May 24, 2024
Naira scarcity: Demonetisation reducing black money circulation, tax evasion, corruption — Expert
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By Godswill Odiong
The Managing Partner, Gbenga Badejo and Co. (Chartered Accountants & Tax Practitioners), Mr. Gbenga Badejo, weekend, hinted that the ongoing demonetization would culminate in the reduction of black money circulation, tax evasion, corruption, and other vices in Nigeria’s economy.

 

 

The Managing Partner, who refers to Black money as income that has not been officially declared, said these and other vices would drop significantly as the government hopes to force those with unaccounted wealth to deposit their monies into the banking system.

Mr. Badejo maintained that the government stands to increase tax revenue for development, thus increasing its ability to spend on social welfare programmes and infrastructure development.

In a statement obtained by The Daily, www.the daily-ng.com,  he explained that with the shortage of cash, many persons have already been encouraged to switch to digital and electronic payment methods, stressing that there would be an increase in the number of active bank accounts or digital accounts.

Objectives of demonetization

Specifically, he said: “The main objective of demonetization was to reduce the amount of black money in circulation. Black money refers to income that has not been declared to the government and is often associated with illegal activities such as tax evasion and corruption.

“By withdrawing the high-value notes, the government hoped to force those with unaccounted wealth to deposit their money into the banking system, where it could be tracked and taxed.”

Positive impact

He stated: “Another positive impact of demonetization was an increase in tax revenue. With the increase in digital payments and the reduction in black money, the government will be able to track more transactions and collect more tax revenue. This will lead to an increase in the government’s ability to spend on social welfare programs and infrastructure development.

“One of the positive effects of demonetization was the increase in digital and electronic payments. With the shortage of cash, people were forced to switch to digital and electronic payment methods, which had a positive impact on the digital payments industry. The Nigerian government has launched the e-Naira digital currency to serve as a medium of exchange and store value, offering better payment prospects than cash-based transactions.

“According to data released by the Nigeria Inter-Bank Settlement System (NIBSS), the total number of active bank accounts as of 2021 was 133.5 million. With the cash crunch, there will be an increase in the number of active bank accounts as individuals, small sized businesses will open a bank or digital account to make daily transactions. Small and medium-sized businesses will get more chances of getting loans and credit facilities to run their businesses.

“In the short term, demonetization can lead to a decrease in inflation, especially if the amount of demonetized currency is significant, as it can reduce the amount of money in circulation and thereby bringing down the demand for goods and services. However, this effect may be temporary, as the replacement of demonetized currency with new currency can result in increased liquidity in the system and the potential for inflationary pressure.”

Bad side of demonetization

Looking at the bad side of the policy, he noted that, demonetization could disrupt production activities due to unavoidable loss of man hours; especially those in the unorganized sector who get their wages paid in cash may experience temporary loss of work.

He said: “Long and unending queues are now common in banks as people often try to withdraw cash. The time spent in queues to obtain new notes disrupts the productivity of economic activities, as commuting becomes impossible when cash is not in hand.

“In addition, with the shortage of currency, people may be willing to pay more to obtain the limited cash available. Based on recent reports, some POS merchants have taken advantage of this situation, charging as high as ₦2,000 to get ₦10,000.

“As experienced in Zimbabwe, prolonged scarcity of Naira can lead to the collapse of the banking sector as many banks will fail due to the lack of liquidity. Many banks in Lagos joined the long list of banks across the country shutting down operations following the scarcity of new and old notes in the country.

“The immediate impact of demonetization was felt in the cash-based sectors of the economy, such as retail and agriculture, which were heavily reliant on the use of cash. The sudden withdrawal of 86% of the currency in circulation may lead to a liquidity crunch, which will affect the ability of these sectors to carry out their day-to-day transactions. Many small businesses, particularly those that operated on a cash-only basis, will struggle to survive in the aftermath of demonetization.

“While demonetization had positive impacts on the digital payments industry and tax revenue, it had a negative impact on the informal sector of the economy. The informal sector, which is largely cash-based, will be hit hard by demonetization, as many people will be unable to access their savings and carry out their day-to-day transactions. This will lead to a loss of jobs and income for many people in the informal sector.

“Demonetization can lead to payment delays in the supply chain, as businesses may face challenges in accessing cash to make payments to their suppliers and vendors. This delay may lead to supply chain disruptions as suppliers may not be able to pay their suppliers, leading to delays in deliveries and production. There will be a surge in the use of electronic platforms and these electronic platforms may fail. This is being experienced recently when the bank apps are down for hours. As a result, businesses may need to experience challenges in managing inventories which may lead to shortages in the supply chain.”

Case of Zimbabwe, others

He said: “The scarcity of currency in Sudan, Zimbabwe, Argentina, etc., resulted in economic instability, a decline in economic growth, a high unemployment rate, and a significant increase in poverty levels. This is because currency scarcity will lead to decreased consumer spending, as people are unable to obtain Naira, they need to purchase goods and services.

“Social unrest will rise as Naira scarcity will result in protests which are often associated with an increased risk of violence coupled with the low productivity, and mass unemployment civil disobedience and criminal activities are heightened. This in a long run discourages foreign investments and causes businesses to relocate, further exacerbating the decline in economic growth.

“As experienced in Zimbabwe, prolonged scarcity of Naira can lead to the collapse of the banking sector as many banks will fail due to the lack of liquidity. Many banks in Lagos joined the long list of banks across the country shutting down operations following the scarcity of new and old notes in the country.

Long term impact

The Managing partner, added: “The long-term impact of demonetization on the economy is yet to be seen. While it is true that demonetization can lead to a reduction in counterfeit, illegal money and an increase in tax revenue, it will also lead to a decrease in consumer spending and a liquidity crunch in cash-based sectors of the economy. The success of demonetization as a policy tool will depend on its ability to reduce illegal activities such as tax evasion and money laundering while minimizing the negative impact on the economy and the public.”

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