EEA’s analysis and advice to government on demonetization

Ethiopian Economic Association /EEA/ has urged government to strengthen its directives and regulations to limit cash holding and withdrawal to the success of the demonetization.
Last week, the government announced the replacement of old birr notes with new notes which have enhanced security features and other distinctive elements. The new currency notes replace the 10, 50 and 100 notes while an additional 200 birr note was also unveiled.
According to EEA, the introduction of the new birr notes has both financial and real economic implications. Demonetization can become a stronghold if it is accompanied by effective regulations and a keen follow-through of the recent directives presented by the National bank of Ethiopia to limit cash amount of holding and withdrawal.
In promoting use of non-cash payment instruments and ensuring safety and efficiency of the payment system on May 2020, Ethiopian Central Bank issued a directive limiting cash withdrawal for individuals to businesses. The move was aimed at tackling tax evasion and encouraging a more efficient use of cash. Under the directive, individuals cannot withdraw more than 200,000 birr per day the ceiling for total withdrawal in a month has also been set at one million birr, also for juridical persons the directive allows 300,000 birr per day withdrawal and 2.5 million birr per month.
“Demonetization could contribute to accelerating digitalization since Fintech is the future and it could also reduce transaction costs,” states EEA’s press statement.
As the association articulate the enforcement of these directives is crucial to the success of the demonetization.
The government disclosed that 2.9 billion birr notes with the value of 262 billion birr have been printed. For printing the money the government has paid 3.7 billion birr which on average means 1.275 birr per note. The government has said that replacement exercise should be completed within three months and anyone who has more than 100,000 birr should make the change within the period of a months’ time.
However, according to the association the replacement needs to be sped up. “Currency in circulation may decline due to slow replacement of notes which requires speedy implementation of demonetization within a short period of time,” Reads the press statement of the association. Apart from the association banks have also been raised the issue of timing and both agree that the time should be sped up. According to Abie Sano, president of Commercial Bank of Ethiopia and current head of Bankers Association, the period should be reduced to one month from three months of currency changing time. He added that the time frame that is given for those who hold more than 100,000 birr should reduce to 15 days and the amount to drop to 50,000 birr.
According to the association the decision to change the notes could have both short term and long term impact, including a surge in deposit and saving and population with bank accounts increases, which could increase financial inclusion.
As the association states the newly introduced 200 birr note could have economic consequences as it could result in a shift of preference towards holding currency, “The optimal mix of the currency denomination has macroeconomic consequences. The introduction of higher denomination (200-birr notes) may result in a shift of preferences towards holding currency instead of deposits. The accumulated money, in cash form, if channeled in the banking system will be more productive. It could contribute to curbing liquidity shortages, and become a source of investment finance,” the press statement states.
According to the plan those who come up with 10,000 birr should save their money in banks, while banks still insist that cash could go as low as 5000 birr for saving.
In the medium term impact according to the association the decision could increase governmental revenues and taxable money and bring more money to the business in the tax net. Improve the effectiveness of monetary policy instruments (as more money moves to the banking sector) .
Prime Minister Abiy Ahmed has claimed the step will help to combat hording, counterfeiting, corruption and other economic problems necessary to salvage the country’s fractured economy.