BSP asserts demonetizing P1,000 and P500 bills not a solution to corruption
The Bangko Sentral ng Pilipinas raised that ideas to demonetize P1,000 and P500 bills to curb illicit cash hoarding amid the flood control corruption scandal may do more harm than good.
In their latest entry on their research blog, the bank acknowledged calls to remove the highest denominations from circulation in order to "flush dirty money into the banking system, complicate bribery, and demonstrate the state's determination to confront graft."
While they noted that the logic is "tempting," they asserted that demonetization is "rarely effective in cash-dependent economies."
"Its costs are immediate and widespread, while its supposed deterrence fades quickly. Where it has worked, implementation was gradual, well-prepared, or limited to denominations already peripheral to daily use," BSP said.
Citing India's decision to invalidate its largest banknotes in 2016, BSP stated how the country had suffered significant economic disruption following the abrupt change.
The Indian government had declared that their ₹1000 and ₹500 notes—which accounted for 86% of cash in circulation at the time—would cease to be legal tender. Citizens were given only weeks to deposit or exchange them.
"The objectives were ambitious: to curb corruption, eliminate counterfeit currency, and accelerate the shift to digital payments. The impact, however, was severe. Queues formed outside banks, cash-based businesses shut down, and millions of informal workers lost income," BSP said.
Although some hidden wealth was funneled back into the system through intermediaries, the Reserve Bank of India later reported that over 99% of the invalidated notes were returned to banks. This means that the goal of “purging" illicit wealth was never materialized.
BSP compared India's situation with that of countries in Europe. Twelve countries simultaneously retired their national currencies in favor of the euro back in 2002, but the difference was that there were "years of preparation, transparent communication, and generous exchange windows" to allow for a "seamless transition."
"Citizens viewed the change not as punishment but as modernization," BSP said.
Why demonetization won't work in the Philippines
The central bank stated that the Philippines is more similar to India far more than Europe in that cash still dominates daily transactions.
According to their data, P1,000 bills make up 83% of the total value and 40% of the volume of all banknotes in circulation.
Their Currency Policy and Integrity Department estimates that replacing the P1,000 and P500 bills would effectively pull out most of the money in circulation—93% by value and 51% by volume—at a sunk cost of P11.5 billion, not counting the massive expenses needed to print, move, store, and destroy the old and new cash.
The BSP claimed that demonetization does not automatically lead to a clean governance.
"Some economies with high-value notes maintain strong integrity, while others with smaller denominations still struggle with governance. The determinant is institutional quality, not note value," they said.
The act is also "deceptive," as everyone will be affected by the economic costs while corrupt individuals often escape.
"As seen in some developing economies, sudden demonetization can erode confidence in the central bank and fuel suspicion of political motives," the BSP explained.
"Those with access to laundering networks adapt; those without—small traders, wage earners, and rural consumers—bear the brunt," they continued.
What should be the solution?
The BSP highlighted how financial transparency reforms offer "far greater promise."
"Easing bank secrecy—with appropriate safeguards—would empower investigators to trace illicit funds, match deposits to asset declarations, and build prosecutable cases," they suggested.
"Unlike demonetization, which imposes broad costs on the public, transparency reform targets corruption at its source," they added.
Other measures that could be done to combat corruption include the digitalization of government payments and procurement, strengthening anti-money laundering and counter-terrorism financing enforcement, and having broader financial inclusion and publicly supported digital payments adoption.
"For developing economies, institutional trust is a scarce asset. Once shaken by an abrupt policy or diminished confidence in money, it is difficult to rebuild," the bank stressed.
"If the goal is not merely to be seen fighting corruption but to succeed in reducing it, then the path forward lies in trust-building, transparency, and reform—not currency shock therapy," they added.
The Philippines is currently facing a corruption scandal due to anomalous flood control projects.
The Department of Finance has estimated that the Philippine economy lost up to P118.5 billion from 2023 to 2025 due to this. Greenpeace has suggested the number is actually closer to P1.025 trillion.
The issue began in July as the rains triggered massive flooding in the metro.
Hearings at the House of Representatives and the Senate revealed billions of pesos lost to corruption, which prompted the formation of the Independent Commission on Infrastructure that will specifically investigate irregularities in flood control projects in the last 10 years.
Former finance secretary Cesar Purisima suggested demonetizing the two largest value banknotes to make corruption harder in light of the flood control projects issue.
A former security consultant of ex-Ako Bicol Party-list Rep. Zaldy Co told the Senate Blue Ribbon Committee that he was allegedly detailed to move suitcases filled with P48 million in dirty money.
