SHARE


The newspaper interview by the Minister of Finance, Economic Planning and Development Hon. Goodall Gondwe led to the idea that the government was contemplating introducing a K5,000 banknote generated a lot of debate. The “political” consequences of such an action prompted the Ministry to issue a press statement in the papers to deny these rumours. However, many of the contributions have strayed off the key point, in terms of the reason currency notes and coins are necessary and the history of currency notes in Malawi.

Notes and coins are held primarily for retail payments. To be relevant, their face values, nature, sizes and weights must be suited to the retail transactions they are needed for. The highest banknote in 1971 was K10. This was because, with this banknote, one could pay for their monthly needs and still have some change. The general price level in an economy should be the determinant of the value of the highest denomination. The K20 note came into circulation in 1983, while the K50 and the K100 note came into circulation in 1993.

In 1994, when, after graduation from the University of Malawi with a Bachelors degree, I joined the civil service teaching profession where my gross salary was K1,400, and after tax, the net was about MK1,100. This amount of money in 1994 was enough to pay rent, support my monthly needs and then meet all my extended family obligations such as paying fees for others and still have enough for entertainment and savings. The highest valued denomination in circulation in Malawi then was K100. The point being made here is that the cost of what you pay for should determine the value of the highest notes. These small notes before 1995 were adequate for highly repetitive small value transactions such as transportation, sweets, cigarettes, matemba and fruits. Not only that, these small denominated notes were enough to cover less frequent, relatively high value transactions such as clothing, footwear and rent. During those days, a few K5 notes in one’s pockets could take care of all your daily needs.

Then, in 1995, the K200 note was introduced followed by the K500 note in 1995, then K1,000 in 2012 and, finally in 2016, the K2,000 note came into being. In principle, therefore, the proposed introduction of K5,000 is in the right direction but is arbitrary, as it is not proposed in reference to retail price realities and is hardly the optimal highest face value for the Kwacha notes at the moment. It is the end that justifies the means. It is the items that people need to pay for with notes that should determine how much Malawi prints on the currency notes and what the highest value should be.

Apart from speaking directly to the realities of retail prices, the suggested K5,000 will have the added advantage of reducing the pieces of notes the Reserve Bank of Malawi has to print, store, distribute and maintain. This is the argument that Hon Gondwe was making. However, this cannot, and should not, be the primary reason for the introduction of the K5, 000 note. The advantages of the K5,000 note is that banks will no longer require many bullion vans, bulk counting rooms, note counters and counting machines. This will also mean customers will spend less time on the queue, since it will be quicker to count money. This will also spill over to the buyers and sellers who spend time counting and recounting notes just to verify the actual amounts paid.

In the presence of generally acceptable small denomination coins, large denomination notes will not be inflationary. Many economies in which large-denomination notes and coins circulate actually have some of the lowest inflation rates, often combined with impressive records of growth. Japan (JPY 10,000), South Korea (KRw50,000), Tanzania (TSh10,000), Rwanda (FRw10,000), Russia (₽5000), Singapore (SGD10,000) cannot be said to be economically worse than Malawi. Therefore, the argument that introduction of high valued banknotes is a sign of troubled economies is simplistic and economically wrong.

Inflation will only increase if the introduction of the K5,000 notes will involve the printing of more currency notes to complement the existing quantity of money in circulation. However, if the aim is to replace the K2,000 or K1,000 or the K500 notes in circulation, then there is a very low risk of inflation. If the idea is to increase the quantity (volume) of money in circulation by introducing K5,000 notes, then the possible inflationary impact of this is common knowledge! Otherwise, bring on the K5, 000 banknote.



Source link

LEAVE A REPLY

Please enter your comment!
Please enter your name here