The matter of demonetisation was raised along with limiting cash withdrawals earlier this year when the banking industry was hit by a serious liquidity crunch. Restrictions on cash withdrawals from banks and the amount of money that can be held outside the banking system was set a few months ago.
The Birr notes have been demonetised this week, and a higher denomination note – 200 Br – has been introduced. The cost of printing has been north of 100 million dollars. It has been claimed that this measure will tackle illicit financial flows, underground trading and cash hoarding. Moreover, it is indicated that the measure would bring the excessive cash circulating outside the banking system into the banking network, and may even help fight inflation, which has been a serious economic malady for a decade.
Currency demonetisation is a significant economic measure. As recently as 1998 a demonetisation of Ethiopian currency was made in reaction to the similar measure taken in Eritrea, a sovereign country using the same currency as Ethiopia. It was the right move.
This is the experience of the rest of the world as well. With bolstered security features and increased durability, gradual conversion of currency notes is commonly undertaken. For instance, since 2016, the Bank of England has been converting the lower denomination pound notes with new ones made of polymer, which is safer, stronger and cleaner.
When there is a suspicion of counterfeit money and a considerable amount of hoarded cash obtained from illegal activities, demonetisation will be undertaken to increase trust in the currency. It also helps to take “black money” out of use provided that the hoarders do not turn up to the banking system for conversion fearing the repercussions.