COULD LOW MONEY IN CIRCULATION BE ASSOCIATED WITH DEMONETIZATION POLICY?

 Introduction

Demonetization according to Clear tax refers to an act of stripping legal tender status of currency units. It happens whenever there is a change of any national currency. It involves the withdrawal of the current form or forms of money from being circulated usually replaced with new notes or coins. According to Investopedia demonetization is done to stabilize the currency and fight inflation, to facilitate trade and access market, to push informal economic activity into more transparent and away from black markets. Countries that have done demonetization include: USA, India, Ghana, Nigeria, Myanmar, Russia, Congo, Australia, European Union, North Korea, Zimbabwe and Venezuela. On 31st  May 2019, Kenya effected a major economic change by demonetizing the old Ksh.1000 bank note through Central Bank. As one of the objective of Central Bank is to maintain stable economy while at the same time mopping out illicit cash in circulation.

Countries that have done demonetization with negative impact on economy.

Ghana

In 1982, Ghana demonetized its 50 cedi currency note with an aim of reducing tax evasion, curb  corruption and manage liquidity of money. However, the move didn't achieve its objective as the public lost faith in banking sector and switched to owning physical assets and foreign currency. 

Ghana's 50 cedi

Nigeria

In 1984, Muhammadu Buhari with the help of Military issued new currency notes with new colors with an aim of making old notes obsolete. The objective of the move was to fix debt-ridden and inflated economy, however, it wasn't achieved. 

Nigeria 1984 demonetization.

Myanmar

In 1987, 80% of money that were in circulation were declared invalid. The objective was to curb black economy. However, the move led to major demonstration

Myanmar 1987 demonetization

Soviet Union

In January 1991, under Mikhail Gorbachev, the erstwhile Soviet Union withdrew 50 and 100 ruple notes to combat the parallel economy. The move targeted a third of the the money in circulation. The demonetization action faced major Economic resistance as Gorbachev faced a coup months later. It also led to break up of USSR. 

Demonetization of Soviet Union of 1991.

Zaire

In 1993, Zaire, under the leadership of Mobutu Sese Seko carried out major reforms to withdraw obsolescent currency from the system. The move increased economic disruptions resulting in the ouster of Mobutu in 1997.

Zaire demonetization in 1997.

With these countries having done demonetization and failed, Kenya is not exceptional. According to Central Bank, over Ksh. 7.3 billion were not returned during demonetization of Ksh.1000. Meaning, by the end of 2019, that amount were out of circulation. If you critically look at it, you will find that post-demonetization effects are being felt: the shilling depreciated, cost of production went high and retrenchment and job loss were witnessed. With the existence of covid 19 and post-demonetization effects, things are getting worse with the shrinking of revenue being collected due to job loss and disruptions of economy.