LFMI has examined and submitted a position paper on the Government’s proposal to restrict cash payments and draft amendments to the Civil Code and the Code of Administrative Offences.
EU experience shows that limitations on cash payments are not effective in fighting the shadow economy. Firstly, the size of the shadow economy in the countries that restrict cash payments is no smaller than in those without such restrictions. Secondly, cash payment restrictions cannot affect the shadow economy since illegal activities are outside the reach of law. And importantly, restrictions on cash payments reduce competition between payment methods and thus create prerequisites for raising prices of financial services.
Advocates of restricting cash payments as a means of combatting the shadow economy claim that the shadow economy is smaller in countries where the scope of cash payments is smaller. A total of 15 out of 28 EU countries limit payments in cash.[1] However, Estonia’s example and a study by the Bank of Finland[2] show that non-cash payments do not reduce the shadow economy, and statistics do not show any link between the size of the shadow economy or its decline and the restriction on cash payments. What is more, studies show that the shadow economy largely depends on a country’s economic development and a mere obligation to use non-cash payments cannot help combat it.
The authors of the amendments claim that “unlimited cash transactions create favourable conditions for opaque economic activities” and that a reduction in cash payments will reduce prerequisites for such activities. However, no comprehensive analysis has been done to show how cash payment limitations will affect those involved in undeclared activities. Notably, the shadow economy depends largely on a bilateral agreement between the parties involved. Therefore, restrictions on cash payments will have no impact on illegal transactions since both parties agree to break the law and engage in unrecorded activities.
Cash payment restrictions will undermine competition between payment methods. The possibility to use either cash or electronic payments prevents banks and other financial institutions from increasing prices of financial services. The absence of alternatives would harm competition and create grounds for price increases.
Around two thirds[3] of illegal income is spent legally. The proposed restrictions may stimulate people to look for illegal ways of spending money. This will also lead to a loss of tax revenues.
The explanatory note of the proposed bill states that cash payments restrictions “will ensure safer personal transactions.” However, in addition to the risks of cash transportation, loss and theft, the assessment of the safety of cash and non-cash transactions should embrace risks associated with banking activities and the use of electronic money. Also, taxpayers bear losses in case of insurance events relating to bank deposits. For these reasons the use of electronic money changes the nature of the risk rather than eliminating it.
Given the fact that restrictions on cash payments do not have a positive effect on reducing the scope of the shadow economy and would harm the country’s economy and the citizens, LFMI calls for declining the proposal to introduce cash payment restrictions.
The full position paper in Lithuanian can be found at http://www.llri.lt/naujienos/ekonomine-politika/finansai-pinigu-politika/ekspertize-es-saliu-patirtis-grynuju-ribojimas-nera-efektyvi-kovos-su-seseliu-priemone/lrinka
[1] Payments in cash are limited in Belgium, Bulgaria, Czech Republic, Denmark, Greece, Spain, Italy, Croatia, Latvia, Poland, Portugal, France, Romania, Slovakia and Hungary. Payments in cash are not limited in Ireland, Austria, Estonia, United Kingdom, Cyprus, Lithuania, Luxembourg, Malta, the Netherlands, Slovenia, Finland, Sweden and Germany.
[2] Takala, K. & M. Viren. 2010. Is Cash Used Only in the Shadow Economy? International Economic Journal, 24(4): 525-540. Available online at http://ideas.repec.org/a/taf/intecj/v24y2010i4p525-540.html
[3] Schneider, F. 2011. The Shadow Economy in Europe, 2011.Chicago: A. T. Kearney. Available online at http://www.atkearney.de/documents/856314/1214702/BIP_The_Shadow_Economy_in_Europe.pdf/cd3277da-74c3-4a35-9ac4-97f7a0e93518
