Ever wonder why we have a Rs5,000 note? If not, you should — because the note has a very interesting story to tell.
It was introduced in 2006, and accounted for the bulk of the increase in “currency in circulation” for the next few years. Those in favour of its publication argued that it simplifies cash movement. So every day, for example, large amounts of cash need to be flown from Karachi to other cities around the country to meet the cash requirements of the banks.
Also read: Senate proposes demonetisation of Rs5,000 notes
These requirements have a seasonality to them, meaning they increase in some months and go down in others year after year. So every time the wheat harvest comes in, cash requirements in the wheat-growing areas of southern Punjab and upper Sindh rise sharply as farmers cash their payments. Then, slowly, the money returns to the banking system as the cash is used to purchase inputs for the sowing of cotton. The system, therefore, sees a large movement of cash going out then coming back in as this cycle plays out.
The argument in favour of the high denomination note is that it helps in the execution of these cash operations, since if these transactions were done in Rs1,000 notes, it would entail five times the volume of cash and the sheer logistics and transport of such voluminous quantities of cash would be cumbersome.
Fair enough. Except there is a small problem: the Rs5,000 note is not used in these cash operations, and according to research done at the State Bank many years ago (and never released so I am going by details shared informally with me by those who saw the research), it does not even exhibit any seasonality in its circulation. The same research showed that once the note enters circulation, it rarely returns to the banking system.
In the case of the Rs5,000 note, simply easing it out of circulation is relatively straightforward.
In fact, there was a slightly declining trend to currency in circulation as a proportion of bank deposits until 2006, when the note was introduced. From then on, the trend reversed itself, and cash in circulation as a proportion of bank deposits began rising again, fed mostly by the new note. But curiously, there was no widespread use of the note in retail transactions. So if demand for the note is rising sharply, there is no seasonality to the demand, and the note does not appear to return to the banking system as regularly as other notes do, what does that tell us about the utilisation of the note?
It tells us that the note is being used primarily for hoarding and for use in bulk cash-only transactions. And therein lie the reasons for its success, and the reasons why a powerful lobby continues to thwart attempts to demonetise it.
According to credible word on the street, the success of the note for such purposes was so spectacular that the State Bank even considered the possibility of introducing a Rs10,000 note. Just google “ten thousand rupee note Pakistan” and you’ll see a string of stories from dodgy websites either eagerly promoting the introduction of the high denomination note, or eagerly announcing that the government has decided to commence printing and the new note is about to come.
There is a small cluster of these stories from the second half of 2013, which suggests the new government was being pressured early in its tenure by groups with a vested interest in the note to undertake printing.
So when the Senate passed a resolution urging the withdrawal of the Rs5,000 note, it was making a very large point. It was also touching on an issue that has very powerful vested interests, so the senators should note carefully who shows up lobbying them to drop their efforts. The data presented by one senator, that almost 30pc of all currency in circulation is accounted for by the Rs5,000 note, shows that the kind of activities undertaken using the high denomination note have mushroomed to a point where they can almost rival retail activities that use lower denomination notes, particularly the Rs1,000 bill.
Demonetisation has its risks if undertaken suddenly as it was done in India, and also if it hits those notes that are widely used by the poor and in retail transactions. But in the case of the Rs5,000 note, simply easing it out of circulation is relatively straightforward.
First you discontinue printing new ones and let those that are already in circulation continue. All currency notes eventually come back to the State Bank once they are sufficiently soiled or damaged due to circulation, and some amount of natural attrition can be allowed to take these bills out of the market. Then the government can announce a long time line, perhaps a full year, following which the note will be demonetised. The process can take a few years to complete, but will not be anywhere nearly as destructive of economic activity as the demonetisation in India has been, since it can compensate for the destruction of the note by printing more Rs1,000 notes in tandem.
The vast majority of those for whom this step will be an encumbrance are the ones using bulk cash to undertake transactions worth hundreds of millions of rupees. Property speculators, stock brokers, smugglers, and many outright illicit transactions that use high denomination cash.
The poor and the retail segment, along with much of legitimate businesses that use cheques or online payments for bulk transactions, are unlikely to be impacted.
The Senate resolution deserves serious consideration and the agenda that it proposes can credibly be advanced in the country without too much disruption for the common people as has happened in India. Otherwise, let’s just ask ourselves again: why do we have this note in the first place?
courtesy : dawn news