At the end of demonetisation of the old Sh1,000 notes on Monday, the Central Bank of Kenya announced that Sh7.3 billion had been wiped from circulation.
The biggest question is: was the exercise a success or not? What is the result on the economy?
Just whose money was this that turned into worthless pieces of paper? How much slipped through the fence and made it back into the financial system, and who are the individuals who did the 3,172 suspicious transactions that are now under probe.
Though it is not yet possible to tell if all the money that was locked out of the financial system belonged to thieves, money launderers and beneficiaries of proceeds of crime, the CBK believes it has handed them a painful deep cut on their ill-gotten wealth.
Dr Patrick Njoroge, the CBK Governor, Wednesday termed the process a success. “The demonetisation process proceeded very well and we are happy with the outcome,” he said at a briefing.
In total, Sh209.6 billion had been returned by the September 30 deadline out of the Sh217 billion in the old generation notes that were out in circulation.
In value terms, 79 per cent were below Sh1 million. Only eight per cent of the values exchanged were over Sh2 million.
In terms of the number of transactions, 99 per cent of transactions were of people who turned up to convert Sh1 million or less.
The old banknotes collected, which can fill five 40-foot containers, have been shredded and compressed into briquettes of one million shillings each, ready for destruction.
The CBK said the billions that did not make it back to the system would have no impact on the economy and on its books given that the money was not in circulation in the first place.
Dr Njoroge said the exercise was meant to deal with two issues — illicit cash and counterfeits — which were both achieved.
During the four-month demonetisation period, banks and other financial institutions flagged a total of 3,172 suspicious transactions that are now under investigation.
“With technology, this number can easily be dealt with. You cannot determine at prima facie that what so and so is holding are proceeds of crime,” Dr Njoroge said, adding that the individuals will need to be taken through due process.
The banking sector regulator said they conducted 15-targeted inspections on various banks after tip-offs that they were not strictly following CBK’s stringent anti-money laundering procedures.
However, analysts say it is too early to gauge the success and effects the exercise will have on the economy.
“My prognosis on demonetisation is that the much hyped cash hoarding was anecdotal and has been disproved. The corrupt are way too smart with their asset allocation,” Mr George Bodo, a banking analyst, said.
Mr Tony Watima, an economist who has been following the exercise closely, said the CBK numbers and verdict should be taken with a pinch of salt.
“CBK has been heavily mopping up to stabilise the shilling, but that has no correlation to demonetisation? And also, there is no impact on inflation? We have a disinflation,” Mr Watima said.
“Work usually starts after the exercise is completed and that is when you can tell its effect and impact on the economy,” he added.
Besides returning discipline in the financial sector, the success or failure of replacing the old Sh1,000 note will define the legacy of the ninth CBK boss.
Most nations that have walked that path did so to get rid of dirty money, return billions of shillings back into circulation as well as deal with the twin challenges of money laundering and terrorism financing.
The other low hanging fruit is usually to force people hoarding large stacks of cash to deposit them back into the financial system. This often helps in money circulation that eventually redistributes wealth.
The other positive outcome of such an exercise has been injecting cash into the banking system, which ends up boosting liquidity in the financial markets and pushing down the cost of loans.
But some countries ended up with unintended consequences after the exercise.
India saw 99 per cent of the “black money” targeted in the crackdown make its way back into the banking system.
The United Nations said the measure did not impede future black money flows in new denominations, meaning, the country had travelled full circle in a process that saw it spend billions of shillings for nothing.
“The disruption had greater and longer-lasting impacts for lower-income individuals, households and businesses that had difficulty insulating themselves against the shock,” a UN report, Economic and Social Survey of Asia and Pacific 2017, said in its assessment of Prime Minister Narendra Modi’s policy
The report noted that rural incomes and consumption were affected due to a decline in prices for agricultural products.
To mitigate the poor from hurting, Mr Modi pushed lenders to increase credit limits for small enterprises.
India had hoped the ban on 500 ($7) and 1,000 rupee notes, which accounted for about 85 per cent of the money in circulation, would make it difficult for hoarders of undeclared wealth to exchange it for legal tender.
However, the policy ended up hurting the very people it was supposed to protect.
Ghana attempted this in 1982 when it ditched its 50 cedis note in an attempt to deal with rampant tax evasion and empty excess liquidity.
It had the downside of fuelling a currency black market, resulting in a total failure.
Debt ridden Nigeria, under the Muhammadu Buhari government, introduced a new currency in 1984 and banned old notes.
This threw the economy of Africa’s most populous nation into chaos. It would cause a spike in inflation, crashing the country’s economy.
Other nations where demonetisation failed include Myanmar (1987), the Soviet Union (1991) and North Korea (2010).
Demonetisation has not always resulted in spectacular failure. There have been five bright spots where the exercise worked for the economy and resulted in the intended outcomes despite various challenges.
These include Pakistan (2016), the United Kingdom (2002), Australia (1996), and the European Union (2002).
Zimbabwe attempted it in 2015 and it is the only African country that partially succeeded given the fact that it went for the US dollar, a stable currency that is regulated far from home.
Pakistan phased out old notes and came up with new designs of its currency in 2016.
The European Union had 12 countries adopting the Euro as a single currency in January 2002. This worked for some time until recently when the union started experiencing withdrawal threats from some members.
Australia came out of its demonetisation exercise that saw it flush out black money without significant side effects on its economy.