Transitioning away from a cash economy

As the global economy graduates towards digital payments and digital currency platforms, Pakistan is moving in the opposite direction with rising demand for cash. State Bank of Pakistan (SBP) data indicates that the Cash in Circulation (CinC) has increased to Rs9.2 trillion ($32 billion) at the end of June 2023, which is equivalent to 30 per cent of the total money supply (M2), or around 11pc of the national GDP. These are alarming numbers when compared to other emerging economies, where on average CinC accounts for only 5pc of national GDP. CinC is the difference between the total stock of money supply and the deposits available with financial institutions (banks, microfinance, and NBFIs). High CinC is inflationary in nature because it directly fuels consumption of goods and services. Higher consumption also stimulates import demand, expanding trade deficits and driving currency depreciation. By reducing the flow of funds that should enter the banking system, thereby expanding the country’s loan base through the banking multiplier, high CinC undermines investment and savings, leading to lower job creation in the economy.