Shabbar Zaidi

Former FBR Chief Shabbar Zaidi Suggests Demonetizing Rs 5,000 Note

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Former Federal Board of Revenue Chairman Shabbar Zaidi suggested that the government should go for the demonetisation of the Rs 5,000 note from July onwards.

Shabbar Zaidi

“5000 Rupee Notes. Demonetise from July 1, 2021. Announce two months earlier”, Shabbar Zaidi tweeted on Friday.

Shabbar Zaidi said that in order to go through with the demonetisation the government should announce a “transition” period so that the plan goes smoothly.

He also believes that those against demonetisation have “no idea about abuse” and claimed that vested interests do not let the benefits of the move come forward. The former FBR chief also believes that the demonetisation will improve the economy and help the banking sector. He also claimed that by demonetising the Rs 5,000 note, bribery will become difficult.

He also suggested that those hoarding gold in lockers should have to inform the government if bullion is being held and the government should also monitor bullion trading.

While the tweet has garnered some approval on social media, it is being criticized by economists and those familiar with the workings of an economic system.

This is not the first time that such a suggestion has caught attention in Pakistan’s media and government offices. In 2016, the government had dismissed a recommendation from the Upper House of the Parliament to scrap the Rs. 5,000 banknote.

Although the underlying reasons for the suggestion had been the same that Zaidi has highlighted, the Ministry of Finance had advocated against it, saying, “Given the continuing use of cash in transactions, the government believes that discontinuation of the 5,000 rupee note would adversely affect the efficiency of exchange in business”.

Economists’ Reactions:

Many notable economic journalists have reacted to Zaidi’s tweet by sharing the history of the Rs. 5,000 note and why it will be a catastrophic mistake to heed his suggestion. The business and economy columnist, Khurram Hussain, wrote, “Demonetization has its risks if undertaken suddenly as it was done in India, and also if it hits those notes that are widely used by the poor and in retail transactions”.

He does, however, seem to approve of the idea of slowly taking the note out of circulation without making it a sudden policy change, and stated, “In the case of the Rs. 5,000 note, simply easing it out of circulation is relatively straightforward. First, you discontinue printing new ones and let those that are already in circulation continue. All currency notes eventually come back to the State Bank once they are sufficiently soiled or damaged due to circulation, and some amount of natural attrition can be allowed to take these bills out of the market”.

Hussain added that then the government can announce a long timeline, perhaps a full year, following which the note will be demonetized. He also highlighted that the process can take a few years to complete, but will not be anywhere nearly as destructive of economic activity as the demonetization in India has been, since it can compensate for the destruction of the note by printing more Rs. 1,000 notes in tandem.

Salman Shah, who is the caretaker Minister for Finance and a noteworthy economist, opposes the notion of a gradual shift in currency circulation unless there is a better and functioning alternative in place to counter its disruptive impacts.

What is Demonetization?

According to Investopedia, “Demonetization is the act of stripping a currency unit of its status as legal tender. It occurs whenever there is a change of national currency: The current form or forms of money is pulled from circulation and retired, often to be replaced with new notes or coins. Sometimes, a country completely replaces the old currency with new currency.”

Recent Case of Demonitization in India:

The most recent country to carry out demonetization was India. Demonetization there was done by the Narendra Modi led government in 2016.

The BJP-led government had ordered the pullout of 500 and 1,000 Indian rupee notes from circulation to tackle widespread corruption and tax evasion.

New Delhi ordered that while people could exchange their old notes for new bills at banks or post offices until the end of the year, or deposit them in their accounts, they would no longer be legal tender from midnight on November 8, 2016.

Modi had said in a televised address to the nation: “To break the grip of corruption and black money, we have decided that the 500 and 1,000-rupee currency notes presently in use will no longer be legal tender from midnight that is 8 November, 2016.”

But it had adversely affected the Indian economy.

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