New Year, New Currency for Ethiopia

The introduction of the new 200 birr notes (approx. $5.50 USD) is the first note of this denomination for the country whose biggest note was previously the 100 birr note. This is a timely move as the birr has been losing its purchasing power and people have needed to carry a considerable amount of cash for transactions (1).

The current administration has introduced the Homegrown Economic Reform Program to stabilize the economy and continue the economic growth that Ethiopia has seen for more than a decade. As part of the reform, the National Bank of Ethiopia (NBE) spearheaded the design and implementation of different monetary policies to help neutralize challenges such as inflation and the liquidity shortage within the country.

The NBE claims that there is a lot of currency circulating outside the banking system which contributes to the high inflation rate the country is currently experiencing. The bank further claims that the money may be funding illicit activities from black market foreign currency dealings to inter-country contraband trading. In May of this year, the NBE issued a directive putting a cap on the withdrawal amount a person or company can make. Individuals are allowed to withdraw up to ETB 200K ($5.4K USD) per day but cannot exceed ETB 1M ($27K USD) per month, whereas companies can withdraw up to ETB 300K ($8K) per day but not exceeding ETB 2.5M ($68K USD) per month. This directive has pushed those engaged in illicit activities to avoid the banking system and conduct business through cash-based transactions.

The NBE has given a three-month period to fully transition to the new currency. The introduction of the new currency is expected to force the money circulating outside the banking system into the proper channels.

Ethiopia is not the first country to change the currency for the same reason. In 2016, India wrote off the 1000 and 500 rupee notes and issued new 500 and 2000 rupee notes in a move to lock out money that is unaccounted for - known as "black money" - which may have been acquired corruptly or money that is being withheld from the tax authorities. In India, people with illegal money usually went on to purchase high valued assets such as a house to launder the money in order to find a way back into the banking system. The Ethiopian government seems to have predicted this move and has changed the procedure of registering sales of moveable and non-movable assets. According to the new procedure issued by the Federal Documents Authentication and Registration Agency, if anyone wishes to get its service for the sale and purchase of assets they should:

In each case, the sales contract or loan agreement can only be authenticated if the parties present a bank transfer slip showing the money was transferred through the proper banking system channels.

The authority further banned all moveable and non-movable asset giveaways for an unspecified time.

In the near term, the Ethiopian government is trying to close every loophole which people with illicit money are expected to take; however, the long term solution is to focus on transitioning from a cash-based to an electronic-based economy. According to Ethio telecom the country currently has 44.5M mobile voice subscribers and 23.5M data and internet users. This shows the country is well-positioned to move to electronic-based transactions.

The lesson from other countries who have gone through a demonetization process teaches us that people will always find a way to get the illicit money back into the system. For now, the government has taken steps to block as many of these avenues as possible. Even though it’s a big undertaking, the change in currency is a promising step forward for the country and we’re encouraged to see further steps being taken with the Homegrown Economic Reform Program.