Cash Crunch and its Devastating Effect on the Nigerian Economy

What is Cash Crunch

A cash Crunch is synonymous with a lack of cash or an absence of liquidity.

It is when individuals or organizations don't have enough cash at hand to meet their financial obligations such as paying bills, salaries, and other expenses that are important to the operations of the company.

Cash crunch is caused by several factors including lack of access to credit, unexpected decline in revenue, and increase in expenses.

What Caused Cash Crunch or Scarcity in Nigeria?

Before October 2022, Nigeria had about N3.2 Trillion cash in circulation, by the end of October over 80% of the cash has been returned to the bank in obedience to the Central Bank of Nigeria's (CBN) directive that all 200, 500 and 1000 naira old notes be returned to the bank and the banks should issue new ones.

According to trusted sources, only N400 billion of new notes were printed, and since then, commercial banks have not been able to meet their financial obligations to their customers.

The Federal Government and CBN stated that the reason for this was to curb vote buying and other related financial crimes currently being perpetrated because of the presence of too much cash in circulation. 

Due to these developments, life became difficult for common Nigerians, and because of the poor online banking infrastructure of Nigerian commercial banks, online transactions became problematic.

Issues that arose include, making transfers and recipients not receiving funds, poor customer care response from commercial banks, failure of Automated Teller Machines, and overcrowding in banks.

Effects of Cash Crunch in Nigeria.

Tesla for example 2019 experienced a cash crunch and was demanding that investors pump in more money to meet its financial obligations. This caused a fall in their stock prices and the carmaker had to sell off additional shares to raise about $2.7 billion to avoid losses.

In Nigeria, the effects have been more significant below are some of its most visible effects

1. Reduction in spending: customers and businesses are now watchful of how much cash they spent on goods and services, leading to a reduction in the demand for goods.

2. Cash Crunch has also led to slow economic growth in the largest economy in Africa. Businesses now cut back on investments and hiring of workers increasing unemployment in Nigeria which now stands at 43%, an all-time high since the country gained independence in 1960.

3. Increase in Prices: Businesses now charge more on goods on services a crucial example is the Point of Sales (POS) operators in the country charging more than 20% in so many cases on transactions.

4. Decrease in confidence in commercial banks: due to the way the cash crunch is handled in Nigeria, taking cash to the bank has now become an unwise decision for the people because they don't know which other policy will be enforced that will prevent their access to cash, this will lead to more withdrawals than deposits in banks.

5. Inflation: most approaches by the government to solve this problem involves pumping more cash into circulation, this can further increase the inflation rate that currently sits at an over 17year high of 24%

The country continues to push out the old notes due to a supreme court order that the old and the new notes should exist simultaneously.

it is yet to be seen the if this will have positive effects on the economy or not, but be assured that investingport.com for more news as it unfolds.