Demonetization may spell macroeconomic danger, EEA
The Ethiopian Economics Association (EEA) said on Thursday that the introduction of new banknotes and denomination into the monetary system might cause a shift in deposit preferences towards holding currency instead of depositing in the bank.
In a statement, the Association warned that the new 200-birr denomination might bring about unforeseen macroeconomic consequences.
According to the EEA, the optimal mix of currency denominations has an essential significance, and “the introduction of a higher denomination, a 200-birr note, may result in a shift of preference towards holding currency instead of deposits.”
The statement the EEA has sent to The Reporter also cautioned that the sluggish replacement of notes might result in a dwindling circulation of currency in the economy. Hence, the EEA advised the government to speed up the demonetization process as timing is a critical factor for preferable outcomes of the currency change.
Since the penetration of new currencies requires careful handling in rural and remote areas, the EEA suggested availing the new currency notes in those areas on time could help dodge unintended implications.
Welcoming the central bank’s measure to introduce the new notes, the Association indicated that the change has short, medium- and long-term impacts. In the short run, the immediate impacts are surges in deposits and increased savings. Fake currency notes will likely vanish, and the stock in the "Black Market" will be wiped-out scaling-up the size of the taxable economy. The EEA highlighted that the number of bank accounts is likely to increase, positively impacting the financial inclusion status of the country.
The preferable outcomes in the medium and long-term periods are that of growing revenues for the government with taxable money also rising, and more businesses joining the tax system. The new currency will also help stabilize the double-digit inflation; the statement signaled. The recent consumer price indices show the inflation rate stands at 23 percent, whereas food inflation reached 26 percent.
Introducing the new banknotes on Monday, September 14, 2020, the Governor of the National Bank of Ethiopia, Yinager Dessie (PhD), said that various factors like collecting money out of the banks, controlling illegal activities like contraband and corruption, and improving the liquidity of the banks drove the currency swap. Apart from these, improving the security features of the Birr is also an important factor because the previous banknotes were prone to counterfeit as a result of unimproved security futures.
Yinager further indicated that the currency control would result in improved revenue for the government because money will be directed into the banks so that it would be possible for authorities to know taxable incomes. Bigger denomination notes will also be helpful to minimize printing costs.
The government spent 3.7 billion birr to print 2.9 billion notes of 10, 50, 100, and 200 birr denominations with a total value of 262 billion, Yinager told The Reporter. He also added that most of the printed money has already reached the country.
Cautionary measures to prevent money located in neighboring countries from entering the country are of paramount importance, Yinager stressed, adding that theft during transportation and distribution should be prevented through strong cooperation of the defense force, the federal police and the intelligence.
While the plan is to completely change the old notes by the new ones within three months, the President of the state-owned Commercial Bank of Ethiopia Abie Sano recommended completing the swap within a month. People with more than 100,000 birr at hand should change their money within a month.
However, following the issuance of the new notes and the mandate given to security officers and bankers to watch out for any potential illicit activity surrounding the demonetization project, a number of people are reporting unlawful arrest and repossession of cash they have been traveling with. Apparently, business people and the public are facing potential repossession of cash they were found with on the pretext that they were involved in an illegal activity of moving large amount of money. Yinager had to offer some explanation in a presser he called on Friday, directing security officers to observe the legally allowed limit on liquid cash, which is 1.5 million birr.
Yinager said that citizens are legally allowed to move as much 1.5 million birr in cash and they should not be penalized that. Apart from that, on busy border crossings like Ethio-Djibouti border, he reaffirmed that citizen can travel out of the country with cash as much as 30,000 birr and reenter holding as much as 10,000. Furthermore, some business activities like perol stations woould require dealing with a lot of liquid cash and officers should take into consideration the kind of work.
Nevertheless, Yinager has announced a lot of foiled attempt by individuals holding illicit cash to launder the money through various means; among these are microfinance institutions and the governor has issued a stern warning to microfinances that the strict rules issued to banks are much applicable to them and should stay vigilant.
Explaining the reason for the change of birr notes, PM Abiy Ahmed (PhD) said that the primary reason for the swap is to mend the handicapped economy, a conclusion reached by an assessment done under the auspices of the Home Grown Economic Reform (HGER).
“It is one of the measures intended to halt the downward spiral of the economy,” Abiy said.
The Prime Minister also warned banks to strictly follow instructions and directives for the distribution of the new notes and avoid any kind of fraud and forgery. “If you are discovered getting involved in any kind of mal-practice, you won’t be a bank tomorrow and the CEOs will be barred from working for any financial institution in the country,” he told bankers gathered in the meeting hall within the Prime Minister’s Office (PMO).
Contributed Birhanu Fikade and Brook Abdu