Ethiopia: Economic Demonetization Long Overdue but Necessary Measure

Ethiopia has recently issued a package of new bank notes as a part of its efforts to curb cash hoarding, illegal trade and illicit financial flows.

According to Global Financial Integrity (GFI) report from 2013, the country has lost close to 12 billion dollars since 2000 to illicit financial outflows. The country, according to Prime Minister Abiy Ahmed has expended 97 million USD to print the new currencies. Citizens have three months to replace the old notes with new ones.

Changing currencies with new ones is not a novel phenomenon in Ethiopia. In fact current change of bank notes is the third round in a period of about three decades. Even during the imperial regimes, bank notes have been changed for four times. Given the damage that illegal financial transactions and contraband has inflicted on the other wise volatile economic system of the country, the current change of notes is indeed long overdue. In fact local banks have been calling for change due to the effects that money outside the banking system has continued to affect the liquidity of commercial banks.

The government has in recent years been forced to print currencies to finance its budget deficit only sustained by foreign lenders. Broad money supply has been increasing by 20% annually according to the National Bank of Ethiopia over the last 15 years and skyrocketed from 104.4 billion Ethiopian birr to almost 1 trillion birr this year.

Demonetization as a financial strategy according to economists could help to ease inflation at the rate of 30 percent in the economy. As a result, banks will have access to billions of Birr but economists warn that it should be handled with the highest level of care to avoid any level of economic backfire including exchange panic in the form of purchase of goods for hoarding.

The government was forced into demonetization of bank notes not only because of the above mentioned factors. Over the last four years billions of paper money has been circulation among forces that have always been busy destabilizing the country through paid hooligans, riffraff who were out to destroy the federal order and the nascent democracy in the country. Suffice it to mention what has happened in Burayou Town over a couple of years.

Corruption in the form of gifts, unlawful use of official government positions for personal enrichment has been left unpunished as it was done through clandestine connections involving government officials and lower level bureaucrats. The entire scenario has resulted in skyrocketing of prices of goods and services particularly in agricultural commodities including badly needed food to the items.

Absence of good governance, lack of effective and quality service delivery in key sectors, unrests that resulted in the death of innocent citizens and massive destruction of public and private property, manmade and natural disasters have complicated the responses that the government has intended to introduce.

Contraband trade in gold and other precious stones and metals contributed dwindling of gold purchased by the National Bank every year. Besides, black marketing in hard earned hard currencies was almost officially conducted except for occasional raids conducted on exchange spots conducted by the police and security forces.

The Ethiopian security forces and the police had rounded up millions of hard currency notes that were to be smuggled to the neighboring countries and other countries further triggering complications in the shortage of hard currency in the country. Besides printing and circulation of counterfeit of fake notes has been going on in different parts of the country.

The illicit financial transactions paused greater security issue for the nation threatening the entire socio-economic and political system in the country. At this point in time when the country is grappling with the COVID-19 pandemic, change of notes even become more relevant for a country that is left mainly to its own resources. Government expenditure in the areas of health and disaster management as well as completing major mega projects like GERD, large irrigations schemes require financial resources that could be secured by strict control over the country's financial systems. The changes introduced in bank notes would help to regulate public finance to effectively complete the major development projects in the country.

The rate of inflation that has continued to grow in double digits in the country will also have far reaching repercussions on the entire national economy but also severely jeopardizes the livelihood of ordinary Ethiopians.

The merit of the economic demonetization lies in the fact that it would contribute to the economic stability for the country and will facilitate smooth, transparent and accountable financial system that could be monitored and evaluated by the National Bank of Ethiopia.

Given the current clandestine oppositions against the broad based reform program in the country, change of bank notes would also contribute to the political stability in the country as a major precondition for peace and security for the nation. As I have noted earlier, the positive contributions of the changes in bank notes could have been maximized if it was conducted much earlier in the previous fiscal year.

Editor's Note: The views entertained in this article do not necessarily reflect the stance of The Ethiopian Herald

More From: Ethiopian Herald

Don't Miss

AllAfrica publishes around 900 reports a day from more than 130 news organizations and over 500 other institutions and individuals, representing a diversity of positions on every topic. We publish news and views ranging from vigorous opponents of governments to government publications and spokespersons. Publishers named above each report are responsible for their own content, which AllAfrica does not have the legal right to edit or correct.

Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica. To address comments or complaints, please Contact us.