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Cost-Benefit Analysis of Demonetization in Kenya - September 2019

Explore the impact and outcomes of demonetization in Kenya with insights on legal tender, objectives, and case studies. Mentoria Economics provides expert analysis on the macroeconomic consequences. Learn about the likely residual effects, including consumer behavior, banking trends, currency stability, financial regulations, and economic growth indicators.

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Cost-Benefit Analysis of Demonetization in Kenya - September 2019

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  1. Mentoria Economics COST BENEFIT ANALYSIS OF DEMONETIZATION SEPTEMBER 2019

  2. OUR GOAL AT MENTORIA ECONOMICSTo be a leader in providing sharp, bold and insightful analysis on macroeconomic trends and emerging strategies Mentoria Consulting

  3. Team Leader • KEN Gichinga, Chief economist • Mr. Gichinga is the Founder and Chief Economist at Mentoria Economics. • He holds an Economics Degree from Harvard University. • In 2011, Mr. Gichinga was featured in the inaugural edition of the Business Daily’s Top 40 under 40. • He has served as a Senior Economist at Commercial Bank of Africa and Equity Bank. • Prior, Mr. Gichinga worked in Microsoft in Seattle, Washington as a Business Analyst where he was responsible for analysing the supply-chain management processes. • Every Friday, Ken Gichinga is on KTN News analysing various economic trends in Kenya Mentoria Economics

  4. Agenda • What is Demonetization? • What were the Stated Objectives? • Case Studies from other countries? India/EU • What has been the impact so far? • Expected Impact after October 1? Mentoria Economics

  5. What is Demonetization? • Demonetization is the act of stripping a currency unit of its status as legal tender Mentoria Consulting Source : wikipedia

  6. What is Legal tender? • A medium of payment recognized by a legal system to be valid for meeting a financial obligation Mentoria Consulting Source : wikipedia

  7. Characteristics of Legal tender? • Anything, which when offered, “tendered”, in payment of a debt extinguishes the debt. • Coins and banknotes are usually defined as legal tender in many countries but personal cheques, credit cards or non-cash methods are usually not. Mentoria Consulting Source : wikipedia

  8. Stated Objectives for Demonetization in Kenya “We have assessed the grave concern that our large banknotes, particularly the older one thousand shilling series, are being used for illicit financial flows in Kenya and also other countries in the region.” Dr. Patrick Njoroge, Governor, Central Bank of Kenya June 1st 2019 (Madaraka Day) Mentoria Consulting Source : CBK

  9. Case Studies? EU versus India Mentoria Consulting

  10. Positive Experience in EU • Well prepared, Printing of new currency almost 3 years in advance. • Public was well informed and fully aware. • In the first few days, participating countries distributed about 8 billion notes and 38 billion coins through 218,000 banks and post-offices and 2.8 million sales outlets. Mentoria Consulting Source : The wire

  11. NegativeExperience in India • Sudden announcement of the demonetization initiative. • Major logistical nightmare in changing 16.5 billion Rs 500 notes and 6.7 billion Rs 1000 • Prolonged cash-shortages created significant disruption throughout the economy. • Lives were lost, jobs were lost the economy • Economic growth slowed down. Mentoria Consulting Source : The wire

  12. What is the likely residual impact in Kenya? Mentoria Consulting

  13. Will there be a rise in conspicuous consumption? • There is little evidence to suggest an increase in conspicuous consumption. In fact, the little evidence that is available points to the contrary. • Data from the Kenya Motor Vehicle Industry Association shows that sales from new luxury cars fell by 50 % • Recent data from the real estate market, reveals that weak house sales have plunged the industry to its lowest point in 4 years. Mentoria Consulting

  14. Will there be a rise in bank deposits? • There could be a potential rise in bank deposits as people remove money from “under the mattress”. • It has been reported that as of June 30th, deposits had gone up by 25 billions shillings. • Out of the 217 million 1,000 shillings notes only, about 100 million notes have been exchanged. Where are the remaining 117 million 1,000 notes? Mentoria Consulting Source : CBK

  15. Will there be a depreciation of the shilling? • It is unlikely that there will be a major depreciation of the currency because CBK has been mopping up excess liquidity to ensure stability. Mentoria Consulting

  16. Will there be an impact on interest rates? • Since the interest rate cap was implemented in 2016, deep analysis of the interest rate structure has complicated monetary policy signals transmission. Mentoria Consulting

  17. Will there be an impact on inflation? • Inflation is typically affected by the growth of broad money supply. • This has actually been lower than it used to be indicating that inflation is likely to be well contained. Mentoria Consulting

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