The Currency Demonetization Craze
Currency Demonetization Craze
The Currency Demonetization Craze And Who Stands To Benefit From It All?
Almost every country in the world has one demolition they usually feel they can do away with. And in virtually every case, these debates always revolve around the nation’s high-value but rarely used denominations. In the United States, the debate on whether to phase out the $100 bill has been ongoing for almost a decade now. The same case applies in Europe with the 500 Euro note as well in Switzerland with the with their 1,000 Swiss franc note. But how does currency demonetization affect local and international investments in the country? Does it have an impact on the currencies international exchange rate and how should a country go around it?
Who benefits from currency demonetization?
The government benefits most from demonetization practices. For instance, it can track and pin down parallel black economies that operate in plain cash. Additionally, as more people deposit their high-value notes for replacement, the government is able to weigh in people's unaccounted incomes and net insignificant share of the income taxes that it uses to bolster economic growth in the mid and long terms.
Nonetheless, the immediate effects of the demonetization are hurtful to both the small, medium, and even multi-national corporations. Given the reduced amount of money in circulation and time wasted queuing at the banks to change the currency, sales drastically fall. Companies, therefore, undergo stressful periods of reduced sales and cash flow problems.
Therefore, this isn’t the best time to consider investing in a demonetizing country, especially if it is a radical move. You are likely to experience highly unstable and risky currency exchange rates. In most cases, these extreme demonetization policies exchanges don’t last more than a few days. If you are seeking to inject money into the country either in the form of investments or payments, it is best that you wait till the process slows down and if possible till after official declaration of its end. The same case applies to expatriates in such countries as well as investors remitting money abroad.
Far from losing a huge chunk of it in the exchange market, large international transactions at this time may raise red flags. Such funds may be viewed as arising from the black market or being moved in from tax havens. Avoid all this by waiting for the end of the process.
How to go about it
India and Venezuela are perfect examples of how not to handle a demonetization process. They both rushed into demonetization processes without proper exchange processes while still imposing strict deadlines. Additionally, they are both demonetizing one of their essentially used currencies thereby causing further unnecessarily long economic standstill.
They should have both followed the European Central Bank’s silent move to phase out the 500 Euro note gradually. Such a move would never hurt the European Union as it is well calculated considering the fact the bill is barely used in any of the EU markets. It, therefore, means anyone wishing to invest in India and Venezuela might have to wait a little longer as the demonetization dust settles and healthy businesses resume. Investors and expatriates in either of these countries will also have to hold on to their liquid money as they wait for economic stabilisation.