Ethiopia’s banknotes change a mask for political crisis 

In a September surprise, the Ethiopian government unveiled new currency notes. The change, the first in 23 years, has been the subject of much chatter. But few have seriously analyzed the significance of its timing, the official justifications, and various costs associated with the introduction of the new banknotes. In this piece, I will critically consider those concerns.

The rationale

The government ascribed the changing of banknotes to the existence of substantial amounts of illegal money circulating outside the banking system. However, this rationale is not backed by any credible evidence.

To begin with, the expression “illegal money circulating outside the banking system” is rather pedestrian. After all, there is always money circulating outside the banking system. In developing economies like Ethiopia, the bulk of transactions are undertaken using currency notes since most rural dwellers don’t own or use debit or credit cards.

Ethiopians almost exclusively rely on cash transactions. Only about 40 Ethiopians per 1000 adults (about 4 percent) own debit cards, according to the World Bank. The country ranks at the bottom of the world in debit card usage — ahead of only two war-torn countries, Afghanistan and Libya. In 2017, the percentage of adults with a bank account was only 35 percent. By contrast, 82 percent of Kenyan adults had a bank account.

The government did not provide estimates for the quantity of money beyond what is normally considered enough for the public to hold on hand to conduct day-to-day transactions.

It is not difficult to provide such estimates. First, the total amount of money in circulation at any given time can be calculated from records of quantities previously printed. Secondly, the government, which controls the banking sector, knows how much money is in the banking system. Third, since the size of Ethiopia’s gross domestic product and the velocity of money (the number of times a banknote is expected to change hands during a year) are known, it is possible to estimate the quantity of birr stashed away. (Birr is the unit of currency in Ethiopia). Instead of generating such evidence-base, the announcement of the new currency notes was based on hearsay analogy to justify their political decision.

Without such evidence, the official story line is not convincing. In fact, it appears to be a scapegoat for the country’s galloping inflation, officially reported as 16 percent in 2019 but realistically much higher especially in light of the deepening political crisis and market boycotts. Furthermore, the government can conveniently evade responsibility for the current economic problem by blaming the ruling party’s political arch-enemy who are suspected of stashing away billions.

Diversionary tactic

The timing of the currency change indicates that the main motivation of the Abiy administration was to divert the attention of the public and the international community away from domestic political crises.

When the demonetization was announced, the public was deeply engrossed in the fallout from the tragic assassination of iconic Oromo artist Haacaaluu Hundeessaa, including the sham pretrial hearings of prominent opposition leaders such as Jawar Mohammed, Bekele Gerba, Eskinder Nega, and others.

Additionally, it should be noted that the new currency was unveiled shortly after the Tigray regional election. Prime Minister Abiy Ahmed was roundly criticized for not sending in the federal army to stop the Tigray poll. Abiy had to appease his ultra-nationalist urban supporters by giving the impression that he had other tools to cripple the Tigray People’s Liberation Front (TPLF). TPLF, the hitherto dominant party in Ethiopia, fell out with Abiy last year after it refused to join the prime minister’s Prosperity Party.

Since the introduction of the new banknotes, the public discourse has mostly been about trivial matters such as the graphics, colors, and print quality. This has given the government some respite, allowing the regime to tighten its grip on power; intensify attacks against opposition groups; and forge ahead with plans and campaign-style debates about the next election.

The cost of currency notes

The direct costs of changing banknotes can be classified into two. The first one is the cost incurred in hard currency to print the notes abroad and transport it to Ethiopia. The government reported that 2.9 billion notes were printed at the cost of 3.7 billion birr ($101.2 million).

The actual printing costs (plus international transportation costs) is likely to be around $250 million (148 percent of the official cost estimate), according to my estimate based on previous printing costs for Ethiopian currency notes and further adjustments for inflation. The government has deliberately reported a low figure to conceal the real cost from the public. The public would rightly object to waste of funds in the middle of a global pandemic and its economic impacts.

The second direct cost is logistical expenses within Ethiopia in terms of transporting and storage. The bulk notes would need to be moved under tight security to all bank branches in Ethiopia. One can imagine the number of bank branches in Ethiopia. The Commercial Bank of Ethiopia alone has about 1,250 branches. If we consider the number of banks operating in Ethiopia and all their branches, the figure adds up to a colossal sum.

Still, the direct costs constitute a tiny fraction of the indirect cost of dispatching the new currency. These are diffused, non-monetary costs because of business disruptions.

For the business community, the currency change could not have come at the worst time.

Routine banking activities such as dispatching loans, serving customers, and facilitating transactions will mostly be disrupted. This would adversely affect business performances during the transition period. There is already more than enough disruption happening due to COVID-19.

The people of Ethiopia will carry the brunt of the costs associated with the disturbances created by the new currency notes. In a nutshell, the people’s livelihoods will be negatively affected in many ways, particularly for families who want to urgently conduct transactions for life-saving purposes.

Anomalies

These normally occurring direct and indirect costs are not even the end of the story. As with everything else in Ethiopia’s governance, mismanagement of dispatching the currency notes is expected to cause utter chaos. Strange things have started to happen from the outset. It suffices to mention just two botched pronouncements.

At the launch of the new currency notes, Abiy ordered the military forces — on a national TV — to confiscate from anyone found holding sums of money equal to or more than birr 1.5 million. He went even further, shockingly declaring that the army and police should keep the appropriated money for themselves. Following that marching order, the army has been frantically searching for illegal money, and numerous expropriations of large sums of birr have been reported within days and have intensified.

Authorities made another scandalous statement at the launch event. It was stated that customers who go to banks to exchange old notes with new ones would not be allowed to leave with more than birr 5,000, depositing the remaining balance was obligatory.

The fact is birr 5,000 is an extremely small sum of money. Suppose one wants to go back to the local market to buy cattle, whose costs would range in tens of thousands. It is extremely worrying that even bankers seem to be ignorant of the nature of transactions the society they serve undertake daily.

Ultimately, the biggest cost to society comes in terms of the distortions to normal governance and the extent to which the diversionary tactics turn public attention away from the political process and wasted opportunities to transition to democracy.

The primary purpose a country needs currency is to use it as a medium of exchange; it facilitates transitions in buying goods and services. For Ethiopia, the Birr, old or new, has no intrinsic economic value by itself. New currency notes would not affect the economic fundamentals in any way. In the end, notwithstanding the government’s claims, the catalog of costs likely to outweigh the benefits of demonetization by a considerable margin.