Malta’s surplus banknotes are a sign of greater economic activity
Malta made the EU’s fifth highest share of “excess banknotes”, ie 32% above the euro banknotes allocated to the island by the European Central Bank.
At the end of 2020, Malta ranked behind Slovenia (68%), Ireland (88%), Germany (136%), and the absolute highest, Luxembourg, with 20 times the allocation of the ECB of 2190%.
A Central Bank report by manager Brian Micallef and senior economist Tiziana M. Gauci argues that the island’s high rate of economic activity, tourism, a large informal economy, and large migrant workers are key factors in this excess cash.
Each central bank in the euro area is allocated a certain amount of banknotes by the ECB based on population size and GDP, but countries can end up with balances that exceed that amount, or lack thereof.
Indeed, even countries that rely heavily on tourism but with a large underlying economy – take Italy, Greece and Cyprus as examples – tend to report a shortage of banknotes.
Not Malta, whose surplus money corresponds to its high economic activity, as well as being one of four countries where non-EU workers account for more than 8% of the workforce, could be plays a role in demand for cash for remittances back home. In four of the six countries with excessive demand for banknotes, they had a relatively high share – more than 15% – of migrants in the working-age population.
And while population growth is being driven by migration, especially in aging European countries with lower fertility rates, unbanked migrants will need more cash for remittances: a lot financial institutions are still reluctant to open bank accounts for individuals in the informal economy.
COVID and the cash paradox
Surprisingly the demand for banknotes in the euro area has increased in recent years even though the use of cash for retail transactions has decreased.
One reason for this is that demand for cash tends to increase during periods of uncertainty and instability, reflecting a precautionary motive for crisis management. Another reason could be a shift from transactions to more collection, especially in the form of large denomination banknotes.
This trend was observed during the COVID-19 pandemic, during which the net outflow of the Central Bank grew by 18.3% (2020). This was also the case in the euro area, with banknotes increasing by 11% during 2020.
The demand for banknotes began to grow significantly from 2017, with surplus banknotes amounting to €172 million, or 17% of the allocated banknotes, by the end of the year. Since then, surplus banknotes have continued on an upward trend, reaching EUR 641 million at the end of 2021, and EUR 691 million at the end of June 2022.
€50 banknotes the most common
From 2013, the €50 banknote became the most important denomination issued by the Central Bank of Malta. Its popularity comes from the fact that it can be used both for transactions and as a store of value. In addition, it is also the largest denomination given by ATM machines in Malta.
In contrast, the share of €500 banknotes – which are no longer issued – dropped from a peak of 43% of the value of Maltese banknotes in circulation in 2015, to 13 % by the end of June 2022. The shares of the €20 and €200 notes have also decreased over the years, amounting to 8% and 5% by mid-2022, respectively.
The net outflow of the three remaining denominations – €5, €10, and €100 – is negative, which suggests that, on balance, more of these notes are presented at the Central Bank of Malta than issued.