Friday 20 January 2017

The Global Demonetization Analysis

Demonetization can be largely associated with the transition of monetary assets. Exchanging the illegal tender with the legal one. Be it the transition from barter to bronze coins or from cash king to less cash society.  Demonetization in India was largely a hit on pirates’ buried treasure – Black Money. This was a part of long war on cash that the country has waged. Cash is just a tender issued by central banks and it cannot act as a commodity. Black marketeer consider cash as a revenue stream generated from illegal activities or activities which go beyond legal framework. In a rich country like India with poorer citizens, demonetization is a human issue as it also questions the earnings of low wager. I fear that war against black money would associate pain and even some collateral damage. The historic move of demonetization has always been cherished by nationalists and criticized by economists. Mostly because economists analyse by examples.

The issue of high value bank notes is not unique to India. The note in questions – Euro 500. European authorities and law makers had a difficult time with combating money laundering. A small bag of Euro 500 notes means a lot of money for black marketeers. And there is an added risk of its use by blow-yourself-up jihadis. 1,000 swiss franc note was the largest in European countries but its less in circulation than the Euro 500. The Euro was easier to launder with than the currencies it replaced. Before the introduction of Euro, Europeans ‘pirates’ practised excessive cash based tax avoidance. When forced to exchange the paper currencies, bundles of lira/ francs/ mark emerged in suitcases to buy other cash generating assets like real estate and gold.

The value of Euro 500 is too high for smaller economies of European union. These notes are rarely seen by the citizens in Eurozone. Euro 500 has a tag of everything going bad in European countries. This rare note has been nicknamed as ‘Bin Laden’. British and Spanish police are using these bills to track black money. Nearly 90% of Euro 500 notes were used in organised crime forcing UK to stop its use. In May 2016, European Central Bank agreed to the argument that the bill in question were used in illegal practices. ECB announced to phase out Euro 500 notes by the end of 2018.

The African struggle for demonetization didn’t go well for the economy. In 1982, Ghana president announced the demonetization of 50 Cedis note. The public was given two weeks to exchange their notes with paper chits. The paper chits would be redeemed later with legal notes of smaller denomination. They never were. Ghana shut down its border for two years as economic measure to control use of 50 Ghanaian cedi notes outside Ghana. The intent was honest – to shut down tax evasion and stop corruption by public authorities. People were insisted to submit 50 cedis in bank accounts. Then exactly one day before the deadline, Ghana announced for tax inquiry on those who submitted more than 50,000 cedis in bank accounts. In one stroke, people lost confidence on president and banking system. Post Ghanaian demonetisation, people preferred investing in physical assets and keeping foreign currency.

In 1984, Nigeria decided to go for demonetisation citing ‘‘there was too many money in circulation’’. The military government of Major Buhari sealed Nigeria’s border to catch black money hoarders. Unlike Ghana, ECB and India, Nigeria replaced all currency notes. Then the people who deposited more than 5,000 naira had their accounts blocked for several months. Anger in Nigerians was mounting and next year president Buhari was outthrown after a coup. The effect of demonetisation on Nigeria’s economic was a long-term disaster. 8 years later, 46 Nigerian commercial banks were declared as insolvent.

Zimbabwe, the country where inflation rate is 1200% had no other choice but demonetisation. A pack of biscuits cost more than 2 million Zimbabwean dollars. Zimbabweans prefer dealing in USD, Euro and INR to avoid truck load of cash. To tackle hyper-inflation, the central bank slashed 3 zeros from the note in a single night. Economist agree that demonetisation proved to be boon for Zimbabwean economy. But later, Zimbabwe decided to opt for USD. The demonetisation process also failed in Venezuela, in South America. Mafia hit country opted for rioting and looting which forced president Mudaro to extend the use of 100 bolivar bills. Demonetisation attempt in Myanmar and North Korea proved to be fatal as people died of starvation.

President Nixon of US decided to nullify bills above USD 100. The use of high denomination bills above USD 100 had shrunk to 1.2% from 6.5%. Demonetisation in US was largely aimed for promotion of payments through cheques. In 2016, several economists are mulling demonetisation of USD 100 bill to save US from recession. Australia successfully replaced paper currency with plastic notes to restrict counterfeit of fake notes. Pakistan, Philippines introduced new design of notes and phased out the call back of old currency notes. It can be said that impact of demonetisation depends on factors like economy strength and public perception. Until now, demonetisation across the globe hasn’t been good at-large. Can India change this?

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