1. COST BENEFIT ANALYSIS OF DEMONETIZATION
Mentoria Economics
COST BENEFIT ANALYSIS OF DEMONETIZATION
SEPTEMBER 2019

2. OUR GOAL AT MENTORIA ECONOMICS To be a leader in providing sharp, bold and insightful analysis on macroeconomic trends and emerging strategies
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3. Team Leader KEN Gichinga, Chief economist
Mr. Gichinga is the Founder and Chief Economist at Mentoria Economics.
He holds an Economics Degree from Harvard University.
In 2011, Mr. Gichinga was featured in the inaugural edition of the Business Daily’s Top 40 under 40.
He has served as a Senior Economist at Commercial Bank of Africa and Equity Bank.
Prior, Mr. Gichinga worked in Microsoft in Seattle, Washington as a Business Analyst where he was responsible for analysing the supply-chain management processes.
Every Friday, Ken Gichinga is on KTN News analysing various economic trends in Kenya
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4. Agenda What is Demonetization? What were the Stated Objectives?
Case Studies from other countries? India/EU
What has been the impact so far?
Expected Impact after October 1?
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5. What is Demonetization?
Demonetization is the act of stripping a currency unit of its status as legal tender
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Source : wikipedia

6. What is Legal tender?
A medium of payment recognized by a legal system to be valid for meeting a financial obligation
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Source : wikipedia

7. Characteristics of Legal tender?
Anything, which when offered, “tendered”, in payment of a debt extinguishes the debt.
Coins and banknotes are usually defined as legal tender in many countries but personal cheques, credit cards or non-cash methods are usually not.
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Source : wikipedia

8. Stated Objectives for Demonetization in Kenya
“We have assessed the grave concern that our large banknotes, particularly the older one thousand shilling series, are being used for illicit financial flows in Kenya and also other countries in the region.”
Dr. Patrick Njoroge,
Governor, Central Bank of Kenya
June 1st 2019 (Madaraka Day)
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Source : CBK

9. Case Studies? EU versus India
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10. Positive Experience in EU
Well prepared, Printing of new currency almost 3 years in advance.
Public was well informed and fully aware.
In the first few days, participating countries distributed about 8 billion notes and 38 billion coins through 218,000 banks and post-offices and 2.8 million sales outlets.
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Source : The wire

11. Negative Experience in India
Sudden announcement of the demonetization initiative.
Major logistical nightmare in changing 16.5 billion Rs 500 notes and 6.7 billion Rs 1000
Prolonged cash-shortages created significant disruption throughout the economy.
Lives were lost, jobs were lost the economy
Economic growth slowed down.
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Source : The wire

12. What is the likely residual impact in Kenya?
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13. Will there be a rise in conspicuous consumption?
There is little evidence to suggest an increase in conspicuous consumption. In fact, the little evidence that is available points to the contrary.
Data from the Kenya Motor Vehicle Industry Association shows that sales from new luxury cars fell by 50 %
Recent data from the real estate market, reveals that weak house sales have plunged the industry to its lowest point in 4 years.
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14. Will there be a rise in bank deposits?
There could be a potential rise in bank deposits as people remove money from “under the mattress”.
It has been reported that as of June 30th, deposits had gone up by 25 billions shillings.
Out of the 217 million 1,000 shillings notes only, about 100 million notes have been exchanged. Where are the remaining 117 million 1,000 notes?
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Source : CBK

15. Will there be a depreciation of the shilling?
It is unlikely that there will be a major depreciation of the currency because CBK has been mopping up excess liquidity to ensure stability.
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16. Will there be an impact on interest rates?
Since the interest rate cap was implemented in 2016, deep analysis of the interest rate structure has complicated monetary policy signals transmission.
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17. Will there be an impact on inflation?
Inflation is typically affected by the growth of broad money supply.
This has actually been lower than it used to be indicating that inflation is likely to be well contained.
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