Although electronic payment methods are becoming more prevalent in Egypt, cash still holds significant importance as a means of payment for many individuals and businesses. It is widely accepted, easy to use, and offers a level of privacy and anonymity that electronic payment methods often do not provide.
For these reasons, the value of the banknotes issued by the Central Bank of Egypt (CBE) has increased almost tenfold from LE93 billion in 2007 to LE885 billion in December 2022, reflecting the ongoing demand for cash as a means of payment. It is likely that cash will continue to play a major role in the payment system for the foreseeable future.
However, the efficiency and cost-effectiveness of cash is largely dependent on the composition of the banknote denominations in circulation. Recent years have seen a depreciation of the value of the Egyptian currency and an increase in nominal income levels, rendering the current denomination structure inappropriate and resulting in decreased efficiency and cost-effectiveness. The CBE should therefore review the denominations in circulation and make the necessary adjustments in order to ensure that they are aligned with real market needs.
The ideal distribution of the banknote denominations in circulation is often described as a bell-shaped curve, which means that the highest concentration of banknotes should be in the medium-value denominations and the lower concentrations in both the higher and lower denominations. This distribution is considered to be optimal because it ensures that there are enough medium-value banknotes available to facilitate daily transactions, while still providing enough high-value banknotes for larger purchases and a sufficient supply of low-value banknotes and coins for small transactions.
Such a well-balanced denomination mix can help to ensure the efficient circulation of money and minimise production costs, benefiting the overall economy.
The bell-shaped distribution of banknote denominations is a common trend observed across different advanced economies. The euro, for instance, exhibits a distribution of banknote denominations that ranges between five and 500 euros, with the middle denomination of 50 euros representing the highest proportion of banknotes in circulation at 49 per cent.
Similarly, the UK pound sterling has a distribution of denominations between five and 50 pounds, with the 20-pound note representing 56 per cent of the banknotes in circulation. The US dollar is unique in that it is widely used as an international reserve currency and a store of value. This has led to a significant portion of the US dollars in circulation being held outside of the US, particularly in countries where the local currencies are less stable, with the $100 bill being the most widely circulated. Within the US, however, the $20 bill is the most widely circulated denomination.
Opposed to this is the distribution of banknote denominations in Egypt, which is highly skewed towards the highest denomination of LE200 that represents 66 per cent of the total banknotes in circulation. The two highest denominations, the LE100 and LE200 banknotes, together make up 93 per cent of the total banknotes in circulation. There is a notable lack of medium-value denominations, such as the LE20 and LE50 notes, which can be attributed to the decrease in the real value of the currency that has made them less useful for conducting day-to-day transactions and caused high-value denominations to be used instead.
It has also created difficulties in conducting high-value transactions where the high-value denominations are inadequate. Therefore, issuing new denominations, namely LE500 and LE1,000 notes, is necessary in order to address this issue and to better align the distribution of banknote denominations with market needs.
In order to minimise the potential impact of higher denomination banknotes on inflation, the currency could also be revalued by deleting zeros from the nominal value of banknotes. This could be achieved by removing zeros from the “old” currency notes, for example. If, for instance, it was decided to remove two zeros from the currency, then 100 units of the “old” pound would be replaced by one unit of the “new.” This would involve replacing the old currency with a new one that has a lower nominal value that equals in real terms the higher nominal value of the old currency.
A redenomination or revaluation of this sort does not change the real value of the assets or liabilities held, but it does simplify the currency system and make transactions easier. The currency becomes more manageable for daily transactions and there is a reduced cost of issuance. It also simplifies accounting and financial reporting, as well as making it easier for the public to understand prices and values.
Many countries of different levels of economic strength have opted to remove a number of zeros from their currencies. While this was a success story in countries like Germany, the Netherlands, and Turkey, other countries have had to repeat the exercise many times over, such as Brazil, Argentina, Bolivia, and Venezuela.
The reason for the different outcomes was that redenomination alone cannot solve deep-rooted economic problems, and it needs to be accompanied by comprehensive economic reforms. If a government fails to address underlying economic issues, a currency redenomination becomes ineffective, and the economy will continue to face the same challenges. Therefore, removing zeros from a currency should be seen as part of a larger strategy aimed at improving economic conditions and restoring confidence in economic policies.
On the other hand, redenomination can cause some temporary confusion and adjustment costs as people get used to the new currency system. In general, it requires careful planning and implementation in order to avoid any confusion or negative impacts on the economy. It also needs to be accompanied by a comprehensive public-awareness campaign in order to inform the public about the changes and how to deal with them.
The writer is a banking consultant.
* A version of this article appears in print in the 4 May, 2023 edition of Al-Ahram Weekly.
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