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India decided in November 2016 not only to take out of circulation its old INR 500 and INR 1,000 notes but actually to demonetise them.
The move rendered the banknotes worthless for holders who could not prove where they got their money from or could not redeem them with a specified and very narrow time-frame. It generated shockwaves within the country and throughout the world.
And yet another country has tried to follow in the Asian giant’s footsteps: Venezuela, which last month tried to ditch its largest banknote.
As we have argued recently, India’s demonetisation move was premature and poorly thought out. Officially, Prime Minister Narendra Modi’s justification for the move to eliminate the old INR 500 and INR 1,000 notes was that a surprise ban would result in destroying black market profiteers, as well as reducing tax evasion.
Venezuela made exactly the same claim: during an 11 December televised address to his nation, President Nicolás Maduro claimed that neighbouring Colombia was home to ‘entire warehouses full of 100-bolivar notes’.
As a result of this criminal behaviour and inflation spiralling out of control, he announced that the country’s highest denomination note, the 100-bolivar, would be worthless in 72 hours, with new high-denomination notes being brought in to replace old ones.
However, unlike Modi who clung to his decision despite the temporary chaos this caused, Maduro was soon forced to change his tune and has now twice delayed the implementation of the ban. The current date for the implementation of the decision is, at the moment at least, 20 January.
These moves have followed looting and violent protests throughout the country, as people who have been massively hit by rising inflation and a lack of basic provisions have taken to the streets.
Both countries are vulnerable to organised crime and corruption, but the current political and economic situation in Venezuela is far grimmer than India’s. A South American country with a population of fewer than 30 million people, Venezuela has fared badly in recent corruption indexes.
The Transparency International Corruption Perceptions Index ranked the state as one of the most corrupt countries in the world with a score of 17 out of 100.
The economy is in free fall, with the highest denomination note that will soon be taken out of circulation worth just two US cents on the black market. Hopes that the introduction of a 20,000 bolivar bill will curb corruption and help ordinary Venezuelans pay for necessary goods without the use of massive wads of notes have not materialised.
The country is currently facing the world’s highest inflation rate – consumer-price inflation hit 480% in 2016 and is forecast to top 1,640% this year, according to the IMF. This is reminiscent of Zimbabwe, where inflation necessitated the introduction of a 100 trillion Zimbabwean dollar note, which was merely a prelude for the demise of the entire national currency.
In December, researchers at Johns Hopkins University in Maryland added Venezuela to the select list of world countries to have experienced hyperinflation – making it the seventh South American state to be handed this dubious honour.
As such, Maduro’s attempt to eliminate the highest banknote in circulation was largely irrelevant, compared with what the John Hopkins researchers called ‘a world of economic chaos, wrenching poverty and death’ in hyperinflation countries, for which politicians ‘should be incarcerated, and the keys should be thrown away’.
India, by comparison, is a rising economy with GDP growing by 7.6% in 2015, with the IMF predicting that this will remain strong in coming years.
While demonetisation has not proved to be an altogether effective way of clamping down on corruption, the reasons behind the move are more clearly articulated than the Venezuelan president’s argument that there are ‘mysterious evil forces’ supposedly bent on destabilising his country that must be combated.
Still, the one area where the countries do have problems that overlaps is in cross-border illicit trading and corruption.
In Venezuela, the illicit economy has partly arisen from the collapse of the formal economy, and gangs in Colombia have taken advantage of this fact to both provide goods to Venezuelans and make profits.
Meanwhile, India’s location in South Asia makes it increasingly vulnerable to the trafficking of narcotics, gold and other illicit goods. Although the motives may be different, they do share at least one objective.
And in many respects, so do other democratic, stable nations and groups of nations, for the past year has witnessed many other moves against large denomination banknotes:
- The European Central Bank announced that production of its €500 banknote will cease, ‘taking into account concerns that this banknote could facilitate illicit activities’.
- Australian Revenue and Financial Services Minister Kelly O’Dwyer ordered the creation of a taskforce that will consider whether to withdraw the AUS$100 note, as her government seeks to recoup lost tax revenue from illicit financial transactions.
- Meanwhile, Sweden is toying with the idea of doing away with all its physical cash, eventually replacing it with a nationally issued electronic currency.
It should be noted that none of the moves outlined above entails demonetisation. All the banknotes withdrawn would remain redeemable and retain their value, something which cannot be said for the rapid demonetisation imposed in India and proposed in Venezuela.
Still, it is obvious that a growing number of countries and central banks are using the withdrawal and cancellation of high-denomination notes as an additional instrument in their fight against organised crime.
And with alternative modes of payment now available, it is clear that 2017 will be a year in which these trends will intensify.
Time to check what you may still have under the mattress.
Banner Image: Venezuela has seen violent protests against the Nicolás Maduro government due to lack of basic items in shops and soaring inflation. Courtesy of Wikimedia.