NIS 200-bill Leads Growth of Cash in Circulation

Growth a result of the growing population and increased economic activity, says the Bank of Israel's currency department in its annual report.

The total value of all Israeli banknotes and coins in circulation at the end of 2011 reached NIS 49 billion - a 9% increase from the NIS 45 billion in circulation a year earlier, according to a Bank of Israel report released yesterday.

The growth in cash in the public's hands is a result of the growing population and increased economic activity, said the Bank of Israel's currency department, in its annual report.

The increase is mainly due to an 18% rise in the number of NIS 200 bills in circulation. Although the total value of all the bills in circulation grew by NIS 4 billion in 2011, the value of the red NIS 200 bills grew by NIS 4.6 billion. The total value of all other bills actually shrank last year.

The increase in higher-denomination bills could be explained by greater demand by banks for these banknotes, as they attempt to reduce the number of times they need to refill their ATMs.

Another possible explanation is a rise in black market activity, which is fueled by high-denomination bills.

Only 0.006% of all bills in circulation last year was found to be counterfeit - a drop from 0.008% the year before. Most of the counterfeit bills were NIS 100 and NIS 200 notes, plus some NIS 5 and NIS 10 coins.

Of all the money in circulation in 2011, 97% was in bills, accounting for NIS 47.4 billion, and only 3% in coins, or NIS 1.6 billion. Of the coins, 24% were NIS 1 coins and only 3% were NIS 2 coins. NIS 5 and NIS 10 coins accounted for 4% and 3% of the total number of coins last year, respectively. Over half of coins - 59% - were of the 10 agorot denomination.

This is a continuation of a trend that has been going on for a number of years. The total value of high-denomination bills is increasing, both in number and in value, while that of smaller bills and coins is falling. In 2006, NIS 200 bills made up 36% of the total value of the currency in circulation, while at the end of 2011 the figure reached 64%.

Greater demand for large bills by the banks is one possible explanation the Bank of Israel has given in the past.

Banks are trying to cut costs by loading their ATMs with high-denomination bills in an attempt to cut down on the number of times they need to refill the cash machines, said the central bank.

This way, the banks have fewer bills to transport, need fewer staff members to fill the machines, and provide better service since the ATMs run out of money less frequently, which can be a major annoyance for the public, said the currency department.

But another possible explanation for the large number of high-denomination bills is the relatively low number of ATMs in Israel. While in the euro bloc the average is 969 cash machines per million people, in Israel the figure is just 384 ATMs per million. In Europe, only the Czech Republic and Sweden have a lower number of cash machines per capita.

The number of ATMS in Israel is a big increase over the five years from 2006, mostly because of the introduction of large numbers of private cash machines, called cash dispensers, which are not owned by the banks. Other opportunities to get cash grew last year too, such as at gas stations or supermarkets. The average value of a cash withdrawal from an ATM last year was NIS 616.

Black-market bills?

There is also another explanation for the growth in the number of red NIS 200 bills in circulation - a big rise in the value of the illegal, "black" economy in Israel, which is fueled by cash. Those who keep large sums in cash, to hide the money from the authorities, usually want it in large-denomination bills, according to banking industry executives.

Another possible explanation for the rapid growth in the number of large bills in the public's hands is erosion in the value of money. Inflation in 2011 was 2.2%, according to official numbers from the Central Bureau of Statistics. As consumer prices rise, the public also wants more cash.

Because of all these trends, the Bank of Israel is expected to issue a NIS 500 bill some day. But central bank officials say they want to postpone such a move as long as possible since they fear it may lead to a further erosion in the value of the Israeli currency.

The growth in big bills over the past five years came despite a big rise in the use of credit cards. Israelis spent NIS 189 billion in 2011 using their credit cards - almost half the total value of private consumption last year, not including housing. In other words, the public is still holding much more cash even though it uses credit cards more, and the share of cash in reported transactions has fallen.

The total cash usage rate, compared with other methods of payment, rose from 34% in 2010 to 37% in 2011. This compares to only a 17% use of cash in the euro bloc, but is well under the 50% cash usage rate in the United States. This works out to NIS 5,511 per person per year in Israel, compared to 1,450 euros per person in the euro bloc countries.