Tuesday, November 22, 2016

AN INTRIGUING WAY TO FIGHT CORRUPTION

Last week the Indian government announced it would be withdrawing the largest denomination notes from circulation as a way to combat corruption ahead of state elections.

Indians have until December 30 to turn in their big notes to their nearest bank. And that the deposit of large sums would have to be accompanied by an explanation as to their source.

The logic is that these large denomination notes allow for ease of storage and movement of large sums facilitating money laundering and tax evasion.

Why didn't we think of this before?

"Imagine if the government woke up one day and said they had demobilised the sh50,000 and sh20,000 note and that everyone in possession of them should hand them in to be replaced by smaller denomination bills...

To begin with, just like in India there would be a jump in deposits across the banking industry. According to reports deposits jumped a record six percent in the last quarter as connected types reacted to a leak about the impending move.

As shown above the move brings more of the money in circulation into the financial sector, which may have an effect on lowering lending rates and it's a move unlikely to adversely affect the majority, none of whom come in contact with big notes, but only that small group of people hanging on to large amounts of cash not earned above the table.

One they would have to suffer some discomfort and answer uncomfortable questions why they have such huge amounts in cash and, after the transition shifting those sums will become that much more difficult

Currently sh50m in cash is ten bundles of sh50,000. But if the highest denomination were sh10,000 you would need 50 bundles. A much more cumbersome weight to lug around. But why not reduce the denomination to sh1000 altogether?

The reason for the huge notes in the first place was to ease the movement of money by people who operate in large volumes like traders. But that was the argument being made when payments, even salaries were made in cash. UCB and one other bank were the only ones with a countrywide network, ATMs and mobile money were non-existent.

By having smaller denominations it would force more people to get bank accounts or at least mobile money accounts. So if for instance I have brought my cows, milk or matoke to town for sale the buyer either writes me a check for my millions, does a transfer to my account via his mobile phone or pays me using mobile money.

"Meanwhile for those with questionable hoards of cash it will be more expensive to store. In effect if we made the highest denominator  sh1,000 it will take you fifty times more space to store your loot. Corruption can not be eliminated but by making it a bit more difficult to operationalize would help reduce it considerably...

But the world can learn from us too.

About two years ago government announced the single account in Bank of Uganda for all ministries.This would replace the thousands of ministry accounts peppered around the banking industry.

Now ministries can only see releases from the central bank against predetermined work plans unlike previously when the finance ministry would release money on a quarterly basis as per the budget.

With one fell swoop the tap of money that was leaking out of government was turned off, bringing general inflation under control and returning sanity to asset prices.

"It has also revealed that a lot of our consumption has been buoyed by this hot money. Otherwise how do you explain the tightness in cash when the government budget has more than doubled in the last five years?...

Previously these numerous accounts were "hard" to keep track off with money disappearing into them never to be seen again, financing land speculation, conspicuous consumption by a small group of officials in government and general financial indiscipline.

The argument from some quarters is that there has been a huge shift of resources to development projects, a lot of whose money is spent abroad but the recurrent budget -- salaries and supplier payments has also grown with the general budget so that argument doesn't real stand up to scrutiny.

This calls to mind what happened in the early 1990s when government improved it's fiscal discipline by shifting to cash budgeting and the outcry that followed.

Even then businesses collapsed, banks were stressed and a whole industry of air supply was badly wounded.

The political pressure was intense both from outside and inside government to loosen the fiscal straight jacket government had imposed on themselves.Thankfully the government didn't buckle in its resolve. One can imagine that even now the pressure is intense to see a return to easier times. And again government should not waiver in its resolve.We will get over it.

"The reason to clamp down on corruption can not be overemphasized. The proceeds from corruption concentrate money in a few hands, distorts the markets discouraging genuine business and ultimately possesses a security risk as the beneficiaries will do anything to keep the rackets ticking over....


Of course the beneficiaries while they may be few are very loud and boisterous and create a perception that the sky is about to fall, but past experience has shown this is not true.

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