‘Demonetization of old Ksh.1K notes did not filter out dirty cash,’ IEA says
The demonetization process, carried out in 2019, did not achieve its intended purpose of ridding the economy off black money according to new findings by the Institute of Economic Affairs (IEA).
According to the policy think tank, the bulk of Ksh.1000 notes which failed to return into circulation likely represents sums held by Kenyans who could not exchange their notes in time including pastoral communities and citizens in the diaspora.
In their argument, the IEA argues the sum of Ksh.1000 notes filtered out is merely Ksh.7.39 billion representing just 2.8 per cent in value of all circulating currency at the end of the process and only 0.1 per cent of gross domestic product (GDP).
“It is not true to say that the amount sieved represented black money. From the evidence, it is clear that not all monies that failed to return to the Central Bank of Kenya (CBK) were dirty,” said Maureen Barasa a researcher with the IEA.
Moreover, the think-tank’s researcher argues the government assumed that all dirty money proceeds were held in physical cash despite the existence of a variety of wealth storage holdings.
“There are diverse ways of storing wealth, one can buy property or jewelry. From this, we can confidently state that demonetization as a purpose to face out black money is a fallacy and it did not therefore achieve its intended purpose,” she added.
The findings by the IEA align to questions raised by other experts in the financial system, who at the end of the demonetization exercise which run between July 1 and September 30 had more questions than answers on the results of the process.
“The CBK may as well have over-estimated the sum of money held in the ‘black economy’. Alternatively, illicit cash might have been well embedded in the system to filter right through the sieve,” Kenya Business Guide research analyst Titus Maina told Citizen Digital in a September 2019 interview.
During the three month process, the CBK put to waste Ksh.7.39 billion representing the value of Ksh.1000 notes that were not handed over at the reserve bank for new notes.
While the success of the process has remained in doubt including the size of illicit Ksh.1000 notes circulating in the economy before the exercise, CBK Governor Patrick Njoroge has been quick to insist the process had met its intentions.
“The money was never in the system and it never came in. This money is neither in circulation today,” CBK Governor Patrick Njoroge told a news conference marking the end of the exercise on October 2, 2019.
The demonetization exercise begun with Ksh.217 billion worth of Ksh.1000 notes representing 83.1 per cent of currency in circulation.
In the end, only Ksh.209.66 billion worth of the old currency notes were exchanged for new Ksh.1000 notes leaving the balance of Ksh.7.39 as filtered cash.
Other demonetization exercises to tackle illicit financial flows around the world have also ended in similar doubts.
In 2016 for instance, India’s demonetization exercise saw 99.3 per cent of all targeted notes return into circulation casting doubts into the success of ‘cleaning monies’ while last year in Trinidad & Tobago, 94.2 per cent of targeted currency sifted back into circulation.
Other motives for demonetization include the modernizing of currency in circulation, statute requirement to change to new currency and the withdrawal of high value notes to combat hyper inflation.