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Ethiopia is demonetizing its economy with new currency to tackle hoarding and illegal trade

The Ethiopian government has unveiled a set of new bank notes as a part of its efforts to curb cash hoarding, illegal trade activities, and illicit financial flows in an already struggling economy.

Prime minister Abiy Ahmed disclosed the notes with denominations of five, 10, and 100 are changed, and a new 200 birr (~$5.50) note is being introduced. Over 3.6 billion Ethiopian birr ($97 million) is being spent to print the new currencies. Ordinary Ethiopians have just three months to replace their old notes.

“Money outside the banking system has been rising, affecting the liquidity of commercial banks. This is in addition to its impact on bolstering illegal trade activities”, said Abiy in a statement.

Local banks have long called for a change in currency via Ethiopia’s Bankers Association noting that over 113 billion Ethiopian birr lives outside of the formal banking system exacerbating the liquidity problems commercial banks have faced this year.

“Even though changing currency is costly and expensive, it is very important to the economy,” says Wasihun Belay, a development economist based in Addis Ababa. “Especially with the inflationary pressure haunting the country for long and its adverse impact on purchasing power, introducing new denomination is a step in a right direction and, in addition, 500 and 1000 notes should also be introduced,” he says.

Although demonetization is an economic strategy used from time to time in developing countries to stabilize the currency and ease inflation it is not without its risks. Economists often warn if mishandled it could trigger market chaos and uncertainty as citizens scramble to swap their notes.

Ethiopia last introduced a new denomination at the end of the Ethiopian-Eritrean deadly civil war two decades ago.

The government has in recent years been forced to print currencies to finance its budget deficit only sustained by foreign lenders. Broad money supply has been increasi...

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