In an effort to tackle corruption and money laundering, Kenya will soon embark on a path of demonetization. As of 1st October 2019, over 200 million 1,000 shillings notes – the largest denomination of the country’s currency — in circulation will be discontinued after a four-month phase out. Kenyan activists such as Okiya Omtata and East African Legislative Assembly MP, Simon Mbugua, have been outspoken in their opposition to the plan in court and parliament.
This announcement follows India’s well-documented demonetization in November 2016 which sparked an acute shortage of cash and had negative effects on economic growth, resulting in a loss of over 1.5 million jobs. Given the failures of India’s demonetization drive, will similar efforts in Kenya be successful? With a weaker economy than that of India, critics have raised concern that the country is less equipped to weather the initial shock of demonetization.
Through a comparative analysis of demonetization drives in Ghana, India, the Philippines and Pakistan, this brief seeks to assess the potential economic effects of demonetization for Kenya. It indicates that a demonetization policy can considerably reduce illicit financial transactions and counterfeit notes through prudent policy choices. The brief also provides recommendations for policymakers regarding how to mitigate these risks.
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Authors: Faith Nyabuto, Analytics Lead, and Shengwei Luo, Intern at Botho Emerging Markets Group