Should Kenya abolish cash?

There’s an unstated assumption in Kenya that this country is on the threshold of a very big discovery, around the nexus between finance and information technology.

One argument is that due to the unqualified success of mobile money transfers and payments, the next applications are bound to come from a Kenyan firm that takes a huge leap that opens up new horizons. 

It is not inevitable, in my view, that Kenya’s technology industry will lead based on this early success, so some caution is required.

However, the next chapter in how trade is facilitated and how money is circulated is important for medium- and lower-income countries, which brings me to the publication of several essays and a book by Ken Rogoff, a leading scholar on finance and macroeconomics.

In the book,The Curse of Cash, published this month, Rogoff argues for the virtual abolition of paper money.

His argument is that cash makes payments among people so convenient that it has a cost to society, enabling crimes such as money laundering, trade in drugs, contraband and tax evasion.

In his book, he presents very incisive illustrations of the fact that most societies with high incomes have attained such a high level of financial inclusion and diverse mechanisms for payments that large payments are usually completed through safe financial intermediaries such as banks and related financial institutions.

This means that having high denomination currency such as $100 and €500 is counterproductive, because it enables criminal enterprises to thrive, while dodging taxes and maintaining untraceable accounts. 

DURABILITY OF CURRENCY

This argument is very relevant to Kenya for a variety of reasons, starting with the fact that the country has charged the Central Bank with producing new currency as required by the Constitution.

That the currency has not been printed within the five-year deadline suggests a technical violation but Parliament allowed for an extension.

The relevant policy questions then become, what denominations of currency should Kenya maintain, and should the durability of currency take into account the impending developments in financial technology?

Those who are convinced that Kenya is a hotbed of digital innovation may want the Central Bank to consider this as it draws up contracts to produce notes and coins.

However, I am not persuaded that the mere development and prominence of mobile money services are reason enough for public policy to nudge Kenyans towards these services.

A comprehensive national payments policy should allow for a diversity of legal mechanisms for transferring and receiving payments for commerce and other social purposes.

Given the plurality of scandals and the revelations of corruption, primarily in the public sector and with connections to some private sector actors, traceability of transactions may be seen as a good forensic tool for deterring crime.

But the problem in Kenya is impunity. The most egregious violations, which lead to loss of money, are aided by political processes that make it difficult for corrupt lieutenants to be charged and punished.

POLITICAL INSTRUMENTS

The meticulously completed reports from the Office of the Auditor General show that in many instances, failure to prosecute violators and recover public money is not so much due to the absence of evidence but Parliament's reluctance to use all the power available to it to compel the Executive to enforce financial regulations and laws.

This is a problem of political instruments, not one that we can throw technology at.  

Many Kenyans are in favour of mechanisms that ensure that citizens bear their share of the tax burden, which can include a policy that seeks to abolish cash transactions thereby reducing tax evasion, which many assume is rampant in Kenya.

However, making all our purchases and financial affairs available for scrutiny by bureaucrats so we catch more tax cheats does not represent a good trade-off.

For a country at a per capita income level of about $1,500 annually, Kenya records an impressive tax take. Again, it is probable, but unlikely, that the biggest tax cheat in Kenya is a regular business operator or employee.

The news this week showing that a ring of tax cheats who import expensive vehicles may involve officers working for the revenue service itself shows that abolition of cash as proposed by Rogoff would be sub-optimal for Kenya.

Often it is the game ranger who helps the poacher escape taxes. And that’s a management and political problem, not a technology one.

Kwame Owino is the chief executive officer of the Institute of Economic Affairs (IEA-Kenya), a public policy think tank based in Nairobi. Twitter: @IEAKwame