News in Brief

Cash Demand Hard to Categorise

A new paper has looked at the cash in circulation in 17 economies between 2001 and 2022 ¹. It looks at cash as a percentage of gross domestic product and finds that it has not been falling as might be expected. It finds that interest rates affect the demand for cash significantly and negatively, while tax revenues have a significantly positive impact. The reasons for the former are in line with the literature on interest rates and risk premiums.

Some measures of financial development are also considered but are found to not have any strong explanatory power. Country fixed effects regression analysis suggests that determining what type of economies may have higher or lower currency in circulation is a complex matter requiring more detailed investigation.

The study found that there is no easy or obvious categorisation possible for countries which demand more or less cash. It used the number of ATMs per 100,000 people and a measure of financial depth as proxies for developments in the financial systems. However, both were found to be insignificant in determining the level of currency in circulation.

The authors were unclear as to whether having access to more ATMs increases the demand for cash or serves as a signalling mechanism for increased digitalisation of financial transactions.

An alternative would be to use EFTPOS terminals as a better indicator of the type of financial development which reduces the demand for cash. Establishing reliable and consistent source of data for EFTPOS terminals across a wide variety of countries can be difficult.

Given that financial depth and access to ATMs is found to have little impact on the demand for cash, the authors were unable to establish that less developed economies should have more demand for cash or that advanced economies must have a falling currency in circulation statistic.

The authors found the shadow economy beyond the scope of the paper.

While digital finance is undoubtedly on the rise, the author’s expectation that cash usage ought to be on the decline was not so evident, with currency in circulation rising or remaining steady in many countries, despite the increased prevalence of digital payments.

Cash Remains Vital for Travellers

YouGov ran a survey across 17 international markets asking how people like to pay when travelling internationally. Eight countries were European, plus Australia, Canada, Mexico and the US. Four were in Asia and one in the Middle East.

Travellers from Hong Kong, Singapore, Germany and Sweden had an over 50% preference for paying in cash. Only India, Mexico, Italy, Indonesia and the US had a preference for cash under 40%.

In eight countries cash was the most popular payment option when travelling – Singapore, Germany, Sweden, France, UK, Australia, Poland and Spain.

Overall, the popularity of multi-currency e-wallets (15%) has overtaken pre-paid cards (11%) but remains someway behind cash (42%), credit (42%) and debit cards (30%).

While there were significant differences between the countries, the role of cash when travelling remains core to most people.

SBP Sets Fitness and Authentication Standards

The State Bank of Pakistan (SBP) is seeking to standardise the parameters used by banknote sorting machines to ensure uniform fitness standards across the different models and makes of equipment being used.

SBP originally issued a circular in September 2014, FD Circular No.1/2014, which provided machine fitness and authentication sorting parameters to banks, establishing minimum standards for their machine sorting. It has now issued a new circular intended to streamline the sorting process and maintain consistency in results for high-end Banknote Processing and Authentication Systems (BPAS), Desktop Note Sorting (DNS), and Countertop Note Sorting (CNS).

The first phase has been to implement these standards at SBP’s premises and all of its field offices. In the second phase of this initiative, SBP, in collaboration with banks, has calibrated banknote processing machines deployed in Karachi. Readings for each make and model have been set so that banks can now calibrate all their machines at their cash processing centres and branches. This has to be completed by 31 December 2023.

Not all banknote processing machines could be tested due to the incompatibility of their firmware. Banks with these machines must make them available for calibration within six months. If they do not, those machines will not be approved for banknote processing.

Pakistan Blames Tax Avoidance for a Cash Surge

Demand for cash is rising fast in Pakistan. The value of cash in circulation reached Rs 9.2 trillion in June, approximately 11% of GDP. One contributing factor may be the withholding tax introduced on non-cash transaction and cash withdrawals.

The State Bank of Pakistan has also emphasised that limited access to banks, high transaction costs, and informality in the wholesale and retail sector, which is the largest segment of the economy, have encouraged cash usage as a way of avoiding taxation.

KRA Drives Move Back to Cash in Kenya

Press reports in Kenya report that aggressive tax compliance measures taken by the Kenya Revenue Authority (KRA) has led to a move away from mobile money payments back to cash by businesses. At the end of September, the KRA deployed 1,400 field officers across the country to visit businesses to ensure their compliance with tax requirements.

The KRA has said that it is seeking information on the businesses opting out of mobile money payments from Safaricom, the telco that operates mobile money service M-Pesa and its business-specific payment solution Lipa Na M-Pesa (Pay with M-Pesa).

M-Pesa has a 99% share of the mobile money market in Kenya. M-Pesa crossed 30 million active customers in March last year, and more than 600,000 merchants received payments through Lipa Na M-Pesa, its business-specific payment solution, in the financial year ended March 2023.

1 - ‘Less-Cash or More-Cash? Determinants and Trends of Currency in Circulation in a Panel of 17 Economies’. Kumar Chandrakamal, Pramod Kumar. Institute of Economic Studies, Charles University, Prague, Czech Republic.