The recorded currency in circulation (CiC) in Pakistan has experienced asignificant decline, dropping to Rs. 8.5 trillion. This decline signifies asubstantial reduction in the informal cash holdings and the utilization ofcash for conducting business transactions.
As of August 2023, CiC, encompassing the cash individuals keep in theirwallets, closets, and even hidden in various places, accounted for 10percent of the country’s GDP. This figure may also include cash held bybanks.
Data provided by the State Bank of Pakistan (SBP) reveals that CiC hasplummeted by nearly Rs. 700 billion during the initial two months of thefiscal year 2023-24, marking a substantial decrease from the Rs. 9.148trillion total currency stock recorded at the end of June FY23.
Simultaneously, the total deposits in local banks have reached Rs. 22.3trillion, resulting in a CiC-to-bank deposit ratio of 25 percent, aconsiderable drop from the 34 percent reported in March 2023.
CiC, when considered as a percentage of Money Supply (M2), stands at over27 percent. Notably, CiC began to decline following the activation of newbudget provisions imposing a standard fee on cash withdrawals bynon-filers, which potentially encouraged individuals to deposit their cashin banks.
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Topline CEO Mohammed Sohail suggests that the reduction in CiC could beattributed to the high Return on Deposits, which banks are offering ataround 20 percent. Additionally, the slowdown in sectors such as theproperty and auto markets, where people previously parked their funds,could be another contributing factor.
Sohail emphasizes the need to bring this so-called informal economy andundeclared wealth into the formal sector, given that CiC remains high at 28percent of Money Supply, posing concerns regarding tax avoidance,corruption, and other reasons.
Despite the ongoing economic challenges, substantial transactions are stillconducted in cash, creating a significant potential for this easilyaccessible cash to be channeled into illegal hawala-hundi markets and moneylaundering activities. The example of the Afghan currency market dealingwith PKR serves as a notable illustration of this phenomenon