What is demonetisation?

Demonetisation can be defined as stripping a currency unit of its status as legal tender. It happens whenever there’s a change of national currency. The process typically involves the removal of the current form of money from circulation, and the introduction of new notes and coins. Once a currency is demonetised, it no longer has any monetary value and cannot be exchanged for goods or services.

Demonetisation is the opposite of remonetisation, which is the reinstatement of a currency as a unit of legal tender.

Where have you heard of demonetisation?

Demonetisation is not a common occurrence. The removal of a circulating currency is a drastic intervention that can have a catastrophic effect on a nation’s economy.

Reasons for demonetisation include:

To facilitate trade between countries
To tackle inflation and stabilise the economy
To increase the transparency of economic activity by limiting illegality, such as the counterfeiting of banknotes

What do you need to know about demonetisation?

There have been a few examples of demonetisation in recent years:

Countries within the European Union (EU) adopted the euro in 2002 to promote stability and growth within the single market. The move led to the demonetisation of 19 currencies, including the French franc, Irish pound and Spanish peseta.
The Zimbabwean dollar (ZWD) was demonetised in 2009 following years of hyperinflation, which saw inflation reach 231,000,000% at its peak. The practically worthless Zimbabwean dollar was removed from circulation in 2015. Zimbabwe legalised foreign currencies - the US dollar (USD), Botswana Pula (BWP) and South African Rand (ZAR) - in an attempt to stabilise the country’s flailing economy. In June 2019, Zimbabwe’s Reserve Bank introduced a new Zimbabwean dollar into circulation, the RTGS dollar. It was the country’s only official currency until March 2020 when the use of foreign currency was allowed again.
In 2016, the Indian government announced the demonetisation of all ₹500 and ₹1,000 (Indian Rupee) banknotes.The controversial decision was made to “crackdown on corruption and illegal cash holding”. It effectively removed 85% of the nation’s currency from circulation. Citizens were given a few weeks to exchange their old banknotes for new ones. A shortage of new banknotes led to a mass closure of ATMs across the country. The move was highly criticised, with analysts estimating it resulted in a 1.5% decrease in India’s gross domestic product (GDP).