An Investigation on the Effect of E-Naira on Inflation

CHAPTER ONE

INTRODUCTION

Background of the study

Inflation is a term used to describe the rate at which the price of goods and services rises over time. Inflation impacts not only the cost of life – items like transportation, power, and food – but also interest rates on savings accounts, company performance, and, as a result, share prices. For many years, digitization has altered the way monetary systems operate, but it has only lately begun to alter their structure more fundamentally, particularly in the face of inflation (Salomon F. KlausJürgen G. & Ulrich S. 2019). Inflationary indicators show a decrease in the buying power of your money as it price of good rises. In other words, this has an influence on people’s ‘purchasing power,’ since they can now buy less with their money. Savings, investments, and pensions are all impacted at the same time, thus it’s vital for an economy to adopt the best feasible exit strategy to enhance money circulation in the face of inflation, if not in physical currency, then in digital cash, which has been demonstrated to be advantageous by study. This is further supported by Ezuwore-O., Eyisi A., Emengini S., & Alio F. (2014), who argue that industrialized economies are quickly diminishing the use of cash, and in certain cases, envision being cashless totally in the near future, which may be achieved by digitalization of local currencies.

The usage of digital currencies is typically regarded as a complement to traditional financial transactions rather than as a required or beneficial replacement.

Digital currencies, according to Gilbert, Scott, and Loi, Hio. (2018), have qualities comparable to traditional currencies but, unlike currencies with printed banknotes or minted coins, do not typically have a physical form. The lack of a tangible form enables for near-instantaneous transactions through the internet and eliminates the costs of transmitting notes and coins. As a result, digital currencies will continue to be helpful for inter-party transactions as long as both parties acknowledge the currency’s legitimacy, as they offer the benefit of quick settlement, particularly in online communities. Although cryptocurrency is the most popular form of digital currency, there are thousands of them in the modern world, each of which operates and enjoys security thanks to the respective encryption codes mutually adopted by the parties in such transactions, especially since most governments around the world have shied away from conferring any form of endorsement and legitimacy on transactions conducted through such channels. Given the rising popularity of digital currency, various governments throughout the world, including Nigeria, have begun to express interest in digital currency activities, with the CBDC option emerging as the preferred entry point. In that regard, the CBN’s move to introduce the e-Naira must be considered the Nigerian government’s first foray into the digital currency world. As a result of this rapid technical advancement and financial market growth, international economies have begun to transition from paper money to digital currency, with Nigerian economies following suit.

According to Abdulkareem M. (2021), central banks around the world have been delicately working on their digital currency by gradually weaning themselves off rapidly-declining cash payments, which is why the Central Bank of Nigeria joined the fray so that Nigeria is not left in the lurch, which led to the launch of her e-Naira, which comes after instructing banks to close cryptocurrency and ban crypto-related accounts in February 2021. (premiumtimesng.com). The consequences for payment system efficiency, as well as the possible hazards associated with the operation of these systems, must to be evaluated especially as its impact on inflation is unknown, hence necessitating the investigation.

Statement of the problem

The street implication of inflation is a lack of cash chasing too many goods, or a hike in the price of goods and little purchasing power. On the contrary, not all inflation is this simple.  Couple with the fact that naira coins in Nigeria are rare in use,  most merchants round up their prices to match the available currency, usually notes. This rounding up induces an artificial increase in prices because some cost-push  is not just caused  price hike but other factors such as round up amount   for example, selling eggs for N100 instead of N88 (https://nairametrics.com, 2021).

More so, prior to the introduction of the electronic naira, the paper naira in Nigeria had a severe foreign currency crisis, and the naira’s pace of depreciation aroused widespread worry among citizens, necessitating the need to test an alternate legal tender. Furthermore, as advised by the CBN earlier this year, cryptocurrency is prohibited, necessitating the transition of the country’s currency from paper to electronic. Thus with the advent of e-Naira, it becomes possible to transfer the exact cash price in the marketplace, especially in rural areas which reduces the possibility of “round-up inflation.

Kalu (2021) indicated that e-naira aspires to assist CBN  fulfill the apex bank’s monetary policy and financial objectives. It will ease interchange of cash and cross-border trade at a lesser cost, especially when additional countries launch their own digital currencies. e-naira will be a complementary legal money in Nigeria, having the same exchange value as the naira, and maintain a parity of value with the naira. Although holders would not receive any income on their e-naira, the entry of FDIs will boost the CBN power to act effectively in the economy and reduce pressure on the naira. This would also generate a rise in investor confidence in Nigeria.      Abdulkareem (2021) opined that e-Naira will reduce pressure on demand for foreign currency and external reserves, adding that the value of the naira will improve significantly while the forces of demand and supply will hardly affect the exchange rate and will shift the liability of the electronic naira directly on CBN without fear of fake currency having equivalent value with the physical cash. Hence  should e-naira becomes acceptable  by business  as a legal tender this would ameliorate effect issues of roundup inflation. While this is debatable, it is upon this backdrop that the researcher seeks to analyze the influence of the e-naira on inflation in Nigeria.

Objective of the Study

The broad objective of this study is to examine the effect of e-naira on inflation in Nigeria. Specifically the study seeks to:

1.        Investigate if the invention of eNaira will have any effect on money circulation.

2.        Determine if the invention of eNaira will have any effect on marketplace cash prices.

3.        Ascertain if the eNaira will have any significant effect on roundup inflation.

 Hypothesis of Research

HO1: The invention of the eNaira will not have any significant effect on money circulation.

HO2: The invention of the eNaira will not have any significant effect on marketplace cash prices.

HO3: eNaira will not have any  significant effect on roundup inflation.

 Significance of the Study

Findings from the study are of great significance as the topic under discussion is of importance to economic developers and analysts. It will be useful to policy makers, especially in formulating policies that will reduce inflation’s growth rate. It will be useful to monetary houses like the Central Bank and Commercial Banks. It will also be useful to students of economics and other related fields. Finally, the study will add to the body of existing literature and serve as reference material for both scholars and students who wish to conduct further studies in related fields.

 Scope of the Study

The scope of this study borders on  the effect of e-naira on inflation in Nigeria. The study will further ascertain if the invention of eNaira will have any effect on money circulation,  marketplace cash prices and roundup inflation incited by  product vendors. However, the study is limited to the Ministry of Finance, Abuja.

Limitation of the study

Like in every human endeavour, the researchers encountered slight constraints while carrying out the study. Insufficient funds tend to impede the efficiency of the researcher in sourcing for the relevant materials, literature, or information and in the process of data collection, which is why the researcher resorted to a limited choice of sample size. More so, the researcher will simultaneously engage in this study with other academic work. As a result, the amount of time spent on research will be reduced.

 Definition of Terms

Inflation: In economics, inflation is a general rise in the price level of an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services;

E-Naira: eNaira is a central bank digital currency (CBDC) issued by the Central Bank of Nigeria as a legal tender. It is the digital form of the Naira and will be used just like cash.

Digital currency: Digital money (or digital currency) refers to any means of payment that exists in a purely electronic form. Digital money is not physically tangible like a dollar bill or a coin. It is accounted for and transferred using online systems.