Update on the Global Demand for Banknotes

CurrencyThe money used in a particular country at a particular time, like dollar, yen, euro, etc., consisting of banknotes and coins, that does not require endorsement as a medium of exchange. More News™ began to publish global annual updates on banknoteA banknote (or ‘bill’ as it is often referred to in the US) is a type of negotiable promissory note, issued by a bank or other licensed authority, payable to the bearer on demand. More demand in 2017. The first years provided no major surprises. Normally, a few currencies (less than 10%) had a negative annual growth rate by value of banknotes in circulation and similarly a few currencies (again less than 10%) had a high annual growth rate of more than 25%. The growth rates of the great majority of currencies varied between 0 and 15%, and their distributions were nicely shaped, tending towards a normal distribution. All this changed in 2020 and since then the situation hasn’t been stabilized.

In 2020 more than 75% of the currencies had a double-digit growth rate, which exceeded 25% in the case of more than 22% of the currencies. It was evident that this exceptional development related to the outbreak of the Covid-19 pandemic would be later counteracted. This didn’t happen in 2021.

However, the pandemic disrupted global supply chains and inflated food and energy prices, which were further accelerated by the geopolitical tensions created by the Russian attack on Ukraine. The global inflation, which during the period 2013−2020 was every year less than 4%, grew to 4.7% in 2021 and jumped up to 8.3% in 2022. To suppress the inflation central banks began to raise interest rates. The measures increased the opportunity costs of cashMoney in physical form such as banknotes and coins. More balances and led gradually to their withdrawal.

The last mile is most demanding and despite the recent downward trend of inflation, the steps of central banks to decrease interest rates have been still moderate. Therefore, in spite of the great uncertainty, which normally increases cash demand, the level of interest rates still limits the precautionary demand for cash. Hence it is too early to draw any conclusions about the medium-term development of the banknote demand.

The update will start with an analysis of the development of banknote circulation in value terms during recent years. After that, developments in banknote volume terms are studied and, before some concluding observations, the most recent developments are addressed by considering the annual growth rates in June 2024.

Banknote circulation in value terms

In the course of these annual updates one of the objectives has been to improve continuously the consistency of the data. In case of some central banks, the financial year is not the calendar year and the figures used earlier have, in some cases, referred to the end of the financial year. However, now in respective chart, the figures refer to the end of the calendar year. Only in the case of two currencies do the figures refer to an earlier month of the year because the corresponding central banks haven’t yet published the figures at the end of 2023.

In charts which address the growth rates by the volume of banknotes in circulation some figures still refer to end of the financial year, not the end of the calendar year. The reason is that those central banks publish the volume figures only at the end of their financial year.

Using statistics and various publications available on central bank websites, a slightly varying number (between 139 and 142) of currencies have been addressed in the following chart, related to the growth rates by value of banknotes in circulation in the years 2020−2023.

Fig. 1: Annual growth rates by value of banknotes in circulation in 2020, 2021, 2022 and 2023 (139−142 currencies)

The pandemic year 2020 clearly stands out. It characterises the paradoxical development of the two motives to use cash. While the transactional use of cash was constrained because of lockdowns and travel restrictions, the precautionary demand reached record growth rates.

The distribution in 2021 indicated a return to normality, and the higher-than-normal cash balances accumulated during the pandemic were not given away. The public’s behaviour changed in this respect in 2022. Even if the uncertainties continued and still justified the precautionary demand for cash, the growing opportunity cost motivated the public to reduce their cash balances.

At the same the number of currencies, which had an annual growth rate higher than 25% increased, because in countries where inflation rate was very high people needed more banknotes just for their daily needs.

The situation didn’t changeThis is the action by which certain banknotes and/or coins are exchanged for the same amount in banknotes/coins of a different face value, or unit value. See Exchange. More significantly in 2023. Because of the continuing high interest rates, more than 22% of the currencies had a negative growth rate by value of banknotes in circulation. This was only two percentage points less than in 2022.  Even so, it meant that 78 % of the currencies had a positive growth rate. The figure draws a different picture from common media reporting.

Banknote circulation in volume terms

Even though most studies related to the banknote circulation analyse its development in value terms, the volume developments are much more important to the industry and cash infrastructure. The development of these two indicators (value / volume terms) deviated significantly during the pandemic because the demand for banknotes for transactions (small and medium denominations) and for savings and precautionary purposes (high denominations) evolved differently.

The denominational data on banknote circulation has regrettably less coverage on central bank websites than its total value. Delightfully, some central banks have recently begun to publish the denominational data, but unfortunately there has been also opposite actions. It is difficult to understand why some central banks which continue to publish data on private paymentA transfer of funds which discharges an obligation on the part of a payer vis-à-vis a payee. More solutions have discontinued to do so regarding their own product, banknotes.

Anyway, I’m very thankful for several central bank colleagues, who year after year have generously provided data for these global updates. Therefore, the publicly available data has been complemented with additional currencies. Accordingly, the annual growth rates of the number of banknotes in circulation was available in 2023 for 99 currencies. Figure 2 addresses the distributions of these by the number of banknotes in circulation in 2021, 2022 and 2023.

 Fig 2: Annual growth rate by the number of banknotes in circulation of 99 currencies in 2021, 2022 and 2023.

It is difficult to draw any firm conclusions on the direction of the volume development. It seems, however, that the 2023 distribution is closer to that in 2021 than in 2022. In value terms the years 2021 and 2023 (see Figure 1) were quite different. This may indicate that the development of the two indicators (value / volume terms) have approached to each other in 2023. This is further analysed in Figure 3 which compares the distributions of two indicators in 2023.

Fig 3: Annual growth rates by the value and number of banknotes in circulation of 99 currencies in 2023

The growth rates in volume terms were in 2023 smaller than those in value terms, but the median growth rates of the two indicators have clearly become closer to each other. The median growth rate by value terms was 5,6% and by volume terms 4,2% in 2023. During the pandemic year 2020 they were, for these 99 currencies, 16.0% and 9.4% respectively. This means that in 2023 the demand for various denominations has been more balanced.

Development of the value of banknotes in circulation during the first part of 2024

The impacts of inflation and interest rates on cash demand can be further assessed by considering the most recent annual growth rates of banknote circulation. To have as comprehensive sample of currencies as possible, and in view of the fact that the publication schedules of central banks vary, the figures in the following refer to the end of June 2024.

Figure 4 depicts the distribution of annual growth rates by value of banknotes in circulation of 114 currencies compared with those one year earlier (June 2023). By using the growth rates in June in both years 2023 and 2024, any seasonal impact on banknote demand can be generally eliminated.

Fig 4: Annual growth rates by value of banknotes in circulation of 114 currencies at end of June 2023 and 2024.

Even if the number of currencies that have experienced negative annual growth rates in June 2024 is still higher than before the pandemic, the situation has improved in comparison to that one year earlier. The number of currencies having a negative growth rate has decreased from 26% to 18%. Also, the drop in inflation is indicated by the lower number of currencies having a very high annual growth rate by value of banknotes in circulation.

Concluding remarks

The main storyline of this update has been that in the current circumstances it is too early to draw any conclusions regarding the future demand for banknotes. Even if the number of currencies having a negative growth rate by the value of banknotes in circulation has been higher than before the pandemic, it cannot be concluded that the public has changed permanently their behaviour.

Central banks are now vigorously trying to suppress inflation, and when they feel satisfied with their efforts, then interest rates will fall back to their previous low level. This will again justify the precautionary demand for banknotes in the increasingly uncertain world.

However, even if that happens, the key challenge regarding the future role of cash, is the paradox referred to above, namely the opposite development trends of the two motives to use cash. Such development puts pressure on the maintenance of the cash infrastructure.

Central banks also need to be able to react to the behaviour of citizens in future crises. It is still an open question whether the trust in physical cash issued by a central bank is transferable during a crisis to a digital currency issued by a central bank (CBDG).

Even if this would be hypothetically possible, the limits to the funds that can be loaded onto a CBDC account would restrict the stabilizing impact of the CBDC in a crisis. When doing so, the central banks may actually abolish the role of central bank moneyA liability of a central bank, including banknotes in circulation and banks’ deposits with the central bank. More as a safeSecure container for storing money and valuables, with high resistance to breaking and entering. More harbour in crises if their focus is only on CBDC. Hence, with good reasons, central banks are signaling that the CBDC will complement but not replace cash.

Nevertheless, it is not sufficient that central banks have adequate strategic stocks in their vaults for exceptional demand for banknotes. Central banks also need a serious plan related to the maintenance and development of the cash infrastructure. Only a well-functioning and resilient cash infrastructure in normal circumstances ensures its use and functioning in uncertain times or in a crisis. It should be understood as a critical infrastructure, which is vital for the functioning of society.