Executive summary
An idea to ban currency notes of Rs. 500 and Rs. 1,000 denominations does make for big headlines, but implementation is a different story. Replacing a country’s currency is a long, costly, and risk-sensitive operation. Nepal’s central bank would have to design new notes, hire foreign printers, import millions of notes securely, and then distribute them across rugged terrain while keeping ATMs and trade functioning. India’s 2016 experience showed that even a large economy with its own printing infrastructure faces months of chaos and economic slowdown, with nearly all old cash returning to banks. So, we need to ask: what problem would demonetisation really solve here, and at what cost?
Why Full-Scale Demonetisation Might Be Challenging
Every Dashain and Tihar, the Nepal Rastra Bank (NRB) makes special arrangements for the public: it releases new banknotes for Dakshina and other rituals. Usually, this is a routine task. But this year (2025) was different. NRB could provide only limited new notes of Rs. 5 denomination, while the larger denominations remained old and worn. On the surface, it seems minor, but it reflects a deeper reality that Nepal struggles to print and circulate fresh notes efficiently.
We can hear growing talk that NRB has begun planning to print notes of new Rs. 500 and Rs. 1000. That is true, but this routine activity is about supplying fresh notes for circulation; it doesn’t mean putting a ban on the existing notes, i.e., demonetisation. (However, given that Nepal’s banking system already has excess liquidity, injecting more cash into the economy may not even be necessary.)
Now, considering the implications of a full-scale demonetisation, imagine trying to replace all Rs. 500 and Rs. 1,000 notes. The scale, cost, and time required would far exceed Nepal’s current capacity. The idea still has appeal. Demonetisation is often discussed as a bold tool to tackle corruption and black money. But on the ground, Nepal’s fiscal, institutional, and logistical realities suggest that it might not be practical and wise at this time.
What Demonetisation Really Means?
Demonetisation declares certain banknotes invalid as legal tender, a policy often pitched to reduce corruption and counterfeit notes and promote digital payments.
In Nepal, some financial experts and even younger citizens have floated the idea of banning Rs. 500 and Rs. 1,000 notes to clean up the corrupt system and move towards a more formal banking system. This sentiment aligns with Generation Z’s demand for cleaner governance during the September protests. While the intention is noble, we keep on thinking if Nepal can actually execute such a thing effectively.
Lessons from India
In November 2016, India demonetised INR 500 and INR 1,000 notes overnight. These notes made up nearly 86% of their cash supply. The goals were to root out black money, stop counterfeit notes, and encourage digital payments. But the aftermath was different.
- Approximately 99.3% of the old notes eventually returned to banks, indicating that most black money was not held in cash
- Cash shortages caused long queues and struggles for small traders, workers, and the informal sector
- India’s GDP growth fell by 1.5 to 2% points in the following quarters of FY 2016/17, compared to the pre-demonetisation trend.
- Digital transactions increased to account for the lack of cash circulation by 43% within a month of the decision (reminds us of Nepal’s pandemic-driven digital upsurge)
Even with four advanced printing presses, India struggled for months to circulate enough new notes in people’s hands. If a country with that scale and infrastructure faced such challenges, Nepal, fully dependent on imported notes, would likely face far worse disruption.
There were spillover effects, too. NRB still holds INR 5.5 million in old 500/1,000 notes because India refused to exchange them.
Nepal’s Banknote Printing Reality
Unlike India, Nepal does not print its own banknotes domestically. Each note is outsourced from abroad through international competitive bidding, often requiring 6 to 12 months. NRB recently worked with China Banknote Printing and Minting Corporation for the latest Rs. 100 notes. The process involves tendering and international bidding, technical and financial evaluation, printing abroad, shipping and customs clearance, secure distribution to NRB vault, banks and, ATMS, and destruction of old notes.
For instance, in FY 2024/25, NRB spent USD 8.9 million to print 300 million copies of Rs. 100 notes with updated maps, taking months to circulate. Tenders for Rs. 500 and Rs. 1,000 notes are ongoing but contracts remain unawarded, reflecting bureaucratic delays
The Economic Reality
Nepal’s economy is dominated by cash. A 2021 study by Tribhuvan University estimated that:
- 42.6% of GDP comes from the informal economy
- Nearly all real estate transactions (99.9%) and most agriculture (96%) are informal
- 50% of the accommodation and food sector relies on cash.
This means that wage earners, farmers, small traders, and rural families all hurt the most. Most importantly, most black wealth isn’t even held in cash; it is in land, gold, or abroad.
A sudden ban on Rs. 500 and Rs. 1,000 would hurt low-income groups and ordinary citizens most, while the targeted individuals would easily find ways to convert assets through legal loopholes or abroad.
We recall that COVID-19 showed some potential for digital adoption, as connectIPS users grew from 0.5 million to 2 million, and activity on eSewa and Khalti surged. Yet, over 70% of usage was urban, while the rural and non-literate relied on informal channels. Even this forced adoption was geographically unequal, and this signals that demonetisation may widen urban-rural and formal-informal gaps.
India’s experience showed job losses and income drops for informal and small workers. Nepal, where reliance on cash is higher, would likely see similar or even worse consequences.
How Demonetisation Would Play Out (Hypothetically)
If Nepal tried, the timeline would look like this:
1. NRB/Government decision.
2. Fixed window (eg, 30 days) for deposits/exchanges
3. KYC checks, deposit limits, and AML checks
4. New notes, international tendering, printing, and shipping (6-12 months).
5. ATM recalibration, nationwide branch distribution.
6. Public awareness and education campaigns.
7. Exchanging and destroying old notes.
The banked people adapt quickly, but rural, elderly, and low-digital literacy groups (31% as per the NRB 2022/23 survey) would suffer the most. The cash scarcity will hurt the daily livelihoods and informal trade (40%+), without even guaranteeing a digital adoption nationwide.
The Cost Factor
Each banknote costs around Rs. 4-5 to print. When we add shipping, insurance, security, and recalibration, the final cost would be incomprehensible. For a smaller country like Nepal, the costs would far outweigh the potential benefits, that too without a guaranteed success, making it an impractical policy tool at this stage.
Smarter Alternatives to Reform
Rather than dramatic withdrawal, Nepal is better served by gradual, structural reform:
- Strengthen tax enforcement and PAN compliance
- Promote QR-based digital payments and mobile wallets all over
- Link large cash transactions to banking IDs
- Gradually replace old notes over the years
- Digitise government payment systems (salaries, pensions, bonuses, and social benefits)
- Improve anti-money laundering tracking of large transactions
It is ironic that while QR codes are common in local shops, many government offices/entities still rely on cash counters. Reform should begin there.
Conclusion
Calls to ban Rs. 500 and Rs. 1,000 notes reflect public frustration with corruption. Yet, without rushing, Nepal must weigh legal mandates, institutional capacity, logistics, and distribution risks. On paper, demonetisation appears bold, but in Nepal’s current reality, it is risky, costly, and unfair. It would burden ordinary citizens far more than the targeted corrupt, while consuming national resources and time.
Instead, Nepal’s focus should be gradual, like building digital systems, enforcing transparency, and strengthening tax nets. In the current vulnerable economy, smart reforms will serve us better, not disrupting the status quo overnight.
(Kharel is a researcher specialising in sustainability, investment, and data-driven economic policy. She can be reached at kharelbibhuti55@gmail.com)
