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It’s no longer a question of what, but when. The government of Uganda says it will gradually phase out small denomination paper notes as one of the measures to reduce the cost of printing and circulating money.
This is the second time the Bank of Uganda is committing to the recommendations of the International Monetary Fund (IMF) to reduce the cost of money.
“Given high currency printing costs, we have conducted a market study to compare printing costs, and a cost-benefit analysis of replacing low denomination banknotes with coins,” the government told IMF in June last year in a letter of intent co-signed by Finance Minister Matia Kasaija and Dr Adam Mugume, the Bank of Uganda Executive Director Research.
The details, captured in the IMF Fourth Review under the Extended Credit Facility Arrangement in June last year, were some of the 2021 IMF recommendations to the government and in particular to the Bank of Uganda, as part of the agenda to cut the cost of printing and circulating money.
The cost of printing and circulating money has been increasing by an average of 5% in the last 10 years. However, in recent years, the increase has been significant, rising by above 15% since 2020.
In the 2021/22 Annual Report, Bank of Uganda indicated the cost of issuing currency, among which included printing and circulation, had gone up, increasing by UGX24.4 billion or 16.5% from UGX147.5b during the 2020/21 financial year to UGX171.9 billion due to a rise in demand for cash due to the re-opening of the economy.
The cost further almost doubled by UGX42.1 billion, increasing to UGX214 billion in the period ended June 2023.
Thus, to reduce this cost, Bank of Uganda adopted the IMF proposal and has twice separately committed to gradually phase out small denomination notes, particularly the UGX1,000 notes
The notes will be replaced with coins that are relatively durable compared to paper notes.
“Given high currency printing costs, a report was prepared by the statistics department, leading to [Bank of Uganda’s] decision to replace the low denomination banknotes of UGX1,000 with coins fully,” the government committed in an update contained in the Uganda Fifth review under the Extended Credit Facility Arrangement.
The February 13th 2024 letter of intent, published together with the review on March 18, was signed by Finance Minister Matia Kasaija and Bank of Uganda Deputy Governor Michael Atingi-Ego.
We could not readily obtain the report prepared by Bank of Uganda’s statistics department, which is referenced in the IMF status update.
However, Bank of Uganda Executive Director Research, says no timelines have been put in place yet, noting that the process will be gradual until a time when all notes have been replaced.
“No timelines yet. But it will be a gradual process until all notes (UGX1,000) are replaced with coins. Not exact of the date. The procurement is a lengthy and protracted process. Getting the correct design [that is] hard to imitate and materials that are durable [will be key],” he says.
Bank of Uganda currently prints and circulates the UGX1,000 denomination in both paper and note form.
It is not clear whether the central bank will maintain the current coin design of the UGX1,000 or will entirely introduce a new one.
The central bank has previously wholly replaced other small currency paper notes, ranging from UGX1 to UGX500 with coins, citing durability and easy handling.
The move to phase out low denomination currency is among a raft of measures under the Memorandum of Economic and Financial Policies in which the government has reassured development partners such as the IMF of effective cost management and reform to deliver sustainable fiscal consolidation.