PESHAWAR: Amid the global shift toward digital payments and cryptocurrencies, Pakistan is experiencing a noteworthy counter-trend – a surge in the demand for cash.
Aurangzeb Kakar, a director at the State Bank of Pakistan said that the Cash in Circulation (CinC) reached a substantial Rs9.2 trillion ($32 billion) by June 2023, equivalent to 30% of the total money supply (M2) and approximately 11% of the national GDP. The heavy reliance on cash, coupled with government borrowing, results in elevated interest rates for the government, raising concerns about the sustainability of Pakistan’s debt.
However, policymakers have not given adequate attention to the growing CinC problem. Government tax measures have contributed to the demand for cash, with withholding taxes on non-cash transactions and cash withdrawals leading to a shift away from bank deposits. The distinction between tax filers and non-filers has exacerbated the situation, pushing funds into the informal economy to evade taxes, often invested in real estate, agriculture, and non-banking assets.
Kakar emphasized that limited access to banks, high transaction costs, and informality in the wholesale and retail sector, which is the largest segment of the economy, have led to tax avoidance.
Addressing the growing CinC issue requires a comprehensive policy response. Pakistan can draw lessons from countries like Indonesia, Mexico, and Turkey, which have consistently kept CinC below 5% of GDP. Pakistan has the opportunity to harness its extensive database through Nadra and promote digitization. Additionally, data repositories like the Credit Information Bureau (CIB) can enhance the documentation of the economy.
Taking steps to address the undocumented real estate market, control foreign currency and gold storage, and regulate informal credit practices are crucial for reducing CinC. While demonetisation could be a potential solution, it should be executed carefully to minimise disruptions, especially for the rural unbanked population with limited digital connectivity.
