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    UncategorizedDemonetization: shot at corruption and informal economy

    Demonetization: shot at corruption and informal economy

    Date:

    Ethiopia unveiled new Birr notes for 10, 50 and 100 denominations, in addition to introducing a new Birr 200 note on Monday.

    Ethiopians have a three-month window within which they will be able to exchange old currency notes for new ones from the banks after the government demonetized its currency.

    According to Prime Minister Abiy Ahmed, the new notes will “curb financing of illegal activities, corruption and contraband.” “Money outside the banking system has been rising, affecting the liquidity of commercial banks. This is in addition to its impact on bolstering illegal trade activities”, said Abiy in a statement.

    He added that enhanced security features on the new notes will also cease counterfeit production. The new and old notes will remain in circulation for three months but the notes of 10, 50 and 100 denominations will stand canceled thereafter.

    When Kenya announced in June that it would issue new 1,000 shilling ($10) notes and destroy the old ones to fight corruption, many predicted chaos. India’s efforts to do the same by “demonetizing” rupees in 2016 led to riots, deaths and a dent in economic growth. A report by India’s central bank said more than 99% of the old banknotes in circulation before the ban had been handed in afterwards, suggesting most people who had had illegally acquired money had found ways to bank it legally.

    The so-called demonetization is designed to tackle corruption and flush out millions of birr held overseas, under mattresses and in bunkers by corrupt officials, criminals, tax evaders and shady businessmen, reinjecting the cash back into the formal economy.

    In Kenya, the four-month phase-out of 1,000 shilling notes proceeded well and achieved its overall objective of removing money obtained from illegal activity from the economy.

    Graft is the biggest hindrance to growth here in Ethiopia. The new banknotes help tackle corruption as the war against corruption is part of demonetization’s motivation.

    I expect that the demonetization drive exposes corruption – but will fail to eliminate it.

    The demonetization has to be conducted in a way that shades no doubt about how effective it will be in exposing money linked to corruption.

    As Ethiopia is demonetizing to tackle hoarding and illegal trade, the thieves in the government and relegated political forces will have a hard time as there is a considerable magnitude of liquidity outside of the money that circulates in the formal economy.

    The other sphere that will be affected significantly is the illegal border trading with neghabouring countries.

    The triumph of the bad guys in the economy has to be busted as the glory days when they were showy with their ill-gotten wealth are gone.

    Financing terrorism would also have a trouble. And the money prepared for ill political interest will be at least exposed.

    Due to the monetization financial transparency ascends so that government organs will have accurate data for administering the economy.

    Besides, bank deposits show sky rise. As a result investment increases as the banks’ capacity to lend gets a boost. However, through the process it is expected that inflation rises as liquidity increases. But, it is expected that more jobs would be created.

    Exchange rate, however, for hard currency is expected to increase as demand for hard currency increases to launder money acquired illicitly.

    Authoritarian governments are more corrupted than democratic ones. Ethiopia has been under an authoritarian regime for the last twenty seven years. Consequently, there have been a massive corruption which yields to a wide spread money laundering activities.

    More importantly, it is expected that the demonetization would tackle down money laundering. Money laundering is the conversion or transfer of property; the concealment or disguising of the nature of the proceeds; the acquisition, possession or use of property, knowing that these are derived from criminal activity; or participating in or assisting the movement of funds to make the proceeds appear legitimate.

    Money obtained from certain crimes, such as extortion, corruption, insider trading, drug trafficking, and illegal gambling is “dirty” and needs to be “cleaned” to appear to have been derived from legal activities, so that banks and other financial institutions will deal with it without suspicion. Money can be laundered by many methods that vary in complexity and sophistication.

    Money laundering involves three steps: The first involves introducing cash into the financial system by some means (“placement”); the second involves carrying out complex financial transactions to camouflage the illegal source of the cash (“layering”); and finally, acquiring wealth generated from the transactions of the illicit funds (“integration”). Some of these steps may be omitted, depending upon the circumstances.

    Ed.’s Note: The views expressed in this article do not necessarily reflect the views of The Reporter. The writer can be reached at [email protected]

    Contributed by Tagel Getahun

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