How three countries deal with demonetization in their own way

While Indians are still grappling with long lines at ATMs, making sure that their chemist, kirane wallah and even the chai-wallah has a PayTM—there are other countries around the world that are dealing with their own economic battles. Venezuela demonetized the 100 Bolivar note this past month giving its citizens only 72 hours to deposit the most circulated note in the country. Australia on the other hand has announced that it has a task force in place to discuss the merits and demerits of demonetizing $100 bill.

 

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India, Venezuela and Australia are three completely different countries that are at varied stages of development, facing their own set of challenges. The reasons for demonetizing a widely circulated currency note are as varied as are these economies.

With the implementation of the demonetization policy, the Indian government is expected to take about 86% of the country’s cash out of circulation—leaving the economy in considerable shock. With a motive to clamp down on black market activities, the Indian government issued the demonetization rule which impacted every Indian all across the nation.

The long-term impact of demonetization remains to be seen on the economy. Over the next few months it looks like people are feeling the pinch. They have tightened their household purse strings. If each household reduces its spending habits aka consumption—then it is going to have an impact on the GDP of the economy of the nation.

Australia:

At the moment, the Australian Financial Services Minister Kelly O’Dwyer has created a task force to study ways in which the government can ensure that all corporates pay their taxes in full. The Australian economy is facing a challenge—people are hoarding their illegal income in the form of $100 notes. This has a direct, detrimental effect on The Aussie economy. The “black economy” of Australia, which is used by criminals and those looking to avoid taxes, could amount to a staggering $21 billion AUD. This would make up 1.5% of Australia’s entire GDP.

A major difference between Australia and India is that while 80+ percent of India’s population favors demonetization, the high majority of Australians oppose it (depending on the survey, the range is anywhere between 70-80% who oppose it). Another interesting fact is that the Reserve Bank of Australia opposes demonetization strongly. The RBA argues that not only is the $100 note used for a large proportion of legitimate cases, but that criminal activity cannot be pinned down to just $100 notes. $50 notes are apparently used as much, if not more, than $100 since they can much more easily go undetected for fraudulent activity.

As opposed to Australia where many people are already in the habit of using credit cards to make payments, India is still a newcomer to the cashless economy. After demonetization the percentage of cashless payments increased by 22% in 2016 versus Oct. 2015, according to IndiaSpend analysis of Reserve Bank of India (RBI) data find here. It might have taken a long time for Indians to move toward a cashless economy had it not been for the shock-waves that were sent through the Indian economy post-demonetization.

According to a report from the McKinsey Global Institute (MGI), the GDPs of emerging economies are likely to see a total increase of 6% by 2025. Worldwide, a move toward cashless economy and digital transactions model would add about 95 million new jobs across all the emerging economies counted together. The same report says that about 99% of the transactions in India are cash-based.

The early adopters were already using credit and debit cards for larger payments. However, the demonetization of the highest denomination notes prompted not only the early adopters of new technology to use digital payment techniques but also forced those unwilling to use E-Wallets, credit cards and debit cards—to start doing so for even the smallest of payments.

Venezuela:

Venezuela is battling with a high crime rate and an underground economy that works in the smuggling and trafficking business. With the rapidly depreciating value of the Venezuelan Bolivar currency, gangs are purchasing cheap Venezuelan Bolivars to buy subsidized goods in neighboring countries and smuggling them back into Venezuela.

The Venezuelan government removed its highest denomination note from circulation within 72 hours as opposed to the Indian government’s policy where the notes were still accepted in hospitals, railway stations, post offices etc for about a month after they were declared as invalid currency. However, in a country with a high inflation rate like Venezuela, this move sparked widespread protests and looting because people couldn’t afford to buy the things needed for basic consumption. Venezuelans had about 10 days to deposit their notes into the bank. The government has now postponed the decision to demonetize the note that is circulated widely in the market until Jan. 2 to reduce the frenzy that erupted after the initial announcement.

Venezuela’s tight deadline to return the high denomination notes led to a scared  marketplace with people flocking to shops in frustration, followed by looting and violence. As opposed to India’s plan of phasing out Rs. 500 and Rs. 1000 notes spanning over a period of 60 days, Venezuelans suddenly were in possession of the most circulated currency note with no power to purchase anything. This coupled with an ongoing problem of crime and high inflation left the common man in Venezuela feeling helpless.

Prior to the demonetization the Venezuelan Bolivar was sold in the black market and circulated within international gangs to purchase goods from neighboring countries. Once the demonetization plan is set in motion, the Venezuelan government, like the Indian government hopes to reduce the circulation of illegal money and the criminal activity that goes hand-in-hand with it.  

Conclusion:

The long-term effects of demonetization are going to be acute on all three countries. In the long-run, these moves should go a long way in reducing the existing black money market in all three countries. However, each country’s pace of adapting to new technology will determine the speed with which its economy bounces back and sees growth. As far as India is concerned, the GDP forecasts for 2017 look grim with an expected reduction of 4%. The impact of drop in consumption levels is going to be felt well into the year 2017.

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