion: Increasing access to affordable financial services is critical, especially for marginalized groups and small enterprises that often face barriers to entry in the financial ecosystem.

4. Encourage Digital Payments: As cash becomes harder to come by, promoting digital payment alternatives can help alleviate some reliance on cash while enhancing financial access.

The Role of Payment Service Banks (PSBs)

The introduction of Payment Service Banks (PSBs) by the CBN aimed to enhance financial inclusion, particularly in rural communities. However, the financial performance of PSBs in 2023 raises alarm bells:

• Notable losses have plagued several PSBs this year, including MoMo PSB, which registered a staggering ₦18.98 billion in losses. Other PSBs, like Smart Cash PSB and Airtel PSB, have similarly faced significant financial setbacks.

Reasons for the Losses:

• High Operational Costs: The costs associated with setting up and maintaining operations, such as technology infrastructure and agent networks, have proved burdensome.
• Low Transaction Volumes: Despite a broad market potential, PSBs have struggled to generate sufficient transaction activity.
• Intense Market Competition: The fight for customers among established banks, fintech companies, and other PSBs is fierce.
• Regulatory Challenges: Stringent licensing and compliance requirements further limit operational flexibility.

The Path Forward

Executives of PSBs have critical roles to play in overcoming these challenges:

• Strategic Planning: Formulating effective and growth-oriented strategies is paramount.
• Operational Efficiency: Optimizing processes and leveraging technology can help reduce costs and improve service quality.
• Customer Acquisition: Innovative marketing strategies will be essential to attract and retain a loyal customer base.

Additionally, the CBN must refine the regulatory framework governing PSBs, ensuring it fosters growth and innovation while maintaining system stability. Ongoing capacity-building initiatives for PSB executives can further enhance the quality of service.

Customers too have a vital role in this ecosystem. By adopting and utilizing PSB services regularly, providing feedback, and enhancing their financial literacy, they can help drive the success of these institutions.

Conclusion

As Nigeria grapples with a worsening cash squeeze, the need for urgent measures has never been clearer. Collaborative efforts between the government, financial institutions, and citizens are essential to navigate this crisis. By addressing the cash supply issue, curbing inflation, and promoting digital payment adoption, Nigeria can strive towards a more stable and inclusive financial future. The time for action is now—before the effects of this cash shortage spiral further out of control.