Demonetization is the process of taking off the unit of currency from its legal tender. It generally takes place when governments decide to bring changes in national currency. After demonetization, the currency loses its status and often replaced with a new currency, for circulation in the market. Demonetization is employed for the purpose to reduce inflation, stabilize the economy, expediting trade and ease the access of currency to the market, or bring informal or black money to the national arena.
Changing the status of legal tender is an intervention in the medium of exchange used in transactions that directly affect the economy. Demonetization can stabilize the economy if proper planning is taken before it, but it creates uncertainty when it is launched abruptly or without warning. The altering of the currency has been substantiated in many countries, for uplifting the value of currency or reducing inflation, or containing the use of informal money.
For instance, the United States withdrew its $1000 note in 1969 to curb its use in the dealing of drugs and black money. European Union back in May 2016 demonetizes the 500 euro note, to stop its use in terror financing, black market activities, and money laundering. In the recent past, the Indian government discontinued the note of 500 and 1000, abruptly. The motive behind the discontinuation was to curtail informal money, tax evasion, and corruption. But it was unsuccessful because the Indian Government decision was quick and there were 86% notes of 500 and 1000 in circulation in the market at the time, which directly affected the masses and had little implications on the reduction of corruption.
In Pakistan, with the inception of the PTI Government, the debate of demonetization of 5000 note has been in the news. Recently, the former FBR chairman Shabbar Zaidi suggested the withdrawn of 5000 Rupee note, he tweeted, “5000 Rupee Note. Demonetize from July, 2021. Announce two months earlier: transition”. The former head added that the demonetization of the note will improve the economy, the system of banking will prosper and bribery would be made difficult. Before Shabbar Zaidi, the Senate of Pakistan recommended the scrap of 5000 banknotes in 2016, a month after the Indian demonetization drive, but it was refused by then government.
Responding to the Shabbar Zaidi suggestion the Ministry of Finance said “Giving the continuing use of cash in transactions, the government believes the discontinuation of the 5,000 rupee note will adversely affect the efficiency of exchange in business”. Khurram Husain a notable economist commented that “Demonetization has its risks if undertaken suddenly as it was done in India, and also if it hits those notes that are widely used by the poor and in retail transactions”. He, however, favors the long term policy for the discontinuation of the currency.
If one looks at the available statistics of 2018, the monetary base of Pakistan was Rs. 5.484 trillion, of which the circulated currency was 4.38 trillion, almost 80 percent of currency circulation in the market. How much of this currency was Rs. 5000 is unknown but the 2016 data shared by the then law minister stated that there are thirty percent notes consists of Rs. 5000. However, the statistics may be different today, but removing such an amount of banknote suddenly would have negative implications on the economy of Pakistan which is already struggling. Some experts suggests, the government should pursue the digitalization for the medium of exchange and transactions which will reduce the use of paper currency, and will monitor informal or black money.
What is your opinion about demonetization of Rs.5000 note?
