Malta’s excess banknotes sign of heightened economic activity

Cash is being used less frequently for daily payments, but Malta has one of the highest volumes of banknotes in circulation, reflecting a higher share of migrant workers paid in cash

Malta has clocked the EU’s fifth highest share of “excess banknotes”, that is 32% over and above the euro banknotes allocated to the island by the European Central Bank.

At the end of 2020, Malta ranked after Slovenia (68%), Ireland (88%), Germany (136%), and the absolute highest, Luxembourg, with 20 times its ECB allocation at 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 a large migrant workforce are key factors in this excess of cash notes.

Every central bank in the Eurozone 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 a shortfall.

Indeed, even countries highly reliant on tourism but with a large undergound economy – take Italy, Greece and Cyprus as examples – tend to report on a shortage of banknotes.

Not Malta, whose excess cash corresponds with its high economic activity, as well as being one of four countries where non-EU workers, account for over 8% of the workforce, could be playing a role in a demand for cash for remittances back home. In four of the six countries with excess demand for banknotes, these had a relatively high share – over 15% – of migrants in the working-age population.

And while population growth is being driven by migration, especially in ageing European countries with lower fertility rates, migrants without bank accounts will need more cash for remittances: many 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 the demand for cash tends to increase during periods of uncertainty and instability, reflecting a precautionary motive to crisis management. Another reason could be a shift from transactions towards more hoarding, especially in the form of large denomination banknotes.

This trend was observed during the COVID-19 pandemic, during which the Central Bank’s net issuance grew by 18.3% (2020). This was also the case in the euro area, with banknotes increasing by 11% during 2020.

Demand for banknotes started growing significantly since 2017, with excess banknotes amounting to €172 million, or 17% of allocated banknotes, by the end of the year. Since then, excess banknotes continued on an upward trend, reaching €641 million at the end of 2021, and €691 million at the end of June 2022.

€50 bank notes the most common

Since 2013, the €50 banknote became the most important denomination issued by the Central Bank of Malta. Its popularity stems from the fact that it can be used both for transactions as well as a store of value. Moreover, it is also the largest denomination dispensed from 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 end June 2022. The shares of the €20 and €200 notes have also declined over the years, accounting for 8% and 5% by mid-2022, respectively.

The net issuance of the remaining three denominations – €5, €10, and €100 – is negative, suggesting that, on balance, more of these notes are lodged at the Central Bank of Malta than issued.