Demonetization likely to become zero-sum game

Any lover of action movies would, at some point, have encountered a kidnapping scene. Typically, a ransom demand is made. A deep-throated voice makes a call to the victim’s associates to ask for cash in old, clean unmarked bills. The captive is then released much to everyone’s relief, whilst the kidnappers are arrested after a series of carefully laid plans that involve following the money trail. Life does imitate art. Real world events are inspired by creative works. Nowhere is this seen more clearly than when acts of corruption are contemplated. In the world of underhand deals or skulduggery, cash is king!

Central Bank of Kenya (CBK) Governor Patrick Njoroge recently announced a notice to withdraw Kenya’s Sh1,000 bank note and to replace it with a new generation one. He attributed this withdrawal to concerns that the notes were being used for illicit financial flows. Kenyans have up to October 1, to trade in old notes for new, after which the old will cease to be legal tender.

Kenya may be following the Indian government’s example in demonetization, that is, the withdrawal of an existing currency. On the night of November 8, 2016, Prime Minister Narendra Modi declared the immediate withdrawal of the country’s two highest denominations. There are similarities and differences between the two countries’ demonetization efforts.

 Government contracts

For starters, both countries hope to wipe out black money and to curb corruption. Kenya is awash with black money, that is, income obtained illegally,or not declared for tax purposes. From independence, there have been concerns that a lot of money finding its way to churches through the ubiquitous “harambee” fundraisers are the proceeds of kick-backs from government contracts fraudulently awarded. There are further concerns that returns from various enterprises are never taxed, especially when they are paid in cash.

Second, there are fears that Kenya, like India, has a lot of counterfeit currency circulating alongside the genuine. The recent discovery of fake billions in a bank’s safe deposit box speaks to this situation and threatens to undermine trust in Kenya’s national medium of exchange. The fundamental difference between the two countries’ processes lies in their execution.

Whereas Prime Minister Modi’s announcement caught everyone flat-footed, CBK Governor Njoroge’s lost the sting of the “shock and awe” it was intended to have. This is because for months on end, there have been rumours of an impending demonetization. This has given those with huge stocks of unbanked and undeclared sums ample time to change them to popular international currencies or hide through the purchase of assets.

Political contingencies

While some Kenyans have already gone to court to question the legality of the CBK governor’s edict, other challenges are foreseeable. First, Kenya has a huge population of the unbanked. These are people who have never set foot in a banking hall, let alone own bank accounts. How they will be persuaded to walk to their nearest bank to change whatever savings they have hidden under mattresses is anyone’s guess. But should they do so, it is doubtful that the banking infrastructure will be adequate in converting what may well turn out to be hundreds of billions in trickles.

Third, there are doubts whether banks have been given enough time to equip their Automated Teller Machines (ATMs) with readers that can recognize the new currencies. Yet, no one has mentioned the cost of upgrading these machines or that ultimately, such costs will be borne by Kenyans.

Fourth, it may be difficult for the government to persuade Kenyans that it seeks their good. As Senator Johnstone Sakaja of Nairobi County recently mentioned, the Jubilee administration appears to be a government that is at war with its citizens. From the contentious Housing Levy, Huduma Namba issuance and now the demonetization of currency, social and political contingencies are served through the promise of pain. This constant state of flux does not bode well for the national goodwill needed to make the change-over to new currencies smooth.

It may be time for difficult national conversations. Because the war on corruption has been perceived as targeting at individuals, the Jubilee administration would be best advised to read from one script. Sections of leaders can no longer afford to have policies they enact they see them as presciently self-serving.

The smart money is also on a gradual roll-out of the new currencies while cleaning out the nation’s Augean stables. Drawing from India’s example, demonetization in a corrupt environment will sooner than later, see the demonetized currencies make their way into the mainstream again; a zero-sum game.