There has been a significant decrease in the amount of cash people are using for everyday transactions in Pakistan. As of August 2023, the total amount of cash in circulation, which includes the money we have in our wallets and hidden away in various places, has dropped to Rs. 8.5 trillion. This represents a substantial decline in informal cash usage for conducting business.
Data from the State Bank of Pakistan (SBP) shows that the amount of cash in circulation, known as CiC, has fallen by nearly Rs. 700 billion during the first two months of the fiscal year 2023-24. This is a substantial drop from the Rs. 9.148 trillion in total currency stock at the end of June in the previous fiscal year.
Additionally, the total deposits in local banks have reached Rs. 22.3 trillion, resulting in a CiC-to-bank deposit ratio of 25 percent. This is a notable decrease from the 34 percent ratio reported in March 2023.
One reason for this decrease in CiC could be the attractive Return on Deposits, offered around 20 percent by banks. Another factor might be a slowdown in sectors like real estate and automobile markets, which were previously used for parking cash.
Experts, like Topline CEO, Mohammed Sohail, express concern about the high level of cash holdings outside the formal banking system. They believe that this informal economy, often used for tax evasion and other purposes, should be brought into the formal sector.
Despite economic challenges, many significant transactions are still conducted in cash. Having more money outside of banks raises the risk of illegal activities such as hawala-hundi markets and money laundering. This situation is exemplified by the hoarding of Afghan currency in Pakistan’s market.
The real estate sector also remains a significant contributor to the problem, especially with high lending rates. Recently, treasury bill yields have surged, indicating that banks have increased lending costs to combat inflation.
For individuals with substantial cash holdings, there is an opportunity to invest in assets that offer monthly returns. This move would help document cash holdings and bring more money into the formal banking system.
In summary, the decrease in cash circulation in Pakistan raises concerns about informal cash usage and the need to promote financial transparency.