CBK's currency move well timed

The Central Bank of Kenya’s (CBK) move to change bank notes is important because it touches on a tool useful in exchanging goods and services and the comforts of citizens.

On October 22, 2018, I wrote that CBK can use the new currency to get rid of the dirty money.

Introducing new notes and coins has benefits and costs and must be well managed because of its impact on the economic, political and social status.

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This change in notes is beyond complying with the 2010 constitution.

It is a means taming illegal cash transactions harmful to the economy. Dirty money allows graft and can’t be taxed.

An example of dirty cash could be the cash paid by sugar barons to MPs to support illegal sugar import; the amount received by those whose income but is unknown to Kenya Revenue Authority, thus not taxable.

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In many instances, this black money is invested in non productive assets such as gold. This dirty money has contributed to joblessness and is largely, inflation.

It also distorts asset prices. Dirty money that can be used to fund both human and drug trafficking, illicit trade, and undermine democracy.

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The most obvious result of the currency is that bank deposits will increase while the interest rates will fall.

Multiplier effect

When lending rates decline, more money will be advanced with bigger multiplier effect. The State will be able to collect more taxes.

If this move widens the tax base, then there is a possibility of lowering tax rates on individuals and businesses.  In the short run, there will be economic convulsions but that is a little price worth paying.

Since the announcement, some Kenyans have supported the move, others have rejected it. Others think it will starve terrorists of financing.

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At the end, there will be losers and winners. We hope this is not a political weapon as some have claimed.

However, if it is to tame bad politics so be it. The question now is whether CBK will achieve its objective of cleaning the financial system of bad money without hurting the poor.

This is because some of those with ill-gotten wealth, such a business that provide goods and services to citizen and changing notes might compromise their liquidity to the detriment of citizens.

I suspect CBK might not get an optimum result because it has given time to the dirty cash dealers to cover their backs such as backdating accounting.

We should expect the holders of the ill-gotten cash to convert the same into land, gold, diamond and even to involve in “repos” by “lending” to relatives and friends.

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It is possible that between now and October the prices of gold, land, real estates and similar assets will show surges and spikes.

Equally, we should expect a massive fall in prices of such assets when the exercise is over.

Bank outlets

What is surprising is that since the announcement, the change in activity at bank outlets is not visible.

This could mean that the plan to change new currency leaked or those affected executed their mission early and that many of us do not have also cash.

It could also mean the dirty money is not kept in the form of cash but in properties, normally real estates that are transferred to one person for a consideration paid by another jewellery.

If that is true, then targeting such cash might not be a successful strategy to fight ill-gotten wealth.

However, CBK has a strong research department aware of the significance of bad money in circulation that must be put out buy circulation to stop buy high-value assets through use of this dirty money.

At one point, there will be less liquidity and prices will tumble. However, for a better tomorrow, we should temporarily bear such costs.

CBK might get better if the 1000 notes were unusable from June 1.  That would have stopped those with dirty cash from changing them for high-value assets.

However, in the long run, CBK must work towards practices that help the government win war against tax evasion and graft.

The State ought to restrict the cash that its officers can withdraw from banks. Remember the huge cash withdrawn by National Youth Service suspects? 

-The writer teaches at the University of Nairobi

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