Amir Khan

In a world where digital payments and cryptocurrencies are fast reshaping the financial landscape, Pakistan is witnessing a contrasting trend — a surge in demand for cash, said Aurangzeb Kakar, a director at the State Bank of Pakistan, while talking to WealthPK. The central bank data reveals that the Cash in Circulation (CinC) surged to a staggering Rs9.2 trillion ($32 billion) as of June 2023, equivalent to 30 percent of the total money supply (M2) and around 11 percent of the national GDP. Heavy reliance on cash, combined with government borrowing, results in high interest rates for the government, raising doubts about the sustainability of Pakistan's debt. “Despite these pressing issues, the policymakers have not given sufficient attention to the growing CinC problem. The National Financial Inclusion Strategy, led by the SBP, aimed to improve financial services access, but it did not curb the rise in CinC,” he pointed out. The government tax measures have played a significant role in fuelling the demand for cash, with withholding taxes on non-cash transactions and cash withdrawals contributing to the shift away from deposits in banks. The distinction between filers and non-filers has further exacerbated the situation. The move towards the informal economy to evade taxes is evident, with funds often parked in real estate, agriculture, and other non-banking assets.

Kakar highlighted that the rural areas faced lower deposit penetration due to factors like limited access to banks and higher transaction costs. The wholesale and retail sector — the largest segment of the economy — remains informal, leading to tax avoidance. To tackle the growing CinC issue, a comprehensive policy response is necessary. Pakistan can learn from countries like Indonesia, Mexico, and Turkey, which have consistently maintained CinC below 5 percent of GDP. Pakistan has an opportunity to leverage its extensive database through Nadra and promote digitization, while other data repositories like the Credit Information Bureau (CIB) can enhance the documentation of the economy. Addressing the undocumented real estate market, curbing foreign currency and gold storage, and controlling informal credit practices are critical steps towards reducing CinC. Demonetization may be a solution but it needs to be executed carefully to minimize disruptions, especially for the rural unbanked population with weak digital connectivity. In conclusion, the rising demand for cash in Pakistan poses significant challenges. However, an integrated approach involving digitization, improved tax policies, and efforts to curtail informal financial practices can gradually bring CinC within acceptable limits, ensuring a more open, documented, and prosperous economy for the nation.

Credit: INP-WealthPk