The government’s plan to make a swift transition to a cashless economy will enhance the central bank’s ability to manage and control money supply and interest rates. Waseem Shahid Malik, ex-member of the State Bank Monetary Policy Committee (MPC), said this while talking to WealthPK. In the past, the monetary policy outcomes remained insensitive to policy changes made by the State Bank, he said. He explained that in a cashless economy, most transactions are conducted electronically, leaving a clear digital trail of money flows. This will allow the State Bank to have a more accurate and real-time understanding of the money supply and its velocity. With better data, the bank will be able to fine-tune its monetary policies more effectively.

In this regard, Waseem quoted the example of interest rate’s inability to curtail inflation in Pakistan. From September 2021 to April 2023, the State Bank raised the policy rate by 1,400 basis points, bringing it to the level of 22%. Likewise, during the period from July to April of FY 2023, there was a cumulative policy rate increase of 725 basis points. However, inflation did not show any downward trend during the same period, he pointed out. He attributed this ineffectiveness to the absence of a cashless economy.

“In fact, the long-standing ineffectiveness of Pakistan’s monetary policy is predominately the result of unavailability of refined data on the money in circulation. Successive governments tried to control inflation by varying the level of interest rate. However, the underlying issue of transaction activities beyond the purview of the banking system remains in place,” he explained. Cashless transactions in Pakistan will leave a digital record, making it more challenging for businesses and individuals to engage in unreported or underground economic activities. This reduction in the informal economy will help the State Bank gain more control over the money supply.

The surge of online stores in Pakistan like PakWheels, OLX, Daraz, and Zameen.com is a positive sign in terms of obatining real-time data on the cash in circulation, he said. In order to promote a cashless economy, he suggested the government promote e-banking and financial literacy, and build cyber security infrastructure.

Credit: Independent News Pakistan (INP)