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The Ethiopian government has introduced a set of new banknotes as part of its efforts to curb cash hoarding, illegal business activities and illicit financial flows in an already struggling economy.
Prime Minister Abiy Ahmed revealed that banknotes with denominations of five, 10 and 100 have changed, and a new 200 birr (~ $ 5.50) note is being introduced. More than 3.6 billion Ethiopian birr ($ 97 million) is being spent to print the new coins. Ordinary Ethiopians have only three months to replace their old banknotes.
“Money outside the banking system has been increasing, affecting the liquidity of commercial banks. This adds to its impact in strengthening illegal business activities, ”Abiy said in a statement.
Local banks have long called for a currency exchange through the Ethiopian Bankers Association, noting that more than 113 billion Ethiopian birr live outside the formal banking system, compounding the liquidity problems that commercial banks have faced this year.
“Although changing currencies is expensive and expensive, it is very important for the economy,” says Wasihun Belay, a development economist based in Addis Ababa. “Especially with the inflationary pressure that haunts the country for a long time and its adverse impact on purchasing power, the introduction of a new denomination is a step in the right direction and, in addition, 500 and 1000 bills should also be introduced”, He says.
Although demonetization is an economic strategy used from time to time in developing countries to stabilize currencies and ease inflation, it is not without risks. Economists often warn that if mishandled, it could trigger market chaos and uncertainty as citizens rush to exchange their bills.
Ethiopia last introduced a new denomination at the end of the deadly civil war between Ethiopia and Eritrea two decades ago.
In recent years, the government has been forced to print foreign exchange to finance its budget deficit that only foreign lenders maintain. The broad money supply has increased by 20% annually according to the National Bank of Ethiopia for the past 15 years and soared from 104.4 billion Ethiopian birr to almost 1 trillion birr this year.
Although this has helped the economy grow by increasing the state’s contribution through massive investments in infrastructure, it has resulted in an increase in the cost of living. Last month, the inflation rate exceeded 20%. Like most developing economies, Ethiopia has been hit hard by the pandemic. After several years of rapid growth, the World Bank and IMF have had to lower their annual growth forecasts of 3.2% from 7.2%. In May, the country’s debt was reduced to B2 from B1 after it declared its intention to participate in the G20 Debt Service Suspension Initiative designed to help low-income countries focus on their healthcare. citizens.
Most transactions in Ethiopia are still done in cash, as the informal sector has a substantial share in the economy. To avoid this, the National Bank introduced a cash withdrawal and withdrawal limits starting last month.
“The introduction of a new currency would be essential to reduce cash transactions,” says Yinager Dessie, Governor of the National Bank.
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