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| Tuesday, 10 August 2004 |
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Issue of new currency notes and coins Article 49 of the Monetary Law Act No.58 of 1949, has given the sole right and authority to the Central Bank of Sri Lanka (CBSL) to issue currency in Sri Lanka. The CBSL supplies currency to meet the demand from the public, commercial banks and government. The demand for currency notes and coins arises mainly from the following: * Additional demand due to the usual expansion of economic activities and general price trends; * Replacement demand as the Bank has to replace the currency, which is considered unfit for further circulation; * Increases in demand due to unusual changes in economic activity, e.g., the high demand for currency from the Northern and the Eastern provinces consequent on the ceasefire; * Stock demand as the Bank has to keep necessary stocks for contingencies, especially to meet seasonal demand (However, currency held in the Central Bank vaults is not considered a part of currency in circulation, and it becomes currency in circulation only after it is issued by the Bank). In addition, it is necessary to maintain the requirements of currency in different denominations, as the Bank also stands ready to provide currency required in different denominations depending on the demand for such denominations. Additional demand due to the expansion of economic activities and general price trends In Sri Lanka, currency is still the main medium of transaction, since the other forms such as cheques, debit cards and credit cards are not developed to the extent in developed economies. In the normal course of events, the economic activity in the country grows. As the value of ecoomic activity increases, the currency available to facilitate this activity also has to increase. Therefore, every year, the Central Bank needs to issue additional amounts of currency. However, the increase in the amount of currency need not be equal to the increase in economic activity. This is because, in a modern economy, banks have the capacity to 'multiply' the value of currency issued by the Central Bank, to create credit money that would be used for economic transactions. Prevailing conditions also change the requirements for different types of currency. The demand for new currency notes, particularly for higher denominations, has increased in the recent past due to the increased number of ATMs, and increased transactions through them. Replacement demand A second reason is that there is a need to replace currency as notes and coins wear out. This is particularly relevant in the case of denominations that are more frequently used by the public. Further, the Central Bank of Sri Lanka follows a policy, like other central banks, of issuing in 'clean notes', where unserviceable, old or damaged notes are taken out of circulation and replaced with new notes. One important reason for this policy is to work against counterfeiting of currency. The lifetime of a currency note is limited. The weighted average lifetime of a Rs. 1,000 currency note and a Rs. 500 currency note is about 6-7 years (based on a sample survey conducted by the Currency Department). A lower denomination note would have a very short lifespan. During the first half of 2004, the CBSL received from commercial banks currency notes worth Rs. 9.43 billion categorised as unserviceable, while the CBSL destroyed currency notes worth Rs. 4.27 billion during the same period. In 2003, the CBSL destroyed currency notes worth Rs. 21.98 billion, which is about 20 per cent of the total currency issue. Unusual increases in economic activity Demand for currency notes and coins may also increase due to unusual increases in economic activity. Sri Lanka experienced such an unusual demand in 2002 with the signing of the ceasefire agreement and the integration of economic activity in the North and the East with the rest of the economy. As shown in Table 1, currency in circulation grew by 15.3 per cent in that year, partly in order to accommodate this unusual increase in demand for currency. Seasonal Demand for Currency The issue of currency can also vary during a year. The demand for currency does not grow smoothly during the year. It has fluctuations due to seasonal factors such as the increased demand during Christmas and the Sinhala and Tamil New Year or some special event such as elections, when people need more currency for their transactions/or hold more cash as a precautionary measure. As indicated in the Chart 1, the usual experience is that there is a surge in demand prior to these events and that the level of currency in the economy returns to normal level afterwards. In 2004, for instance, this seasonal demand pattern was accentuated due to a concentration of circumstances. In April 2004, the demand for currency peaked a Rs. 120 billion, since the general elections overlapped with the April festive season, and there were an unusual number of holidays coming close together. Conclusion It can therefore be seen that there is a need for a Central Bank to issue new currency every year due to a number of reasons. In Sri Lanka, the annual increase in the currency issue during the past five years has been about 11 per cent. However, the total money stock in the economy is much wider than the currency in the hands of the public, since the money stock includes, in addition to the currency, demand deposits, time and savings deposits and 50 per cent of NRFC deposits held by the public in commercial banks. |
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