Money is a collective delusion. People agree that little slips of printed paper are really worth something, and approximately how much they are worth. If everyone believes this really hard, everyone can use money as a store of value, a medium of exchange, and a unit of account.
People can also store a pile of banknotes and have confidence that it will still be worth something when we want to spend it. Whenever money goes into the Bank, it will add value before it once again gets into the hands of customers. It is also difficult to make plans nationally unless all the money is in circulation.
However; in some cases, both people and government in a given country will be put at risk. People will lose their confidence in the government doubting that they could not get their currency credited in the banks. On the contrary, the government will also worry about the illegal circulation of currency notes that could occur in the country.
When the people lose confidence in the currency, some experts suggest two options for the government to consider as a course of action: it has to either restore confidence in its own currency, or use another currency, which the government cannot easily print more of.
Thus, many countries have ended experiencing hyper-inflation by making some foreign currency legal tender, no longer issuing their own currencies and using foreign money for everything.
Henceforth, the government of Ethiopia has selected the second option in order to tackle illegal activities in addition to stimulating and boosting the country’s economy.
The government has announced that the new banknotes will help to curb illegal activities and corruption in addition to safeguarding the country’s financial resources which had been in illegal circulation even in neighboring countries as a result of few groups’ greedy and irresponsible handling of the economy.
Appreciating the timeliness of the government’s decision to introduce currency change, Mekonen Abera, an economist by profession, told The Ethiopian Herald that first and for most, the change of the banknotes will stabilize the economy and boost investment as it is increasing investors’ confidence.
“As the government strengthens the security of the financial sector, investors will invest in Ethiopia.
This will play an important role in stimulating the country’s economy,” he said.
He further elucidated that the change of the banknotes will help to identify the legal currency notes from the counterfeit money. “It will also create an opportunity to identify anonymous, forged and corrupt business practices,” that, as to the government, had been the order of the day until recently.
It will also contribute to identifying individuals and organizations that are making profits, operating legally and those who abuse the law. Hence, besides taking punitive measures, it helps to bring the latter to the right track, he added.
As it was announced by Prime Minister Abiy Ahmed, over 3.6 billion Ethiopian Birr ($97 million) was spent to print the new currencies. Subsequently, Mekonen suggested that the benefits of demonetization can be strengthened if it is accompanied by effective regulations.
The currency change should be taken as a golden opportunity to neutralize illegal cash hoardings that are intentionally conducted by some groups to perpetuate economic sabotage and commit heinous crimes. At the same time, it will make bank credit an instrument for rapid economic development rather than being a tool for economic exploitation by causing artificial inflation.
Moreover, he agrees that the change in currency should not be taken as the only and lasting solution. He emphasized the importance of properly regulating the financial sector and allowing foreign banks to operate in the country. The government has to also further intensify its effort to get rid of the black market.
“But for a better economic advantage,” Mekonen continues “the commercial banks should substantially improve their customer services and branch expansion to meet current and future business expectations in order to mobilize domestic savings to the maximum possible extent”.
Wasihun Belay, also an economist, on his part stated the change of the banknotes allows the government to collect the money that is widely distributed in the market and helps control inflation. “Despite being costly and expensive, currency change is very important to the economy,” he says.
Although demonetization is an economic strategy used from time to time in developing countries to stabilize the currency and ease inflation, it is not without its risks.
According to Wasihun, the change will also increase savings as it will bring all the money to the National Bank that is essential for providing adequate funding to investors. “If the government wants to borrow money from a bank to fill its budget deficit, it will have a chance to make enough money. If corporations get enough credit, the country will have enough production. If there is enough production, there will be employment opportunities. When there are job opportunities, poverty is reduced,” he agreed.
According to statement by the Ethiopian Economic Association (EEA), there are areas that are likely to be affected and still would require further investigation following the currency note change. EEA also stated 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 the taxable economy may increase at the revenue end.
Recommending that it requires the speedy implementation of demonetization within a short period of time, EEA urged the government to be cautious about timing being critical factor in which currency in circulation may decline due to slow replacement of notes.