Sat | Nov 25, 2017

No 'rounding tax' expected from demonetising small coins

Published:Wednesday | October 25, 2017 | 12:00 AMAvia Collinder
Senior Deputy Governor of the Bank of Jamaica John Robinson says signs in banking data show that BOJ’s actions are having the desired impact.
Jamaican coins
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Jamaica will soon eliminate small coins, and while such a measure tends to lead to a 'rounding tax', the monetary authority say that won't happen when it comes to foreign exchange rates, stock prices, dividends and any other non-cash transactions.

It's also expected that merchants will continue to price their items as they have done before and only customers who turn up at the register to pay with cash are expected to feel the pinch of rounding.

Some businesses say they already practice rounding, given that the one, 10 and 25 cent pieces that are to be removed from circulation by next year are hardly ever available now to give back precise change. And even where they are available, consumers would often refuse them.

Bank of Jamaica's senior deputy governor, John Robinson, said so far the demonetisation plan has "enjoyed wide endorsement" by consumers, businesses, and the government alike.

"It addresses a long-standing anomaly whereby coins are minted and distributed for use in commercial transactions but, in practice, are often rejected by vendors and consumers alike," said the central banker.

"The result is that most of the small coins issued by BOJ have not been returned for recirculation but have accumulated in people's homes and redeemed only occasionally, if at all. They have been 'lost in circulation'," he said.

Up to October 18, coins in circulation totalled $4.13 billion, of which those below the one-dollar denomination amounted to $146.997 million.

The most widely used denomination is the $1 coin, of which nearly $875.697 million was in circulation up to a week ago.

Notably, the BOJ said a review by the central bank indicates that between 2005 and 2016, there was a drastic decline in the use of these specific coins.

As a proportion of the demand for all coins in circulation, demand for the 25 cent declined from 11 per cent to 1.6 per cent over the period, while demand for the 10 cent declined from 14 per cent to 2 per cent. Significantly, the demand for the one cent coin over the period was almost nil.

Group CEO of GraceKennedy Limited Don Wehby says the conglomerate foresees limited impact on its grocery retail business Hi-Lo and money trading operations.

"Particularly for the FX Trader cambio business, we do not trade in coins and have always tended to round up or down as the situation required. Similarly, from the remittance inbound perspective, our agents are fully aware of the demonetisation process and have also been practising rounding up or down where necessary," said Wehby.

"Based on our assessment, our customers rarely request the smaller value coins, so overall we expect no impact on our business at this time," he said.

GraceKennedy is one more than 60 stocks that trade on the Jamaica Stock Exchange and is among the listings that consistently pay a dividend to shareholders.

How that dividend is computed will not change, the conglomerate's boss said.

"Demonetisation will only affect cash transactions, therefore, our dividend payments which are issued via wires and checks - which are typically deposited - will bear the full value. Based on our internal analysis, we expect the effect of rounding to be immaterial to our pricing/margins at the end of the day," he said.

Dividends are typically declared in 'cents per share'. GraceKennedy, for example, has so far declared two dividends this year of 30 cents and 38 cents per share - amounting to around $676 million, overall. So far this year, Gleaner Business estimates show that around $24.9 billion has been declared as dividend for distribution to owners of Jamaican stock.

At current prices, the coins to be demonetised cost more to make than they are worth.

It costs $1.73 to produce a one cent coin, $1.54 for each 10 cent coin, and $1.96 for each 25 cent coin. By contrast, it costs less than $3 to make each $5 and $10 coin, and less than $10 to make the $20 coin.

"The withdrawal of coins and the standing offer by BOJ to exchange them for notes will have a positive impact," said Robinson.

"It will offer immediate value to persons and households who have been accumulating these coins, save the country the cost of minting these pieces annually, present an opportunity for service clubs and other charitable organisations, as members of the public could, if they wish, turn these coins over to such organisations, and simplify cash transactions," he told Gleaner Business.

avia.collinder@gleanerjm.com