Switching the $100 bill, if done quickly and effectively, will catch more than a few criminals – if at the price of Christmas cheer for the economy.
If that is the price we are willing to pay for safety (and a safer country grows faster), we must move quickly to ensure we get the greatest bang for our buck. We can seize this opportunity to boost digital transactions, bring people into the formal economy and boost growth.
First, the Central Bank is right to put a tight deadline – up to December 31 – until which both bills can be used concurrently. Any longer would give people time to rush to the casinos, buy gold and stitch up hasty property and business deals. The laundry dial will be turned up to the max, and we must be ready.
The longer the Central Bank waits, the greater the window of time for criminals to spin and dry. That’s why even though a longer timeline might lower short-term economic costs, the result would be far fewer criminals caught or “black money” destroyed. The Central Bank should stick to its deadline.
Now the price. Some costs will be unavoidable, particularly lost productivity as people take time off to exchange currency. Whether it is criminals’ cash rendered useless, or simply people unable to exchange cash, there will be less money circulating. Businesses may run short of notes and pay workers and suppliers late. It will temporarily become more difficult to make transactions.
Although it will be good to bring tax-evaders into the formal economy, the reality is that any pinch they feel will unfortunately hurt formal businesses and citizens they do business with.
The Central Bank has mentioned that the deadline will have exceptions in special cases. This should include the elderly, ill, and people with disabilities, who keep considerable cash and have more difficultly participating in the formal banking system.
That said, many well-informed people worried about an impact along the lines of India’s 2016 demonetisation need not be so concerned.
The Indian government banned existing notes with four hours’ notice, and then ran out of notes in the following weeks. This particularly hit the economy, leaving tens of millions immediately cashless in a country which is much more cash based than ours. We may well face a last-minute rush – we should be ready for that – but our situation is much less severe.
All in all, the costs, though not insignificant, are likely to be smaller than feared. Indeed, the effect on growth may well be partially offset by spending by people who would rather avoid the queues and hassle in the bank.
The real question is whether we can properly carry out such a huge logistical exercise.
The banks have said they can handle the situation. Good. Almost the entire population will now have just over two weeks to change their cash, not to mention file forms and provide proof of funds if they deposit more than $10,000 without an account (and $50,000 with one). Every ATM and cash-counting machine in the country will have to be checked to ensure they can handle the new polymer notes. Police presence will have to be beefed up to prevent the large numbers of citizens walking around with cash becoming easy pickings for criminals.
Who is going to verify that proof of funds is legitimate and not fabricated? Who is going to flag suspicious transactions to the authorities?
It is the overworked tellers, faced with immense pressure and queues of hundreds. They must be given background support and training, on-the-spot and in the branches, if this exercise is not to be rendered futile. The Financial Investigations Unit, the police and the Director of Public Prosecutions must be ready to nab criminals as they are spotted.
Success or failure of this exercise hinge completely on how it is executed.
The implications go beyond the goal of crippling criminals – many of whom may have already laundered their money. We can use this moment to bring thousands into the formal banking system and dramatically boost electronic transactions.
This could make buying and selling easier and more transparent, boosting economic growth and saving hours spent tallying cash or going to the bank. Criminals would have fewer easy targets to stab for their day’s pay. Small businesses would be less exposed to robbery.
Small retailers are currently discouraged by electronic transactions, as they are deterred by transaction costs and their customers prefer cash. But debit-card costs are relatively small compared to the benefits; and a nationwide programme like this could encourage people to use cards and electronic payments en masse. The benefits outweigh the costs.
We must include more people in the financial system. Without a good credit, transaction and history it is much harder to qualify for bank credit or work with the government. In short, it is difficult for any business to scale up.
The $100 bill replacement is just that opportunity. Each person who comes into a bank to deposit or exchange a large pile of cash should encounter someone who can encourage them either to open an account or to use their cards and electronic payments. The Central Bank and Government should support banks with this.
Despite its challenges, one of the greatest benefits of Indian demonetisation was that electronic transactions were significantly boosted, as more people used cards and payment apps. The Indian government worked in parallel to catalyse a whole fintech industry. Previously unbanked Indians were able to take advantage of new apps and electronic payment platforms that were easier to sign onto and had lower transaction costs.
This is the perfect timing for the Central Bank to begin issuing electronic payments licences to boost our nascent financial technology industry, and support start-ups like Wipay that can make digital transactions much more accessible to the public.
The Government and banks seem to be moving to execute. There is no chaos (despite the early long lines). If they can pull this off with minimum fuss and grasp the moment – not only as a security exercise but as a way to speed the economy into the future – then we might not have a blue Christmas after all.
Kiran Mathur Mohammed is a social entrepreneur, economist and businessman. He is a former banker, and a graduate of the University of Edinburgh