Let CBK use new currency to get rid of dirty money

DeLaRue CEO Martin Sutherland and National Treasury Cabinet Secretary Henry Rotich during the official signing of a joint agreement between the government and DeLaRue Currency and Security Printing at Treasury Building last year. [Beverlyne Musili, Standard]

The Central Bank of Kenya (CBK) can tender the currency deal after the Court of Appeal upheld its decision to procure the legal tender from British firm De La Rue. The printing and supply of new generation bank notes case is however headed to the Supreme Court.

This could turn out to be a pompous period to the financial and money markets as well as economic growth.

The important news is that CBK can be allowed to replace the current with new outlook ones if it wins the case at the apex court. The focus shifts to the benefits and costs of introducing the new notes, and how CBK can use the process to address graft in money deals and lockout the cash that is unaccounted for.

Financial markets and intermediaries are vital to a well-functioning economy as they channel funds from those without productive use to those who do.

In economies where money is not managed well, traders cannot acquire funds to set up businesses that would help grow the economy.

In financial markets, a core stock in trade is money; and that cash can either propel financial markets or financial markets propel money.

Changing currency is a delicate and costly affair as it impacts on safety and image of new notes.

However, countries change in currency to introduce new security features that counterfeiters can’t fake.

Political issues

A change in currency notes could address economic, social and political issues.  The idea of currency change has its roots in bad politics.

 There people who wanted a change because they did not like the then president’s portrait on the currency.

Our problem with current currency notes is that there are huge amounts of them in counterfeits in circulation.

In supermarkets and retail outlets, it is not common to see fake notes displayed as a warning to potential victims about the existence of counterfeits. The existence of the counterfeits it makes it difficult being certain about the currency in circulation.

Economists say knowledge about money in circulation is a consequential input to the conduct of monetary policy.

Monetary policy is key because it impacts on the level of economic activity and the quality of life.

When changing currency in 2016, Indian Premier Narendra Modi asserted that ‘black money and graft are the biggest obstacles in eradicating poverty’ and that the vice manifests itself in black money.

India used the change in currency to crackdown on graft and illegal cash holdings. Black money is cash illegally obtained or not declared for tax purposes, and there could a lot of that in Kenya.

Their people who drive around with millions of cash in their car boots, and you wonder where they get this money from. Recipients of black money must hide it; spend it only in the underground economy.

Legal cash

Those who hold black money can give it legitimacy, by converting it into legal cash through laundering.

The money from the illicit activity is considered dirty, and the process “launders” the money to make it look clean’. If there is black money in our country, then CBK can use this change in currency to mop out the dirty money.

CBK must do what India did - keep the current change date secret and allow only a few days but focus on the most abused currency notes.

In the case of this change, CBK should work out a scheme with the Kenya Revenue Authority to net tax cheats and collect more levies. There should also be a clear deadline beyond which the old notes are unacceptable for transactions.

Those coming with large amounts of cash should be required to explain the source and I guess there will be resistance to this change from holders of black money.

This process will be a new start for CBK as it offers a chance to the bank of last resort to know the amount of money in supply, which is critical to monetary policy.

Citizens are aware of social and economics coats associated with inflation which leads to lower economic growth.

Inflation makes it hard to plan. Not surprisingly, policymakers in Europe have made it clear that the primary objective of Central Bank is price stability.

CBK contains inflation, but this can only be achieved if its officials know the amount of money in circulation.