Demonetization of Currency: An Expert’s Opinion You Should Read

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Mohamed Wehliye, an advisor at Saudi Arabian Monetary Agency (SAMA) and well regarded for his insights on Kenyan economic and monetary affairs says that the current move by the government relative to demonetizing close to 217.6 billion pieces of the KSh1,000 old series is a step in the right direction.

In a Facebook post, Mr. Wehliye highlighted the following about the demonetization:

1. It is good for the country. Immediate focus is on the corruption objective but it has other objectives & possible benefits.

2. Tax – It will bring a lot of money back into the formal system. Direct and indirect taxes benefit and good data for KRA to mine.

3. CASA – Current Accounts & Savings Accounts boost – helping with more liquidity in the banking system, lower cost of funding and better lending rates. Just imagine half of the 217 billion circulating coming into the banking system!

4. Less counterfeiting. The 1000 note is the most abused when it comes to counterfeiting. The counterfeit 1000 notes will be nabbed and the new currency will hopefully have better security features

4. Will reduce currency to GDP ratio – promote cashless society.

5. The 1000 bob is 83 percent of the total value of money in circulation. Criminals and money launderers love big denominations. The demonetization will hopefully bring down this ratio. The lower the percentage of 1000s circulating the more difficult it is for criminals to use it and the higher the chance they will get caught transporting it.

Now I see many say Oh it failed in India, it will also fail here. We are not India. Totally different case!

1. Modi surprised even his own central bank. They had to print replacement money after the announcement. Why India put limits to how much you can change each month and why there was cash crunch. They were not printing fast enough. 105 people lost their lives – mostly in queues. We have ours already printed. In Kenya, CBK is taking advantage of the move to the new currency. If say in the unlikely event one guy brings all the 217 billion 1000 notes kesho, he will have it replaced at CBK aki explain ametoa wapi. India couldn’t do that. Ukikohoa, CBK itaitika!

Also, our demonetization is coming at zero cost because whether we withdraw the 1000 notes or not we have to print new ones any way (as per constitution). Killing 2 birds with 1 stone. Well timed.

2. India is 2nd most populous country. Logistical nightmare. The 2 currencies they withdrew was worth USD 320 billion. Ours is a fraction of that – a mere USD 2 billion.

3. What you don’t hear is that it was successful in India re the other objectives I mentioned. Tax collections improved 14 and 18 percent respectively in the 2 years following demonetization. Big drop in counterfeiting of the 500 and 2000 rupees. Bank deposits increased and more money returned to the formal system. The asset management business saw growth as folks started to invest in mutual funds instead of keeping money under the mattresses. Why they say it failed is because of the cash crunch it caused and because 99 percent of the 2 notes they demonetized were returned- meaning there was no unaccounted for money in the system or criminals sold the money at discount and the buyers had it deposited (many think later was the case).

How much money will not return because it is black money? Hard question to answer. 217 billion of 1000 notes is circulating. It is hard to know how much is moving on the superhighway, how much on small roads, how much in *chochoros (informal roads) and how much is PARKED (the bit we are interested in). Money in your pocket, in shop drawers, in Mpesa, in Uganda, held in big safes at home by the corrupt and criminals – all = money in circulation. Why it is hard to tell in advance!

We will only know, when on the 2nd of October, CBK tells us how much of the 217 billion has returned. The amount not returning is the figure to watch. The guys who chickened out or ran out of time because it was a lot to return within the deadline. That money will be extinguished. It will be as though it never existed. Any amount not returned reduces CBK’s liabilities and is a profit to the Central Bank. Free money to CBK.

One strange thing I noted is – in December 2018, we closed with around 237 billion of 1000 notes. CBK today announced 217 billion. So in 6 months, we had 20 billion coming into the banking system. 2 possible reasons:

1. New banking products have attracted it – saw increase in fixed deposits.

2. Some folks had leakage (labda the Kieleweke sideĀ 😎)

All in all, the withdrawal of the 1000 notes = net benefit to the economy. If objective 1 is not met, 2 or 3 or 4 will be met.

I heard some noises from politicians (as usual) Lubbish! – Those are folks who will not help us find our stolen goat- in Nyathuna they have a saying- Angimituiria na umirite ndangimiona rikii. And the Igbo – An old woman will feel uneasy when dry bones are mentioned in a proverb!

You can follow Wehliye on Twitter

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