Dirty Money and the Demand for Cash

In IMF Working Paper 2020 255, entitled ‘Dirty Money: Does the Risk of Infectious Disease Lower Demand for Cash?’, its author Serhan Cevik – a senior economist with the IMF – looked at data from 133 countries between 1995 and 2017 to understand how people react to a rise in infectious diseases. Against his initial study he then ran a further five subsets of data to test his findings. After controlling for macroeconomic, financial and technological factors, the data was clear that a rise in infectious disease reduces the demand for physical cash.

The paper set the scene, today’s pandemic, and was clear that there is no unambiguous evidence of a link between cash and COVID-19. The WHO’s statement that cash is safe, but wash your hands, and a number of studies into cash and COVID-19 were quoted. However, he noted that the perception of risk is important and can drive a precautionary adjustment in behaviour.

The study used cash in circulation as a proportion of GDP per capita as its proxy for cash. It collected data on this, the spread of disease (SARS, ebola, malaria and yellow fever), health spending as a share of GDP, the informal economy, financial development, mobile phone penetration and the deposit interest rate. In the data set the EU, UK, Switzerland and US were excluded because the demand for their currencies overseas could not be accounted for.

In the first analysis, the data across all the countries proved to confirm previous studies, that richer countries use less cash, countries with advanced financial development and/or with high levels of mobile phone penetration use less cash, and that interest rates have little impact on cash usage.

A 1% increase in infectious diseases led to the following decrease in cash usage: 

• Ebola 1.63% decrease.

• SARS 1.44% decrease.

• All (ebola, SARS, malaria, yellow fever) 1.68% decrease.

The author then analysed the data looking at it through a number of different perspectives:

• Removing outliers on the distribution curve.

• Excluding the years of and after the 2008 financial crisis.

• Looking only at the 105 low income developing countries.

• Modelling using estimates based on health spending as an alternative for infectious diseases.

• Without the informal economy.

The outcome remained the same, albeit sometimes with even greater levels of change.

These results may be expected and, therefore, unexceptional, but they do provide sound evidence. The author concluded by pointing out some of the challenges and risks of moving to less cash, including how to achieve financial inclusion and to mitigate against cyber-crime, fraud and money laundering.

He did not speculate about whether the extended duration of the COVID pandemic and/or the greater alternative of smart phones and digital payment technology might be leading to a higher impact than in his study.