The announcement on Madaraka Day that the current Sh1,000 note — Kenya’s highest currency denomination — will not be legal tender come October 1 has elicited mixed reactions. It’s expected to deprive hoarders of money outside the banking system, the easy movement and storage that the note affords.
Underlying this is a perception that people largely hoard money for only one reason — to hide proceeds of crime or counterfeit money printed by “wash wash” merchants. This has made demonetisation be seen as a high noon for criminals.
But experience in other countries — such as Zimbabwe, Eritrea and India — should somewhat temper the lofty expectations. In 2016, India demonetised the 1,000 rupee note in a bid to get rid of dirty money and bring the clean money back into the system. To its surprise, virtually all the old notes were exchanged for new ones with a tiny fraction converted into other assets, notably gold.
Hoarders found ingenuous ways to have unsuspicious amounts deposited in financial institutions or expedited household, farm, construction and factory activities to pay more wages to unbanked workers in cash. As a result, inflation surged and the currency depreciated with far-reaching effects on the economy.
Like India, in Kenya, cash is king. One of our challenges is curbing inflows of cash through porous borders. These are believed to back the mushrooming middle-income eateries, downstream petroleum market, high-capacity personal vehicle imports and acquisition of property in prime areas at inflated prices.
The other is that corruption networks and ‘tenderpreneurs’ tend to be paid in hard currency through overseas accounts held by shadowy companies registered in tax havens. When the National Treasury targeted this money through an amnesty issued two years ago, which expires this month, a fifth of it — estimated at Sh1 trillion — is said to have been repatriated.
Unlike in India, however, demonetisation in Kenya is an escalation of several recent policy actions which, when combined, should have a bigger impact. The anti-money laundering legislation, the know-your-customer requirements for banks, seizure of assets acquired through proceeds of crime and limits on non-electronic bulk (cash and cheque) payments should ensure that illicit money is kept out of the system and its holders held to account.
Key to this is enforcing compliance through heavy regulatory penalties for intermediaries who flout the rules. The other is swift handling of potential litigation so that it does not undermine confidence in the currency. Over time, there should be constant review of measures to discourage cash in big transactions and, if need be, even withdraw the Sh1,000 note altogether.
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