Dr Vaalmikki Arjoon

recessionary implications:

Dr Vaalmikki Arjoon

STICK to a tight time-frame to demonetise the $100 bill.

That was the view of economist Dr Vaalmikki Arjoon as he weighed in on the demonetisation debate yesterday and its impact and consequences.

The Government has announced the demonetisation of the $100 bill to deal with money laundering, counterfeiting, tax evasion and profits from illegal activities.

The Government moved swiftly to implement legislation to effect the change and had already commissioned money for the roll-out.

The new polymer bill becomes legal tender from tomorrow. It will eventually replace the current $100 note.

Arjoon said if the Government’s rationale with the demonetisation of the $100 bill is to deal with crime, then it needs to stick to a two-week time-frame for the notes to co-exist with each other.

“The longer this period, the greater the window of opportunity for illicit finances to be laundered in physical assets such as property, gold, jewellery, cars, art, etc. We could very well find that when the dates are officially set, many with illicitly earned funds may attempt to spend them off quickly on such assets before the deadline to redeem the notes.

“We also have to consider that much of these illicit finances would have already been laundered, so the extent to which they are able to purge T&T of these ill-gotten gains may be limited. “Second, this initiative involves the TT$100 bill, while much of the monies involved in the drug trade, especially at the higher levels, are in US currency. This policy may therefore only put a spoke in the activities of the lower level dealers and ‘soldiers’, who would primarily earn in TT money. Indeed, this suggests that while the demonetisation of the TT$100 bill does have its merits, it is not sufficient to tackle the activities of the informal economy and must be implemented alongside additional AML/CFT legislations, which we are still far behind on,” he told the Sunday Express yesterday.

He argued that the polymer note will curb the extent of counterfeit money circulating in the system, given its new security features.

“The key thrust for this initiative, however, is to attempt to curb activities in the underground economy by eliminating a sizeable portion of black money, ie, cash received from activities in the drug trade, terrorist financing, human trafficking, gang-related activities, guns and ammunition, prostitution, etc. The idea is that when individuals with sizeable sums of cash in TT$100 denominations go to the banks to exchange their existing cotton note for the new polymer note, they will have to declare a source of funds with the commercial banks.

“This has the potential to shed light on many who are engaged in illegal activities and allow for their illicitly earned funds to be seized. The hope is that this demonetisation will cut funding from the underground economy and therefore severely limit their activities. It will also bring to light some who are engaged in tax evasion, although their businesses may not involve illicit activities,” he said.

Cash-based society

But like all initiatives, Arjoon pointed out that there are some potentially serious consequences, and measures should be put in place to limit them.

One of them is an acknowledgement of the fact that T&T is still a cash-based society.

And those include small business owners, farmers and some domestic workers.

“If the window to exchange the notes is small, like the two-week minimum stipulated by the new legislation, there will be long lines at the bank to exchange the cotton notes for the polymer notes. Some could miss the cancellation date. Indeed, this process will temporarily remove monies out of active circulation and delay spending.

“The money supply could also fall when funds brought to the banks are red-flagged and are not allowed to be redeemed, given that monies illegitimately held are still part of the money supply. Less cash in circulation means that less money is being spent and less cash is available for cash-based businesses in the very short term. Sales revenue will therefore fall further and there will be a slowdown in business activity, especially micro and small business such as small retailers, farmers, manufacturers and construction firms, which don’t have LINX/credit card machines,” he said.

He said demonetisation could cause even more short-term recessionary implications for the country.

“We ought to have implemented this demonetisation outside of the Christmas period, as it could restrict the potential sales that small businesses receive in this period. There are also instances of panic and uncertainty among some segments of the business community on the availability and ease of access to the new notes. Bank staff also need to be prepared for a very chaotic period, as a considerable segment of the population will seek to redeem their notes, especially if the time-frame to do so is short. Some banks also charge for deposits, but in this instance, they should waive their deposit fee given that many persons may choose to just deposit their notes and not exchange them for physical cash,” he said.

He agreed that the process will shed light on several firms that are unregistered and/or not paying their fair share of taxes but in that capture, there are legitimate businesses such as farmers and grocery owners who will be caught in the net.

He observed that many retirees and elderly people don’t use debit/credit cards and other forms of electronic money.

“They tend to keep cash at home from their pensions. Many have medical ailments. The commercial banks therefore ought to have some contingencies in place to allow for retirees to access this new polymer note as conveniently and as quickly as possible, without having to join queues at the bank. In fact, the State should seriously consider allowing retirees and those with disabilities to redeem their money even after the cancellation date of the cotton note (although at that time it will no longer be legal tender), without having to get special approval from the CBTT,” he stated.

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