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.
