The governor of the central bank, Dr Ernest Addison, has announced the introduction of GH¢100 and GH¢200 notes as well as a GH¢2 coin. In a speech [pdf] explaining the decision, Dr Addison pointed to currency depreciation and inflation since the re-denomination of the cedi in 2007. He argues that the benefits of the re-denomination exercise have been reduced due to the real value of the notes having depreciated.

Watch the short video below to see how the new notes will look.

Before I go on to talk about what the introduction of the notes could mean for the economy. I would like to state that the Bank of Ghana (BoG) carried out a survey on business people and market operatives which informed their decision to issue the new banknotes. If a nationwide survey has indicated that transactions would be carried out more efficiently with the introduction of higher denomination notes, then let me not speculate on that. Instead, I will dig right into the effect that higher notes are likely to have on the economy specifically with regards to inflation, taxation, currency depreciation, implementing monetary policy, BoG currency management and the shift to digital currency.

Inflation. It is intuitive to think that the introduction of larger banknotes leads to inflation. However, studies (like this and this) show that higher denominated banknotes do not lead to inflation. The case is usually that a country experiencing high levels of inflation introduces higher denominations or re-denominates in order to meet the higher demand for currency. This is why inflation and higher denominations seem to appear together. It does not mean higher denominations cause inflation.

Currency Depreciation. As in the case of inflation, I am not aware of any potential significant impact that the introduction of higher denominations could have on currency depreciation. For factors that are contributing much more to the depreciation you can read my take from March this year.

Taxation. In my review of the 2020 budget I warned that we are unlikely to see a slowdown in the government’s aggressive tax policies because of the high revenue targets for 2020. The preference for cash in the informal sector is already a large challenge for the government in tracing incomes for tax purposes. Making it easier for people to transact business in large amounts of cash is very likely to only make tax enforcement more difficult.

Implementing monetary policy. Among the central bank’s most important tools for regulating the economy is the ability to adjust the interest rate at which it lends to banks and also adjusting what percentage of the value of customers’ deposits banks have to keep in cash. In an economy in which everyone deals with banks, the central bank would be able to easier control borrowing and lending rates and thus help control inflation and economic growth. However, if there exists a large cash-based section of the economy, the central bank’s influence is significantly diminished. The introduction of higher denomination notes could therefore make the central bank’s monetary policy job more difficult.

Currency management. The central bank’s currency management operations will benefit from the higher denominations. Their cost of printing, storing and transporting notes will be reduced by the introduction of higher denominations.

Cashless economy? As at September 2019, there were 31.5 million mobile money accounts out of which 13.6 million were active. The value of transactions carried out from January-September 2019 alone was more than GH¢219 billion, equivalent to 63% of GDP! The BoG has the data that shows there’s a large demand for notes but what about the potential impact of increasing limits on mobile money transactions. Should we rather not see this demand as an opportunity to work with telcos and fintechs to meet the gap? The BoG stresses that the new notes do not mean that they have abandoned their cashless agenda. Well, the new notes do not necessarily help the agenda, either.

Ghana’s monetary situation is so significantly different from where it was 12 years ago. Digital cash has become such an important player in the economy. And the benefits, in my opinion, are such that we should promote it as an alternative to cash. However, the BoG notes that dealings in cash are our current reality and so they seek to make that easier. And these new denominations send a signal that the digital age might be further than we think.