What if Nepal Government Decides to Demonitize Rs. 500 and Rs. 1000 Currency Notes?
Article by Aaditya Acharya
In simple parlance, demonetization is an economic exercise in which a county's currency is no longer legal tender. A country's currency is the physical money of the country which is in the form of banknotes or coins. In the time of demonetization, a country's currency is worthless i.e. it cannot be used to purchase any kind of services or goods.
Purpose and Advantages of Demonetization
Different governments have carried demonetization activity in the economy from time to time for several reasons. The objective of demonization can be as simple as replacing old currency or it can be used as a strong economic tool to combat and fight corruption and black money. Other general objectives of demonization are to control hyperinflation, limit terrorism funding, bring more money in formal banking channels, and promote a cashless economy.
History of Demonetization:
The measure of demonetization is not a new concept for the world. There were many nations that have tried changing their currency in the past. Ghana in 1982 demonetized its 50 cedi currency to monitor money laundering and corruption.
The military government of Nigeria, to combat black money, has demonetized their old currency and replaced it with different colored currency in 1984.
Similarly, in 1987, the Myanmar government invalidated around 80% of their currency to curb black money. North Korea faced demonetization of their currency in 2010, which lead to a major breakdown with people left to starve for basics.
Zimbabwe once had a hundred trillion dollar note which was demonetized and exchanged in a mocking way, dropping trillion dollars to $0.5 dollars. In 2016, the Indian government decided to demonetize the 500 and 1000 rupee notes.
Disadvantages of Demonetization:
Analyzing actual instances of demonetization in history, we can see demonetization has done more bad than good. Demonization is difficult and the government needs to spend an enormous amount of capital for printing and minting the new currency. Demonetization leads to chaos among citizens, reduction in business activities, impact on the job market, and crippling of the economy.
Further, it doesn't guarantee the elimination of black money, money laundering, and tax evasion, as funds from such activities can also be stored in other forms of assets such as gold or real estate.
Demonetization in India:
India demonetized notes of the Indian rupee 500 and 1000 in 2016 which at that time represented 86% of the currency in circulation. The Modi government dauntlessly claimed that the demonization will eradicate corruption and black money from the Indian economy. However, according to the Reserve Bank of India, 99% of demonetized currency returned to banks, which clearly shows demonetization in India failed to meet its prime purpose.
The opposition party in India blamed the government for haphazardly, superficially, and ignorantly announcing demonetization which created chaos among citizens resulting in hundreds of death. Right after demonetization, the Indian economy lost 1.5 percent of GDP in terms of growth which alone was a loss of Rs 2.25 lakh crores a year.
On the bright side, demonetization in India resulted in an increase in funds in the banking channels, an increase in cashless transactions, and further assisted for the formalization of the Indian economy.
Demonetization in Nepal:
In recent days, there have been rumors anticipating the demonization of Nepalese currency. There is no fact or reliable source to verify this, and the rumor will remain as such. If the government were to demonetize the currency, being a sensitive case that it is, unveiling the information through informal channels would kill its sole purpose.
Nonetheless, what if the government of Nepal decides to demonetize Nepalese currency, perhaps Rs 500 and Rs 1000 notes?
Nepal possesses similar kinds of socio-cultural values to India. Also, being a neighboring country and having an open border, Nepal is closely associated with India in different aspects. Many policies of Nepal were formulated in reference to India. Similar to the Indian economy, informal sectors in Nepal also cover a huge percentage of the economy. Corruption, tax evasion, and black money are diseases of both nations. Favoritism and misuse of power are all common in Nepal as well as in India.
Therefore, Nepal is likely to make similar mistakes that India did. If demonetization happens, Nepal also doesn't have the proper system and resources to carry this level of operation. Like what happened in India, chaos, protest, and even deaths can be anticipated as a result of unmanaged currency exchange centers (bank branch, government counter). Due to misuse of power, unprofessionalism, and corrupt mindset, people at positions and their closed ones may (will) get information early.
The share of unrecorded informal sectors is significant in the Nepalese economy. So, demonetization may result in an increase in unemployment and harm the daily workers. On top of it, the cashless economy already stimulated by the Covid19 pandemic may not grow drastically by demonetization alone.
Nepal Rastra Bank, which has already reduced the domestic remittance limit and further planned to completely eliminate domestic remittance, is expecting to reduce informal banking activities and bring more cash in the authorized channel. So, demonetization which carries similar objectives may not be worthy in the Nepalese economy at the moment.
Acharya has published articles in SEBON's annual magazine before and is currently interning at Sharesansar. Inclined towards value investing, Acharya is an advocate of gender inclusiveness in business and finance.
