This week Prime Minister Abiy Ahmed’s Government revealed the new currency note. During the announcement of the introduction of the new notes, Prime Minister Abiy noted the large amounts of money circulating outside banks exacerbated the problem and the new currency would play paramount role in resolving the problem.
In its press release, the Ethiopian Economic Association (EEA) has its own warning opinion regarding the demonetization suggesting that it may spell macroeconomic danger. The association in its press release indicated that thorough analysis would be necessary to quantify the potential effects of the demonetization.
Government officials give green light to the move suggesting that it help to curb illicit money transfer, counterfeit and contrabands. Enhanced security features on the new notes aimed at making them more difficult to counterfeit. the notes that replace the old Birr 10,50 and 100, a new 200 Birr note is issued by the government. The 5 Birr note remains unchanged and will be turned into coin format soon.
According to EEA the immediate impacts may include a surge in deposits and hence savings; removal of fake currency notes. Apparently EEA in its statement also predicted that “black money” stock could also be wiped-out from the economy and size of taxable economy may increases at the revenue end.
Furthermore, the association indicated that increased number of people with bank accounts may occur, which subsequently could increase financial inclusion that could be as immediate impact.
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.”
EEA 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.
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.
