News: Ethiopian Economic Association weighs on potential effects of demonetization

By Medihane Ekubamichael
@Medihane

Addis Abeba, September 18/2020 – The Ethiopian Economic Association (EEA) has weighed on the potential effects of Ethiopia’s recent demonetization in terms of its economic implications both on the financial and the real economy.

This week, the government of Ethiopia has announced the introduction new currency notes, with enhanced security features. The association in its press release indicated that thorough analysis would be necessary to quantify the potential effects of the demonetization.

There are areas that are likely to be affected and still would require further investigation. 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.

EEA also indicated some medium to long-term impacts that potentially could result following the demonetization. In this regard it described that it was likely to increase in government revenue as more taxable money is declared and hence brings more businesses in the tax net. Stabilization of inflation is also anticipated.

The association predicted an increase in investment; as such accumulated money in cash form, if channeled in the banking system, will be more productive. It could also contribute to curbing liquidity shortages, and become a source of investment finance.

The currency note change, in its long term impact is also predicted to improve the effectiveness of monetary policy instruments (as more money moves to the banking sector).

Demonetization could contribute to accelerating digitalization and fintech as they are the future of the financial system that is known to reduce transaction costs in well-developed system.

However, 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. EEA recommended that it requires speedy implementation of demonetization within a short period of time. EEA also urged that optimal mix of the currency denomination has macroeconomic consequences in which the introduction of higher denomination (200-birr notes) may result in a shift of preferences towards holding currency instead of deposits. Rural and remote area penetration of new currency is also pinned as point of concern that may require careful handling.

The Association, one of the oldest in Ethiopia, also suggested that the benefits of demonetization can be strengthened if it is accompanied by effective regulations. The NBE has recently taken measures to reduce the amount of cash holding and withdrawal limits through its directive, which has implications on the demand for currency over deposits. The enforcement of these directives is crucial to the success of the demonetization, EEA said in a statement. AS