My Turn

Unpacking K5 000 debate

The Reserve Bank of Malawi (RBM) plan to introduce a K5 000 banknote has stirred controversy centred on inflationary effects.

The central bank is responsible for the entire currency management process, including designing, production, storage, distribution and disposal of banknotes.

It has to ensure an optimal currency structure that is efficient, cost-effective and balanced.

This requires RBM to be responsive to the changing needs of the economy and keep pace with the evolving economic trends.

International best practices require monetary authorities to review their currency regimes at an interval of five to 10 years. This allows them to address inevitable weaknesses and challenges noted in the management of notes and coins in circulation.

Such reviews are also necessitated by innovations in technological, aesthetical and security considerations.

However, the introduction of Malawi’s highest banknote and the redesigning of the K2000 note has caused a heated debate among economic experts, politicians, businesspersons and the public.

However, the bank is acting within its mandate.

Two weeks ago, RBM Governor Wilson Banda told journalists in Lilongwe: “The policy guides that the highest value denomination should not account for more than 60 percent of the total value of the currency in circulation.

“The introduction of the new banknote intends to reduce the issue costs and that the K5000 will act as a store of value.”

I agree with the governor’s reasoning, but an important reason not said is that the central bank is responding to the changing economic needs or trends in the country.

In this case, the “store of value” will not make sense if inflation will continue to rise at the current pace.

And contrary to most arguments from lay Malawians, the introduction of the new higher banknote will not worsen inflation. Rather, RBM is responding to inflation.

In other words, the apex bank is doing us a favour, saying: “Instead of loading your banknotes in a wheelbarrow heading to a shop to buy a few goods, you should only carry a few banknotes in your pockets for the same goods.”

Currently, the prices of goods and services on average are escalating and the kwacha is losing its purchasing power each passing day.

If you go to a shop today, you will need a bunch of cash to buy five litres of cooking oil. When the K5 000 comes into circulation next February, one banknote or two will lessen this pain.

The governor also envisioned the new banknote reducing the issue costs. This means that our economy is not performing well.

In simple terms, the government presently needs to print too much money which will chase few goods.

If you want to pay a K5 000 bill, instead of producing three K2 000 banknotes or five K1 000s, you should only produce one.

The coming of the K5 000 denomination will reduce the printing costs of K1 000s and K500s.

Elsewhere, the highest bank denomination is not used for transactions, but as a store of value. In Malawi, you will see that the K2 000 note is almost everywhere.  Thus the top bill has become the banknote we mostly use for our daily transactions. The K1 000s and k500s notes are rarely found.

This means that the Reserve Bank is running away from printing plenty of these notes because, with current prices, users will need a bagful of K500s to buy a fridge in a shop.

This is a symptom that the kwacha is losing value.

And here is the take-home message: The arrival of the new banknote will not change anything in the country’s economy except that instead of carrying a one million kwacha in a bag, this time it will fit in our pockets.

The bill is not inflationary because the prices of goods and services will not be affected. They will keep rising, but the value of a kwacha will not be affected and it will keep on falling.

Generally, there will be no significant positive change on our economy except at the Reserve Bank. Instead of importing bulks of banknotes or printing several K2 000s and K1 000s, they will only be minting a few K5 000 bills.

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