DEMONETISATION

Rushing exchange of Sh1,000 notes bad for currency

Reducing time frame would only cause inflation and devaluation of our currency.

In Summary

• It will also make it difficult for anti-corruption officers to track down stolen money.

• Plus, we have few people holding billions of stolen money in the Sh1,000 denomination.

The new notes.
The new notes.
Image: ENOS TECHE

During Madaraka Day Central Bank of Kenya Governor Patrick Njoroge unveiled the new currency notes, which are now legal tender courtesy of a Gazette notice issued on May 31.

This was not as surprising as when Njoroge mentioned the demonetisation of the old Sh1,000 note. Anyone holding the old Sh1,000 note has until October 1 to exchange it for the new one.

He said fake currency was making rounds in Kenya and the region as well.

 

Thirty percent of Africa’s financial wealth, about $500 billion, is hidden in offshore accounts. This is according to The Hidden Wealth of Nations by Gabriel Zucman. 

However, the money hidden in offshore accounts aside, we have had people in Kenya being caught with money hidden in their houses. For example, not too long ago a National Land Commission official was caught with Sh17 million in his house. This gives us reason to believe that people are hiding millions or even billions of cash in their houses.

The move by CBK will help in the war on corruption. If those piling billions in Sh1,000 notes fail to beat the deadline, then the billions they have stolen will be as good as toilet paper. Attempting to exchange Sh1 million at a go is enough to arouse the suspicion of the EACC and other authorities.

This happened in India when it demonetised its 500 and 1,000 Rupee notes. Its citizens were given only 50 days to exchange these notes for smaller denominations. These smaller denominations were depleted in some banks before the process ended, causing further confusion.

The only option is to engage in the rampant purchase of physical assets. However, the DCI, DPP and EACC are more vigilant than ever. 

In a church service in Kahawa Wendani, MPs allied to Deputy President William Ruto asked the President to order the reduction of the timeframe for exchanging the Sh1,000 notes to about a week or so. This proposal was ill-advised.

If the period is reduced, then it means that people will suddenly engage in impulse buying at a higher rate than if we stuck to the original deadline. There will be much more money chasing fewer goods.

For example, if two people wanted to buy a shirt now we will have 10 people wanting to buy the same shirt. Thus, because of an increase in demand, its price will increase from let’s say Sh200 to Sh500.

 

All goods will follow the same pattern of suddenly increasing in prices. This is called inflation. Concurrently, you will now require Sh500 to buy the same shirt you will have bought with Sh200.

This means that our currency will be devalued because you need more money to buy what you would have bought with lesser money some time back.

It will also make it difficult for anti-corruption officers to track down stolen money. This is because even those who have made money through genuine means will be hurriedly purchasing assets or queuing in banks to exchange their old Sh1,000 notes for new ones.

Masterminds of corruption will take advantage of this chaos to acquire the new notes through unscrupulous means or dirty deals. The other risk of reducing the timeframe is that the Sh1,000 new notes may be depleted unexpectedly.

This happened in India when it demonetised its 500 and 1,000 Rupee notes. Its citizens were given only 50 days to exchange these notes for smaller denominations. These smaller denominations were depleted in some banks before the process ended, causing further confusion.

The about 120 days are enough to exchange the old Sh1,000 notes for the new ones. This is considering that we have few people holding billions of stolen money in the Sh1,000 denomination.

Reducing this time frame would only cause inflation and devaluation of our currency. It would also create chaos for them to take advantage of and increase the risk of the new Sh1,000 running out unexpectedly in some banks, creating confusion.

Economist and founder of The Bizconomist Journal. [email protected]