Pace of Demonetization
Demonetization is the process by which some or all of the existing banknotes of a country are stripped of the legal tender status. Sometimes the demonetized currencies are replaced by new ones. The reasons for this exercise differ from country to country and the pace of demonetization is based on the urgency of the situation.
On 18th October 2018, Norges Bank (Bank of Norway) introduced the new 50-krone and 500-krone banknotes, assuring the public that the old banknotes will be valid until 18 October 2019. This was a continuation of a series of demonetization process which started on 30 May 2017, by introducing new 100-krone and 200-krone banknotes. The plan of the Central Bank is to demonetize and replace five denominations of Norwegian currency by 2020.
The main reason for this three-year exercise was to incorporate complex security features to secure the currency against any possible threats from counterfeiters. As there were no imminent threats to the security of the currency, the central bank could afford a three year period and the public could comfortably plan ahead for the transformation.
In contrast, demonetization for 500 and 1000 rupee in India on 8 November 2016 was completely out of the blue, even for the top level employees of the government and banks. A pre-planned publicly announced affair similar to Norway would have yielded little results considering the enormity of black money and terrorism which were funded by counterfeit currency. So an abrupt demonetization of high denomination bank notes was essential to rein in illicit activities.
The National Investigation Agency of India had investigated the ‘Mumbai attacks’ and finally came to the conclusion that the funding for terrorists came in the form of fake currency from Pakistan’s intelligence.
So a swift demonetization operation will weed out the fake currency and put a stranglehold on the terrorist funding.
But there were serious repercussions in the economy, people panicked and stampeded for withdrawing cash from their accounts leading to serpentine queues in front of the automated teller machines and massive footfalls in banks. Cash shortages severely hampered the progress of the economy.
When counterfeiting and terrorist funding are the main reasons for the demonetization in Norway and India respectively, hyperinflation led to the demonetization of Zimbabwean dollar in 2015.
In 1980 when the Zimbabwean dollar was introduced it was equivalent in value to a US dollar. But over the years hyperinflation eroded the value of the Zimbabwean dollar to such an extent that the Central Bank was forced to print a $100 trillion banknote.
Here instead of replacing new Zimbabwean dollar, other country currencies like the South African rand, Botswana pula, pound sterling, Indian rupee, euro, Japanese yen, Australian dollar, Chinese Yuan, and the United States dollar were endorsed by the Zimbabwean government to stabilise the economy.
An official rate was established with the lead currency, the US dollar (1 USD- 35 quadrillion Zimbabwean dollars) to bring down the inflation levels. Currently, the economy is limping back to normalcy and the government has plans to issue new Zimbabwean dollar.
Demonetization is an invaluable tool in the hands of the Central Bank if it is judiciously used but certain circumstances pressurize some countries to accelerate the pace of demonetization leading to ripple effects in the economy.