Eliminating big bank notes?
Ukrainians and international collectors of coins and bank notes could be soon in for a new surprise. Shortly after the NBU has floated the idea to stop making one and two kopek coins, rumours now have started to spread that the NBU is also studying a proposal to take big bank notes out of circulation. More specific, the notes of 200 UAH and 500 UAH are said to be among the most likely victims.
The reasoning behind this new and innovative idea is fairly straightforward and to some experts quite compelling. One of often heard criticism against the idea of eliminating small coins has been that such action could lead to inflation as shops will round up prices, for example increasing prices that previously ended on 0.92 to prices ending on 0.95. In the same spirit, eliminating big bank notes should reduce inflation as shops will be inclined to decrease the prices of costly items in order to save on the cost of counting bank notes. Indeed, in the absence of 200 and 500 UAH bills, a shop owner would have to spend time on counting (and verifying the originality of) 100 notes of 100 UAH to sell an item costing 10000 UAH, compared to counting 20 notes of 500 UAH before.
There is fairly little academic research on this topic given the novelty of the idea, but several academics have suggested that eliminating big bank notes would be useful, especially in transition countries such as Ukraine. One paper has argued that it would reduce the size of the underground economy as it would make illegal payments more difficult as envelopes and suitcases would need to be bigger. Another recent academic paper has suggested it would provide a welcome stimulus to the economy of crisis-hit countries. More money would need to be printed, handled and transported creating jobs for printers, cashiers and money transporters. And the retail sector would benefit from the extra demand for money clips and wallets.
From a political point of view, both the decrease of inflation and the boost in economic activity would be welcome for the new government. The decreased inflation would reduce the pressure to increase pensions and government employees’ salaries, and the extra economic activity would increase government revenues reducing the pressure on the budget. President Yanukovich and his Committee for Economic Reform hence are likely to closely follow the progress of the NBU study. Even the IMF mission which is currently visiting Ukraine is said to follow this initiative, as in case of successful implementation of such initiative in Ukraine, it could consider making this new approach part of its standard advice to countries in trouble.
In Norway, the idea to eliminate big denominations was first proposed in 2005 by the Norwegian Business Security Council, which hoped that the lack of bank notes would stimulate people to make electronic payments, but it was never implemented. If the NBU decides to implement this idea, Ukraine thus will be spearheading the next wave of financial innovation.