Sunday Times - Sri Lanka 2006 April 23rd - Plus - Page 4

On a higher note

By Dr Kavan Ratnatunga

The Central Bank of Sri Lanka, in a press release dated December 23, 2005, justified the need to issue higher denomination currency notes, and stated that a Rs. 2000 note has been printed. Now almost four months later, we are still to see it in circulation.

Meanwhile, you may have noticed that the currency notes even of a higher denomination in circulation now are quite dirty. Without the anticipated release of the Rs. 2000 note, the Central Bank has been forced to reuse dirty notes, which would have normally been removed from circulation.

The highest denomination currency notes are generally for use in large cash transactions and should not be seen in normal circulation. For example in the USA, the US$ 100 and 50 don't circulate much. If you were to give a US$ 100 currency note in a grocery store, the cashier would take the note to the supervisor for approval of acceptance. In Sri Lanka, however, you could be using a Rs. 1000 note in almost any environment.

The Central Bank of Sri Lanka first issued the higher denomination currency notes of Rs. 500 and Rs. 1000 in 1981. In 1981 the exchange rate to the US$ was Rs. 16.75 and the Rs. 1000 and Rs. 500 notes were worth about US$ 60 and US$ 30. Today these same denominations are worth under US$ 10 and US$5. In India the highest denomination note is Indian Rs. 1000, which is worth about US$ 25.

If you take the per capita GDP, USA has a per capita GDP which is over 10 times that of Sri Lanka after it is normalised by the Purchasing Power Parity (PPP) of the currency in the local economy. The highest denomination in USA is $100, and the per capita GDP would seem to imply that Sri Lanka should be able to manage with a US$ 10 or Rs. 1000 note. So what is the real justification of the Rs. 2000 note in Lanka?

The largest useful denomination really depends on the size of the largest cash transactions. In USA the $ 20 note is the highest in general circulation. Higher denomination currency notes are not needed, because large transactions are most often done by personal cheque or credit card.

Before the widespread development of the banking system and use of cheques, there was the need for currency notes of a very large denomination to be able to inconspicuously transport large amounts of cash. In fact the main reason for the invention of currency notes a few hundred years ago, was to avoid the need to transport gold and silver at the risk of being robbed. Till 1942 there was a Rs. 1000 note, which at that time was worth 80 gold sovereigns or a million rupee The efficient banking system has removed the need for very high denomination notes. The Rs. 100 note was the largest denomination for a long time, since the Central Bank of Ceylon was established in 1950, and was worth about 2.5 gold sovereigns in the early 1950s. With electronic transfers for many transactions, we are heading toward a coin and currency-less society. However, that is in the distant third world future.

In Lanka cash is used a lot more since credit card penetration is not much, and personal cheques are hardly accepted by any shop or restaurant. Cash is also probably used for many other reasons, and as a consequence there is an urgent need for much higher denomination currency notes, at least the Rs. 2000 note.

1941 Rupees 1

1941 Rupees 2

Currency notes were issued with pictorial designs for the first time on February 1, 1941. The first note had an image of an elephant's head with a mahout on the reverse matching that found on the front of the Rs. 1000 note. The two-rupee currency note had an image of the Sigiriya Rock. It is strongly rumoured that the new Rs. 2000 note, which has ben printed has Sigiriya on it to match the old series.

In 1852 the British gold sovereign was made legal tender in Ceylon and was the coin of largest denomination that was legal tender in the island. In the early 1940s, a sovereign was worth about Rs. 13, while it is worth over Rs. 13,000 today.

When the Rs. 1000 note was reintroduced in 1981, that was then worth about half a sovereign. So the main justification for the Rs. 2000 note is the purchasing power of the currency as reflected by the price of gold. The largest denomination note needs to be about the price of half a gold sovereign now worth over Rs. 7000. Interestingly even a thousand years ago, the largest denomination in Lanka was a Kahavanu made with about half a sovereign of gold.

The writer maintains an educational website on two thousand years of Lankan coins at http://coins.lakdiva.org/, and is Vice President of the Sri Lanka Numismatic Society.


This text is a copy of On a higher note By Kavan Ratnatunga which appeared in the SundayTimes of Sri Lanka on 2006 April 23rd.

It was edited from slightly longer article Urgent need for higher denomination Lankan Currency Notes, but that too was edited down from my original article never published on paper Justification of the New Rs 2000/- currency Note which was written 2005 December in reply to the CBSL Press release.