BOJ ex­plains rea­sons for pulling ‘red money’

Jamaica Gleaner - - NEWS -

THE BANK of Ja­maica (BOJ) has an­nounced that it will soon de­mon­e­tise the one, 10, and 25 cent coins.

This means that the BOJ will no longer have th­ese de­nom­i­na­tions made, and that after a cer­tain time, th­ese coins will no longer be le­gal ten­der and the bank will no longer is­sue them to the pub­lic.

Im­por­tantly, how­ever, even after th­ese coins are no longer le­gal ten­der for trans­ac­tions, the BOJ will in­def­i­nitely con­tinue to re­deem them for face value.

What this means is that there will soon be no more cents in cir­cu­la­tion, and so the one dol­lar coin will be­come the low­est coin de­nom­i­na­tion, while the to­tal range of coin de­nom­i­na­tions left – all in dol­lars – will be the one, five, 10, and 20 dol­lar coins.

HOW WILL THIS AF­FECT CON­SUMERS?

Im­por­tantly, this change will only af­fect cash trans­ac­tions, and so all elec­tronic trans­ac­tions will con­tinue as usual. What should hap­pen in cash trans­ac­tions is that there should be a sim­ple sys­tem of round­ing up and round­ing down to the near­est dol­lar. A loss on one side should be com­pen­sated for with a gain on the other, and so the net ef­fect, in­clud­ing any pos­si­ble ef­fect on in­fla­tion, should be neg­li­gi­ble. Trans­ac­tions end­ing in one to 49 cents should be rounded down to the near­est dol­lar, so an item cost­ing $40.49 should be rounded down to $40. At the other end, trans­ac­tions end­ing up in 50 to 99 cents should be rounded up to the near­est dol­lar. There­fore, an item that cost $40.50 should then be rounded up to $41.

WHAT IS THE IN­TENDED TIME­LINE?

Now that BOJ has ob­tained min­is­te­rial ap­proval, the next step, in keep­ing with the stip­u­la­tions of the Bank of Ja­maica Act (Section 16(1)), is for the mea­sure to be soon gazetted, at which time three months’ notice will be pro­vided.

The bank will make an­other an­nounce­ment when the pre­cise date is fi­nalised, but at this point we ex­pect for­mal de­mon­eti­sa­tion to oc­cur early in the first quar­ter of 2018.

WHY ARE WE WITH­DRAW­ING TH­ESE COINS?

There are two pri­mary con­sid­er­a­tions. First, and most im­por­tant, is the ex­tent to which th­ese coins are still be­ing used, and se­cond is if they are still cost-ef­fec­tive to man­u­fac­ture.

DE­MAND

A re­view by the bank in­di­cates that be­tween 2005 and 2016, there was a dras­tic de­cline in the use of th­ese spe­cific coins. As a pro­por­tion of the de­mand for all coins in cir­cu­la­tion, de­mand for the 25 cent de­clined from 11.1 to 1.6 per cent over the pe­riod, while de­mand for the 10 cent de­clined from 14.2 to two per cent. Sig­nif­i­cantly, the de­mand for the one cent coin over the pe­riod was al­most zero.

RE­DEMP­TION

Ideally, all notes and coins should even­tu­ally end up back at the cen­tral bank after cir­cu­lat­ing through the fi­nan­cial and com­mer­cial sys­tem, at which point dam­aged ones are re­moved and re­placed with new ones, and to­gether with those in good con­di­tion, all are re­turned to the sys­tem.

The process of re­turn­ing notes and coins to BOJ is called re­demp­tion, and the re­demp­tion of the coins in ques­tion has been in sig­nif­i­cant de­cline as well, in­di­cat­ing that they are ‘lost in cir­cu­la­tion’ and are just ly­ing around not be­ing used.

There is a prob­lem with coin re­demp­tion in gen­eral, but it is much worse with th­ese three coins in par­tic­u­lar. Of what is in cir­cu­la­tion, the aver­age re­demp­tion rates of the 10 and 25 cent coins are at 16 per cent, com­pared to a 52 per cent re­demp­tion rate for higher coin de­nom­i­na­tions.

COST OF PRO­DUC­TION

At cur­rent prices, it now costs more to make th­ese coins than they are worth, and so con­tin­u­ing to make them is no longer eco­nom­i­cally vi­able and the coun­try will save money by dis­con­tin­u­ing them.

It costs J$1.73 to make a one cent coin, J$1.54 to make each 10 cent coin, and J$1.96 to man­u­fac­ture each 25 cent coin. By con­trast, it costs less than $3 to make each $5 and $10 coin, and less than $10 dol­lars to make the $20 coin.

THE ONE DOL­LAR EX­CEP­TION

The one dol­lar coin is an ex­cep­tion in this anal­y­sis.

At a cost of J$2.30 per coin, it is no longer eco­nom­i­cally vi­able to make the cur­rent one dol­lar coin. How­ever, de­mand for this coin re­mains heavy, amount­ing to al­most 50 per cent of all coins in de­mand.

The Bank of Ja­maica has no in­ten­tion to with­draw such a heav­ily used de­nom­i­na­tion from cir­cu­la­tion. But we also do not in­tend to keep pro­duc­ing a non-cost-ef­fec­tive coin. The so­lu­tion the bank is al­ready pur­su­ing is to re­view the de­sign of this coin with a view to us­ing les­s­ex­pen­sive ma­te­ri­als to make it.

IN­TER­NA­TIONAL PRECE­DENT

Ja­maica is not unique in this re­gard as sev­eral other coun­tries across the world have al­ready suc­cess­fully taken sim­i­lar mea­sures.

OP­POR­TU­NITY FOR CHAR­ITY

As has been the case in New Zealand and Canada, this sit­u­a­tion presents an op­por­tu­nity for ser­vice clubs and other char­i­ta­ble or­gan­i­sa­tions, as mem­bers of the pub­lic could, if they wish, turn th­ese coins over to such or­gan­i­sa­tions, who in turn can then re­deem them at BOJ for cash, sub­ject to the usual le­gal and statu­tory re­quire­ments.

Brian Wyn­ter, gov­er­nor of the Bank of Ja­maica.

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