In November last year the Indian government gave its
citizens 50 days within which to turn in the
highest denomination notes for smaller notes in a bid to among other
things raise revenues from undeclared incomes, mostly from the corrupt and
black marketeers.
The scrapping of the 1000 and 500 Rupee notes that were
scrapped accounted for 80 percent of the money in circulation by value.
There was some reported discomfort as people lined up to
deposit their cash holdings with the banks.
Deposits in the banking sector
jumped and banks were forced to reduce lending rates.
But also as a result millions of dollars in untaxed income
showed up overnight that has the Indian revenue authorities licking their lips
with excitement.
The down side is that the real estate market in the big
cities has slumped by as much as half compared to the same period last year.
"With the improved banking and payment systems that have removed the need for the carrying of large sums of money around isn’t it about time Uganda considered such a move as well? If only to increase our savings in the formal sector and to trap more taxes....
Imagine if we announced that we were scrapping the sh50,000,
sh20,000 and sh10,000 notes, it will release those fabled money vaults in rich
men’s houses into the formal banking sector for all of us to take advantage and
like in India, uncover untaxed income that could very well boost our revenue
collections.
Of course you can expect a bit of discomfort initially just
as we felt with the currency conversion in 1987, but we will soon get over it.
We will be fine.
It goes back to the point that we are poor as a country not
for lack of cash or resources but more because this cash or resources is not
aggregated into meaningful sums within easy reach of the productive sectors of
our economy.
In 2011 cash in people’s pockets and under their mattresses
accounted for just under 20 percent of the total money in circulation but this
compares poorly with more developed economies where the figure is about two
percent.
The difference between the two numbers is worlds apart as it
suggests greater efficiency for the productive sectors to access credit in the
west than Uganda, efficiencies which rise exponentially with each percentage
point difference.
"The beauty of such a move too will not affect the poor as they are rarely in touch with the larger currency denominations. In fact it may end up being beneficial to them in incentivising them to get their own bank accounts....
One may argue about the efficiency of private banks in
deploying resources, but we will cross that bridge when we get to it, let us
first raise deposits.
This too will help the central bank control inflation much
more efficiently since the banks are responsive to the instrument it uses in
tightening money supply.
Of course one can expect virulent opposition to such a
suggestion, especially for the direct beneficiaries of these unmonitored money
movements.
As we have seen with India the first casualties would be the
real estate sector which has for long been used to launder the illicit funds in
the economy, explaining the property boom of the last few years. It is not
unusual to carry out real estate transactions with bundles of cash.
The need for the economy to be more fomalised cannot be
overstated. Economic data will be more representative of the real economy
allowing investors to make more informed decisions, because it will make
interventions easy to make and their outcomes more predictable.
For the rest of us mere mortals who don’t carry wards of
cash around anyway we will continue using the ATM or making bank transfers to
settle obligations or use mobile money.
What as a country we should never do is what Zimbabwe did
and is trying to do now.
A few years ago because inflation which was in six digits
was making printing more and more money impossible, the Zimbabwe dollar was
shelved and the country adopted US dollars, South African Rand and a hodge
podge of other currencies.
The hyperinflation was caused by the annihilation of the
productive sectors especially agriculture and the printing of money to appease
political constituencies as tax revenues begun to drop off.
But now Harare finds itself in a catch 22 situation because
since the productive sector had been gutted they can’t export enough to earn
the forex they need to circulate.
As a way around it Zimbabwe has issued dollar bonds, a kind
of currency. The citizens don’t want to know. A currency is only as credible as
the trust the users have in the government issuing the currency.
It does not take a prophet to see what will happen to
ZImbabwe in 2017.
"Either Harare has to swallow humble pie and attract the white farmers and industrialists back – not unlike Uganda and the Asians, privatise the state enterprises and fall back in with the Bretton Woods’ institutions to help rehabilitate their infrastructure and get the economy up and running...
Or they bite the bullet hope to ride out the public dissent
as the economy goes further into the toilet and hope for a miracle for things
to turn around.
They will probably hope for the latter rather than the
former and the end game is certain.
