Central Bank of Kenya Governor Patrick Njoroge announced on May 31 the demonetisation move, to remove the old Sh1,000 notes out of circulation by October 1.
This implies that the old Sh1,000 notes will no longer be considered as having any legal tender and therefore null and void after that date.
This comes hand-in-hand with the introduction of the new currency to replace the old notes.
This directive, according to Dr Njoroge, seeks to cleanse the ailing financial system of dirty money and help get rid of corruption.
Whether this is the best way to solve corruption menace in Kenya, is a question for another day since some believe this move would not completely root out graft in Kenya.
Corruption is believed to be a moral issue perpetuated by the environment and society we live in, that would require a more different social approach to complement well-formulated laws in order to be completely eradicated from the roots.
This move has brought a lot of panic since it comes at a time that nobody anticipated. As people try to salvage their monies both dirty and genuine, from looming oblivion, banks and other financial institutions have become so vigilant and stringent in terms of allowing these cash into the system.
Every individual or company must now provide valid and corroborating evidence supporting the sources of their funds and the purpose of the money before it can be accepted and changed.
This has not only affected deposits but also large withdrawals as equal scrutiny is done.
It has not been a cup of tea for individuals who are not able to account for their cash or establish a credible proof of their possessions even as idle money, initially kept at homes are sneaked into the system. We, therefore, would not be surprised to see the following things happen in the next three months.
1. INCREASED CONSUMPTION OF DURABLE GOODS
Since banks are becoming stricter with the replacement of the old currency, it is becoming almost impossible for individuals who are not able to account for their money to introduce it into the system. It is, therefore, becoming more attractive for individuals and companies to store their cash in terms of assets and other durable goods.
2. INCREASED INFLUX INTO THE CAPITAL MARKETS
Others would believe in channelling their idle money to the capital markets in order to escape the agony of going through the financial institutions.
3. INCREASED DEMAND FOR FOREIGN CURRENCY.
Most of the banks have started experiencing abnormal demands for foreign currencies, especially the dollar as people try to hide their money in foreign currencies.
This is a situation that the Central Bank of Kenya must closely monitor in order to avoid depreciation of the Kenyan currency.
4. BLACK MARKET.
It is a possibility that people would try to engage in illegal or corrupt deals in order to hide or get their monies into the system. Some companies or businesses are at the risk of being used by the affected parties in their quest to hide behind them or use them as conduits through which they can introduce their money into the system.
5. CONFUSION AND DESPERATION.
After trying several options some of which I have alluded to, still, not all will succeed in getting their money into the system. Because time also is of the essence and the deadline not so far away, most of the affected individuals and businesses are bound to suffer much confusion and desperation, especially in the last month of the grace period.
6. INCREASE IN INFLATION
With this confusion and desperation as the deadline quickly catches up, inflation increase is quite inevitable, especially as the deadline approaches. Current statistics show that the economy grew by 6.3 percent in 2018 while inflation decreased to 4.7 percent owing to strong macroeconomic factors.
People are expected to spend highly towards the deadline, which would then drive up inflation during the period.
This move by the Central Bank is a good one in cleaning the financial system of corrupt money and reducing graft in general.
However, it is just but short term. What happens after the October deadline? This looks at the long run effectiveness of the policy, which according to me would not be the lasting solution to the country’s corruption menace.
It would serve much better if complemented with other social reforms since corruption in Kenya is as a result of moral decadence and is becoming a normal and morally accepted thing among our people.
A lasting solution would be the one which changes our attitudes and moral orientation on corruption to make us all view it as a sin and not an opportunity.
Corruption is the greatest killer of our African economies and if not completely uprooted from our thinking, then cleaning the system will not avert future corruption scandals.
People will still go back into the same stealing and accumulate the same dirty money after which, we clean the system again for another cycle of accumulation and corruption.
The writer is founder of ETF Solutions.