Ethiopia: Incapacitating Illegal Traders and Money Launderers

Money serves as a medium of exchange of goods and services. It is a tool for the accumulation of wealth. The nation’s economy is cash based and according to studies, only those that form 25 percent of the more than 100 million populations have access to Bank.

This shows that, the significant portion of the economic activities goes to the informal sector.

Hence, the circulating money has high probability to be out of Bank which in turn exacerbates illegal trade, tax evasion, criminal act and political instability. These and other factors might have forced the government to change the currency said Surafel Demelash, a lecturer at the department of economics in the University of Virginia.

The government prints money and the National bank lends the money to the commercial Banks. Banks also lend the money to investors with which they purchase inputs for their business activities. Employers pay salary to their employees.

The loaned money with high volatility to liquidation has been creating currency shortage in the formal sector. Corruption and illegal trades have proved this. Hence, the government’s measure to change the currency will turn the nation from murky past to a rosy future said Sirak Demelash.

The shortage of paper money might lead the society to bartering which demonetize the economy.

Even though the government has a mandate to print paper money, the amount of money should not exceed the available commodities and services in the market. Otherwise inflation might be occur.

The introduction of new currency can bring public consensus because it tackles problems that arise from illegal trade and money laundering, which pauperized the public .

On the other hand, it brings an economic power shift. In the economy, where crony capitalism prevails, the fusion between corrupt politicians and multi billionaire businessmen creates weak government which is incapable to collect tax because the politics will be vulnerable to manipulation by individuals behind the curtain. The illegally hoarded and transacted money hampers economic planning because the amount of money in circulation is unknown.

When the old currency pour to banks because of the introduction of a new one, financial power also shifts from gangsters to the government. Their economic playing field shrinks down.

As to Surafel, unlike fixed and portable property such as land, house and vehicles, money has a rapid circulation rate and its slow return to bank had created high probability for liquidation. Such situation again might threaten the nation’s security.

The time duration to change the old currency within a month for small amount of money and 3 month for more than 1.5 million Birr can be taken as positive step. With no option, money hoarders go to banks for change because time ticks against them.

These days hearing news about the capture of illegal money at border towns is no longer uncommon. The action does not affect people who often go out and come back to country for various purposes; it mostly hurts illegals particularly who hoard the money in neighboring countries.

But the Governor of the Commercial Bank of Ethiopia, Abi Sano has a different view with regard to the time duration for changing the old currency by the new ones. As to him, a month duration is too much. Protraction might create shortage of new currency in circulation.

Some argue that, a three month time duration might give a chance to illegal traders to purchase more commodities and food items. This creates scarcity of commodities that exacerbates inflation.

But as to Surafel, the three month duration is not long as such to create havoc in the market and the commodity suppliers also know receiving the old money is unsafe to them. Obviously, they will do their job consciously.

The new directive put by the Federal Document Ratification Agency stipulates that when the selling and purchasing of movable and immovable properties takes place, unlike in the previous time, the selling of property in cash is prohibited.

The property transfer is approved only when the account is transferred through a banking system. This again restrains illegal traders to change their illegally-gained money into property.

Money is not an end by itself, it is a means for exchanging of wealth in the form of commodity, property and services and when new currency is introduced, the old ones, unless replaced, will have no value.

The new currency can be said the beginning of a new economic era which avoids pitfalls created in the past. It also facilitates electronic transaction system and brings attitudinal change.

Our knowledge, institutions and service providers, producing companies are true sources of wealth. But unless it is exchanged wealth becomes a wasted capital and will be depreciated. Hoarding money is also an unhealthy practice and must circulate and serve the economy as blood veins.

The Ethiopian Economic Association on its part, had predicted the short and medium term positive impact of the introduction of new currency in the economy.

The study states that, the immediate impacts include a surge in deposits and hence savings;

Removal of fake currency notes wipeout the stockpiling of “black money” from the economy. As such the size of taxable economy increases. Population with bank accounts increases, which could increase financial inclusion.

In the long term, increase in government revenue as more taxable money is declared and bring more businesses in the tax net, stabilize inflation, increase in investment.

The accumulated money in cash form, if channeled to the banking system, will be more productive. It could contribute to curbing liquidity, and become a source of investment finance, improve the effectiveness of monetary policy instruments.

As more money moves to the banking sector, it strengthens the digitalization of the economy. It could also reduce transaction cost.