RESEARCH AND POLICY NOTES RPN 1-16 APRIL 2016 An Analysis of the Denomination Structure of the Maldivian Rufiyaa Hassan Fahmy Disclaimer: Research and Policy Notes cover research and analysis carried out by the staff of the Maldives Monetary Authority for both internal and external research purposes and policy decisions. The views expressed in this paper are those of the author(s), and do not necessarily represent those of the MMA. RPN 1-16 AN ANALYSIS OF THE DENOMINATION STRUCTURE OF THE MALDIVIAN RUFIYAA a Hassan Fahmy* Abstract This article provides a summary of the analysis on the optimal currency denomination structure. The basis of this analysis is the D-Metric model which has been successfully applied in a wide range of countries around the globe (Crickett, 2012). Since the release of its first paper banknote series in 1947, the Maldives’ currency series and its denomination structure has had regular and effective upgrades on a timely basis. The entire currency series has been renewed three times in the past including the most recent upgrade to the “Ran Dhihafaheh” series. Structural changes (i.e., introduction of new denominations and conversion of banknotes to same-value coins) have taken place with the renewal of currency series as well as in between such changes. The structural changes made with the release of the new “Ran Dhihafaheh” series—that is the introduction of high- denomination 1,000 rufiyaa banknote and the planned transition of 5 rufiyaa banknote to a same-value coin—have been long overdue as per the results of the D-Metric model. However, it is reasonable to have brought about such modifications to the currency denomination structure with the release of a new series as this would minimise the economic cost and impact of such changes. * The author is a Research Analyst at the Monetary Policy and Research Division of the MMA. He would like to thank Ahmed Fazeel Abdul Latheef, Ismail Shareef and Mohamed Sofwan Hassan for their valuable efforts in gathering and providing data required for the analysis. The author would also like to thank the senior officials and colleagues at MMA for providing valuable input to this article. 1 | Research and Policy Notes, Maldives Monetary Authority Hassan Fahmy 1. Background The currency denomination structure of each country consists of notes and coins issued to accommodate the payments made within the economy. The denomination structure can be broken down into two parts: (1) the boundaries which consist of the breaking point between notes and coins as well as the smallest coin value and largest note value; and (2) the components which consist of the number of notes and coins within those boundaries (Pattanarangsun, 2011). The components or the denominations are mostly spaced using the 1-2-5 (binary-decimal triplets) or 1-2.5-5 (fractional-decimal triplets) system (Pattanarangsun, 2011)1. For instance, a hypothetical country following the 1-2-5 system may start counting from 0.01, 0.02, and 0.05 and then step-up by multiple of 10 to 0.10, 0.20 and 0.50 and so on. Some countries may even choose to mix the two systems. In Maldives, 10 laari, 25 laari and 50 laari follows the 1-2.5-5 system while the rest of the denominations follow 1-2-5 system. While the spacing between denominations are based on the widely popular 1-2-5 or 1-2.5-5 system, the choice of denominations for notes and coins is mostly based on the D-Metric model. Although the model only takes into account the average daily pay in an economy as a proxy for the purchasing power in determining the boundaries of the currency denomination structure (Pattanarangsun, 2011), the results are most of the time augmented by a number of other factors; cost structure and economies of scale in printing and minting, demand for specific denominations, laws and regulations, public’s perception of inflation, etc. The currency denomination structure of a country is also a function of its past economic and political events. For instance, in the case of Indonesia, effects of rampant inflation in 1960s and the Asian Financial Crisis in late 1990s are visible today in the form of exceptionally high denominations in its currency (Hsieh, 2009) as shown in Table 1. However, such high denominations are not necessarily indicative of its economic performance in the recent years. Currency denomination structures can greatly vary from country to country. Central banks broadly try to minimise the number of monetary items within the structure while allowing payments for a wide range of amounts to be made conveniently. Such payments involve anything from petty transactions to large transfers between banks and other financial institutions. 1 These two systems are a compromise between three theoretical optimization problems that are beyond the scope of the discussion of this paper. Interested readers are directed to Pattanarangsun’s dissertation on “The Optimal Currency Denomination Structure: The Case of Thailand” (2011: 10-13) which includes concise summary on the subject. Research and Policy Notes, Maldives Monetary Authority | 2 An Analysis of the Denomination Structure of the Maldivian Rufiyaa By observing the currency structure of selected economies in Table 1, it can be seen that there is no direct relationship between the currency structure and the size of the economy. High-income economies, as listed by The World Bank (2016), have a varying range of denominations. Japan’s and Republic of Korea’s largest coins have a face value of 500 while Australia’s, Canada’s and US’ largest banknotes have a face value of only 100. In contrast, Japan’s and Korea’s largest banknotes have a face value of 10,000 and 50,000, respectively. Countries ranked in the upper- middle-income group such as Fiji, Jamaica and Mauritius have their largest banknotes with face values that are much lower than that of Japan and Korea—100, 5000 and 2000, respectively. 2. Analysis of the Currency Structure in the Maldives Maldives printed its first banknotes in 1947. Only five banknotes were printed and issued by the regime then—½ rufiyaa, 1 rufiyaa, 2 rufiyaa, 5 rufiyaa and 10 rufiyaa—as summarised in Table 2. It should be noted here that the first ever banknotes issued by the government were not 3 | Research and Policy Notes, Maldives Monetary Authority Hassan Fahmy accompanied by any coins, although coins minted by previous rulers may have been used in its place (Maldives Monetary Authority, 1983). The first coins issued by the government were circulated in 1954. The first structural change to the banknotes was brought about after four years of its issuance; 50 and 100 rufiyaa were added in 1951. With the issuance of coins three years later, the government released a 50 laari coin in place of the same-value banknote. With this change, the total number of monetary items (notes and coins) increased to 12. After 35 years since the introduction of paper currency in the Maldives, a news series with a fresh design was issued in 1983 in favour of improved security. Highlighted improvements to the public security features were the paper quality, the security thread and the watermark. Moreover, with the new series, 1 rufiyaa became a coin and a 20 rufiyaa banknote was issued. As the need for a higher denomination rose later on, 500 rufiyaa banknote was issued in 1990. In 1995, the central bank began to issue the 2 rufiyaa coin and halted the issuance of 2 rufiyaa banknote and 2 laari coin, albeit they remain as legal tender to this day. The third currency series of the Maldives, the “Ran Dhihafaheh” series, was introduced in late 2015 and issued into circulation on 26 January 2016—32 years since the release of its predecessor. Notable improvements to the public security features include: the polymer substrate (instead of paper), clear window, masked letters, hidden denomination number Research and Policy Notes, Maldives Monetary Authority | 4 An Analysis of the Denomination Structure of the Maldivian Rufiyaa (Shadow Mark), iridescent ink pattern, dual colour UV (Gemini), spark ink (Spark Orbital) and tactile dots for the visually impaired. The security thread and the watermark have been dropped as it is incompatible with the polymer substrate. Based on the research outlined in this paper, the currency structure has also been amended; a 1000 rufiyaa high-denomination banknote was introduced and the issuance of 5 rufiyaa was halted in favour of releasing a 5 rufiyaa coin later. The following sections briefly explain the findings of the said research. 3. The D-Metric Model The D-Metric model was developed by Payne and Morgan in late 1980s based on data provided by sixty currency-issuing authorities throughout the world (Barry, 1994). According to Payne and Morgan, the data revealed a consistent relationship between average daily pay (D) and the currency structure being used in the country. For instance, the top most denomination in most countries turned out to be roughly five folds of the average daily pay (5D) and the lowest useful coin around 5000 parts of the average daily pay (D/5000). Table 3 shows a D-Metric chart with hypothetical data. The first column labelled “D” shows the average daily pay. The adjacent columns show the denominations of notes and coins corresponding to the average daily pay stated in the “D” column. The unlabelled column in between the “Notes” and “Coins” columns is the note-coin boundary. To follow an example from the Table 3, consider the average daily pay of 260. To find the lowest useful coin, the average daily pay is divided into 5000 parts (D/5000) and 2000 parts (D/2000).