Amir Saeed

As Pakistan’s cash-based economy hinders growth and complicates tax collection, digital transformation offers solutions by enhancing financial inclusion. Talking to WealthPK, Aatizaz Hussain, former manager of Financial Literacy Programme at the National Institute of Banking and Finance, highlighted that Pakistan’s economy faces significant challenges due to its reliance on cash transactions, which exacerbate financial exclusion and hinder economic growth.

“The prevalence of cash transactions leads to financial exclusion, particularly affecting rural populations and small businesses.” Pakistan has a deeply entrenched cash-based economy, where a significant portion of transactions, around 85%, are conducted using physical currency. Although there has been a slight decrease in cash usage at Point-of-Sale locations, from 84% in 2019 to 78% in 2023, the informal sector remains robust, contributing more than 40% to the country’s GDP.

“This reliance on cash is partly due to the widespread perception of cash as safe and convenient, as well as the underdeveloped digital payment infrastructure. Despite efforts to promote digital transactions, cash remains the preferred payment method,” he noted. Hussain lamented that a substantial portion of the population remains unbanked, with limited access to formal financial services. “This exclusion is further complicated by a lack of financial literacy and cultural preferences for cash transactions, often driven by distrust in banking institutions.”

He added that many small businesses operate entirely in cash to avoid tax liabilities, which makes it difficult for them to establish credit histories and access formal credit, pushing them towards high-interest informal lending sources. “Furthermore, this reliance on cash also limits the government’s ability to effectively implement monetary policies and collect taxes, as a significant portion of economic activity remains undocumented.

Additionally, the cash-based economy hampers the development of a robust financial infrastructure, which is essential for attracting foreign investment and promoting economic stability,” he said. Talking to WealthPK, Dr Anwar Shah, a development economic researcher at Quaid-i-Azam University, Islamabad, highlighted that the persistence of cash transactions in the country is not merely a cultural preference but a systemic issue that hampers the nation’s economic potential.

“The informal economy, fuelled by cash dealings, poses significant challenges to tax collection and financial regulations,” he added. “The country’s low tax-to-GDP ratio of 9.5% reflects widespread tax evasion and the limited reach of formal financial systems. Economies with robust digital payment systems and integrated banking networks benefit significantly, enabling businesses to secure loans, invest in innovation, and boost economic development,” Shah noted. He emphasised that digital transformation offers a promising solution to these challenges.

“By transitioning to a digital economy, the country can enhance financial inclusion, reduce the informal economy, and improve tax collection.” “Initiatives like the central bank’s Raast digital payment system aim to bring millions of unbanked citizens into the formal economy, expanding the tax base and reducing financial exclusion. However, achieving this requires addressing structural challenges such as digital literacy gaps and regulatory frameworks that often hinder innovation,” the development economic researcher noted.

Credit: INP-WealthPk