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Janme Jay
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Several countries around the globe have introduced some sort of currency reforms in which government removed certain currency denominations from circulation and replaced them with new ones.This process of “demonetization” is persued by governments for a variety of reasons.
This process of demonetization could be disruptive and often is a signpost on the road to hyperinflation.
The recalling of 100-Bolivar note by the Venezuelan Government and replacing it with new ones denominated at 500-20000 bolivars seems to be the case of combating hyperinflation.
Hyperinflation ,as defined by economists, as a pattern of monthly price increase exceeding 50% is a possiblity in Venezuela in next few months and its annual inflation in 2017 is being predicted to be 1640% by the IMF.
Although considered a rare event, hyperinflation occurred as many as 55 times in the last century in the countries such as China, Germany, Russia, Hungary, and Argentina .
Venezuela can be the first country to face it since the Zimbabwe(in 2008-09) in this century.The current scenario of Venezuela is in sync with the tradition of gross mismanagement of currency in South American and former Soviet-bloc countries, where past governments used this “demonetization scheme” to transfer wealth from the public to themselves.
In all these episodes, the very basic fact is that that the government cannot finance its unsustainable spending through taxation or borrowing, so it resorts to debasing currency.
Venezuelan President Nicolas Maduro, through demonitization, may intend to alleviate high inflation rates.But what is really needed is to plug-in the excessive primary deficits that is draining the situation of economy there, so that the government no longer need to keep printing money.Moreover, this demonetization unveils the level of mismanagement of Venezuelan economy even more.
These currency reforms are commissioned for different sorts of reasons: technical reasons as introducing counterfeit-proof bills, switching currencies (such as when a country enters eurozone), removing unpopular notes etc.In these forms of demonitization, enough time is given to bill-holders to trade in old bills for the new ones.In this form, there is minimal disruption, be it social or economic.
When Germany(2002), France(2002), Lithuania(2015) switched their currency to Euro, currency transition went smoothly and same was the case with other 19 countries that have joined eurozone.
Another form of demonetization was witnessed in India, when Prime Minister Narendra Modi on November 8 announced that 500- &1000- rupee bills constituting 86% of the cash in circulation in India will no longer be the legal tender and should be exchanged within the year 2016.Since then, People standing in long lines outside banks and ATMs are common site and several businesses have been hit-hard in thecash driven economy.
This demonetization was intended as away to crackdown on illegal activities.But, its abrupt implementation has inflicted unnecessarily high costs on the Indian economy.High denomination notes are often used in money laundering, tax evasion, bribery, drug-trafficking and even terrorism and so it seems that the government’s intention was to check on these using “demonetization tool”.
After Indian demonetization news, UBS AG (a major investment bank) analysts led by Jonathan Mott said in a note to clients that Ausralia should follow India’s lead and scrap its biggest bank notes which would be good for the economy as well as banks.
The European Central Bank in February 2016 said it was considering withdrawing 500 euro notes because of an increased conviction in world public opinion that such high value notes are used for criminal purposes.
Also, prominent observers, Peter Sands, Kenneth Rogoff and Larry Summers thinks that the United States should phase out $100 bills.
Senate of Pakistan has also passed a resolution to demonitize 5000 rupee(~$50) bills after India’s move.
This type of demonetization is typically carried out gradually and bills are phased- out over a period of time.India’s strategy of rapid demonetization has fallen short because it was abrupt & secretive and its implementation was very poor.500- &1000-rupee ($7.5 and $15 respectively) is used by all Indians for all purposes, so its demonetization hit-hard to all of the society.It should have allowed for more time to print ample supply of new notes and to encourage digital payment methods to businesses.
India’s example would be of help the leaders of the West in simulation of the demonetization strategy for conceptualization and implementation for their countries to follow India’s path but with more precision and minimal disruption.
#afeem
This process of demonetization could be disruptive and often is a signpost on the road to hyperinflation.
The recalling of 100-Bolivar note by the Venezuelan Government and replacing it with new ones denominated at 500-20000 bolivars seems to be the case of combating hyperinflation.
Hyperinflation ,as defined by economists, as a pattern of monthly price increase exceeding 50% is a possiblity in Venezuela in next few months and its annual inflation in 2017 is being predicted to be 1640% by the IMF.
Although considered a rare event, hyperinflation occurred as many as 55 times in the last century in the countries such as China, Germany, Russia, Hungary, and Argentina .
Venezuela can be the first country to face it since the Zimbabwe(in 2008-09) in this century.The current scenario of Venezuela is in sync with the tradition of gross mismanagement of currency in South American and former Soviet-bloc countries, where past governments used this “demonetization scheme” to transfer wealth from the public to themselves.
In all these episodes, the very basic fact is that that the government cannot finance its unsustainable spending through taxation or borrowing, so it resorts to debasing currency.
Venezuelan President Nicolas Maduro, through demonitization, may intend to alleviate high inflation rates.But what is really needed is to plug-in the excessive primary deficits that is draining the situation of economy there, so that the government no longer need to keep printing money.Moreover, this demonetization unveils the level of mismanagement of Venezuelan economy even more.
These currency reforms are commissioned for different sorts of reasons: technical reasons as introducing counterfeit-proof bills, switching currencies (such as when a country enters eurozone), removing unpopular notes etc.In these forms of demonitization, enough time is given to bill-holders to trade in old bills for the new ones.In this form, there is minimal disruption, be it social or economic.
When Germany(2002), France(2002), Lithuania(2015) switched their currency to Euro, currency transition went smoothly and same was the case with other 19 countries that have joined eurozone.
Another form of demonetization was witnessed in India, when Prime Minister Narendra Modi on November 8 announced that 500- &1000- rupee bills constituting 86% of the cash in circulation in India will no longer be the legal tender and should be exchanged within the year 2016.Since then, People standing in long lines outside banks and ATMs are common site and several businesses have been hit-hard in thecash driven economy.
This demonetization was intended as away to crackdown on illegal activities.But, its abrupt implementation has inflicted unnecessarily high costs on the Indian economy.High denomination notes are often used in money laundering, tax evasion, bribery, drug-trafficking and even terrorism and so it seems that the government’s intention was to check on these using “demonetization tool”.
After Indian demonetization news, UBS AG (a major investment bank) analysts led by Jonathan Mott said in a note to clients that Ausralia should follow India’s lead and scrap its biggest bank notes which would be good for the economy as well as banks.
The European Central Bank in February 2016 said it was considering withdrawing 500 euro notes because of an increased conviction in world public opinion that such high value notes are used for criminal purposes.
Also, prominent observers, Peter Sands, Kenneth Rogoff and Larry Summers thinks that the United States should phase out $100 bills.
Senate of Pakistan has also passed a resolution to demonitize 5000 rupee(~$50) bills after India’s move.
This type of demonetization is typically carried out gradually and bills are phased- out over a period of time.India’s strategy of rapid demonetization has fallen short because it was abrupt & secretive and its implementation was very poor.500- &1000-rupee ($7.5 and $15 respectively) is used by all Indians for all purposes, so its demonetization hit-hard to all of the society.It should have allowed for more time to print ample supply of new notes and to encourage digital payment methods to businesses.
India’s example would be of help the leaders of the West in simulation of the demonetization strategy for conceptualization and implementation for their countries to follow India’s path but with more precision and minimal disruption.
#afeem
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