Practical, Emblematic Changes for Nation’s Currency

The National Bank of Ethiopia needs to take measures to improve the redundancy of the design of the Birr notes and add higher denominations to ease the pressure on the 100 Br notes, writes Alemseged Assefa, former vice-governor of the central bank.

For the past couple of months, there have been rumours circulating that changes are going to be introduced to Birr notes by the National Bank of Ethiopia. Indeed, given the notes’ current state, there are a couple of fundamental changes that have to be introduced, such as what is printed on the Birr notes and their denominations.

Primarily, the relevancy of a particular phrase on the Birr notes needs to be addressed. Since many of us focus on the value of the Birr notes rather than on what is stated, we mostly trade them away without giving much thought.

It is crucial to know how this notice originated first and observe its relevancy to the present day Birr, currently serving as the legal tender.

To provide the Birr printed after 1945 with public acceptance and to create awareness in the public mind, the regime of Emperor Haile Selassie put “Payable to the bearer on demand” in Amharic right next to their values. This was to imply that the notes, backed by gold and silver, were redeemable. This notice continues to appear to this day on Birr notes issued and circulated in the economy.

Payable to bearer means payable to the holder or presenter. A person holding instruments such as checks, promissory notes, bank drafts or bonds is a bearer. When an instrument is payable to bearer, it means whoever owns the instrument can receive the funds due to it, since it is a legal promissory note.

But with what and by whom the one holding Birr notes will be paid is not clear. One does not go to a bank to get paid equivalent value for what the Birr note represents.

True, the notes issued and put in circulation before 1945 were backed by precious metals, mainly gold and silver. But after the year 1945, they were no longer redeemable by precious metals. Gold served as reserve money.

Since gold became a valuable international reserve money and served for intentional payment and debt settlement, the demand and importance of gold in the Ethiopian economy gradually increased. The need to hold physical gold or silver sitting in a vault was abandoned.

The United States dollar printed before 1963 had a similar notice: “Will pay to the bearer on demand.” This was because, before the American Civil War, the value of money was set by the weight of precious metals such as gold, silver or copper.

But the US had to settle its significant debt after the Civil War, which lasted from 1861 to 1865, and thus had to resort to using paper money not backed by precious metals. This, however, did not go well, as there was worry that the public would not accept them, which would make the currency lose its value.

Following this, gold and silver certificates came to serve as paper money backed by precious metals held by the treasury, in which for every dollar certificate issued, a corresponding amount of gold or silver in the vaults were held to back it.

But the economy advanced and became too flexible for physical gold and silver. Interest on loans, the stock market, managed inflation, foreign currency fluctuation and creativity all brought the need for dollars without the corresponding rise in precious metals, whereby the Federal Reserve came up with a solution to the problem.

The Federal Reserve, aka the Fed, created dollars of its own that were backed by investment in the economy to hedge against the loss of the value of the money. The Fed thus added the notice “Will pay to the bearer on demand” on the Federal Reserve Notes, or US banknotes, so that the public knew that the US dollar backed their notes.

Additionally, there were still other types of money, such as gold and silver certificates and United States Notes, where if people were worried about the Federal Reserve Notes they hold, they could go to banks and get their money exchanged.

Later in 1933, as the price of gold surpassed the value of the dollar, the gold standard was dropped and that of silver was adopted. However, in 1963 silver was worth more than the dollar, and the economy had a problem.

As the US economy grew strong, the Fed could not keep backing it with silver, and as a result the rules were changed. Subsequently, silver certificates were to be cashed in, and all paper money thereafter would be legal tender, not redeemable for anything but only for other dollars.

Hence, starting with the series of 1963 paper money, the notice was removed as it became the only money issued to serve the functions of currency in the economy. It was replaced by the notice, “This note is legal tender for all debts, public and private.”

In Ethiopia, the Birr notes are the only paper money serving as legal tender in the Ethiopian economy and are not redeemable or convertible to gold, silver or bullion of specified weight on demand. That is why the notice “Payable to the bearer on demand” should be removed in future issuance of new notes.

This may be replaced with the notice written in most banknotes of many countries, “This note is legal tender” in Amharic, written above the value of the denomination. The note, being lawful money, will intrinsically be guaranteed by the government so that people will accept it to settle debt, both private and public.

Another crucial factor that the new leadership of the central bank needs to address is the 100 Br note. It is increasingly coming under pressure in money transactions in tandem with the vast quantity of notes in circulation, money supply growth and continued double-digit inflation in the economy.

It is high time that this highest denomination, currently worth about 3.60 dollars, be supported by higher bills and new 20 Br bills to ease the pressure exerted on the note.

During the second quarter of the past fiscal year, of the 104.74 billion Br in circulation, excluding the one Birr note that has been replaced by a coin and is no longer in circulation, the 100 Br notes amounted to 85pc of the total.

This implies that 85pc of the cash transaction in the economy is done with the highest note, or that the public holds more than 85pc of the 100 Br notes. This high proportion indicates that this note is not only used as a means of payment but also to a considerable degree as a store of value.

As a result, the 100 Br note has tended to show strong growth in cash circulation over the past half decade, ratcheting up, on average, by 13pc annually. These factors are why we need to support the note in this fast-growing economy with much higher bills.

Issuing 20 Br, 200 Br and possibly much higher denominations like 500 Br notes will benefit this country of over 100 million people, a persistently expanding economy and high inflation.

There are multiple advantages to this than just easing the pressure on the 100 Br bills. It could help reduce the costs of frequent printing of notes, which are paid for in foreign currency. A considerable amount of time spent on counting, sorting and placing large stacks of 10 Br, 50 Br or 100 Br notes will also be saved, and result in work efficiency and cost reduction to the banks and the central bank.

The automatic teller machines (ATM) could likewise be fed with smaller numbers of notes of higher value, further reducing the downtime of the machines due to the frequent overload of bills.

The higher notes could also reduce the frequency of currency shipments to issue holding branches in the country as larger amounts could be delivered with these bigger bills.

These steps will also have direct benefits to citizens. Though not advisable to carry so much money around, one can hold more money in notes required for various transactions and carry-around cash necessary for daily random expenses. It is also the case that as people tend to give more value to higher notes; the big value notes deserving proper handling may have more life in circulation than the current ones.

The new bills, together with the existing ones, could be printed with new features, images and subjects that reflect the national treasures and wealth that Ethiopians collectively feel proud of, value and embrace.

The banknotes should tend to reflect the core values of the society, faith in progress, the virtue of work and social harmony.

The key factor to create more appealing and identifiable banknote designs is to incorporate more input from users. It is crucial to invite the public to respond with proposals for persons or subjects for a new banknote design, based on the design policy developed by the central bank.

By Alemseged Assefa
Alemseged Assefa, former vice-governor of the central bank.

Published on Sep 22,2018 [ Vol 19 ,No 960]



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