Digitalisation: avenues, hurdles
The global financial landscape is undergoing a profound transformation with the advent of digital currencies, mobile banking, and fintech innovations. These advancements are reshaping economies by promoting financial inclusion, enhancing transparency, and reducing reliance on cash-based transactions. In Pakistan, a country with a significant cash-based economy, the push toward digitalisation of currency and financial inclusion is gaining momentum. The government and financial regulators, led by the State Bank of Pakistan (SBP), have introduced policies and regulations to encourage digital payments and discourage cash transactions. These efforts aim to modernise the economy, combat the informal sector, and integrate millions of unbanked individuals into the formal financial system.
However, the transition to a digital economy is not without challenges, including infrastructural limitations, regulatory complexities, and socio-economic barriers. This article explores the digitalisation of currency in Pakistan, its role in promoting financial inclusion, the laws and regulations designed to reduce cash usage, and the advantages and disadvantages of this shift.
Financial inclusion, a key objective of digitalisation, aims to provide affordable and accessible financial services to underserved and unbanked populations. According to the World Bank, 1.4 billion people globally remain unbanked, with Pakistan accounting for a significant portion mainly due to illiteracy, no access to banks or the inability of Pakistan Post to offer banking services like Singapore Post, hence Pakistan has a large informal economy, especially in rural areas. Digital financial services, such as mobile banking and digital wallets, have proven effective in bridging this gap by enabling low-cost transactions, savings, and credit access without the need for physical bank branches.
In Pakistan, the digitalisation of currency aligns with the government's vision of a "Digital Pakistan," launched in 2019, which seeks to leverage technology to enhance economic growth and governance. The SBP's National Payment Systems Strategy (NPSS), introduced in 2019, and subsequent regulations have laid the groundwork for a cash-light economy. However, the transition requires balancing innovation with regulation, addressing infrastructural challenges, and ensuring equitable access for all citizens.
Pakistan's economy is heavily cash-dependent, with cash transactions accounting for an estimated 80-90% of all payments, particularly in rural areas and the informal sector. According to the SBP, the informal economy constitutes approximately 30-40% of GDP, driven by cash-based businesses, unreported income, and limited banking penetration. Only 26% of Pakistan's adult population had access to formal financial services in 2021, per the World Bank's Global Findex Database, leaving millions reliant on cash for daily transactions.
This reliance on cash poses several challenges. Transactions are difficult to track, enabling tax evasion and the growth of the black economy. The Federal Board of Revenue (FBR) estimates that Pakistan's tax-to-GDP ratio, at around 10%, is among the lowest in the region, partly due to unreported cash-based activities.
Cash facilitates illicit transactions, including money laundering, terrorist financing, and corruption, undermining economic stability and security.
Handling physical cash incurs significant costs for printing, transportation, and security. For businesses and individuals, cash transactions are time-consuming and prone to theft or loss.
The lack of access to banking services excludes millions from savings, credit, and insurance, perpetuating poverty and inequality, particularly among women, rural residents, and low-income groups.
The digitalisation of currency offers a pathway to address these issues by promoting transparency, reducing costs, and integrating the unbanked into the formal economy.
The Pakistani government and the SBP have introduced a range of policies and regulations to encourage digital payments and reduce cash usage. These measures are part of a broader strategy to modernize the financial system, enhance tax compliance, and promote financial inclusion. Key initiatives include: StBP's National Payment Systems Strategy (NPSS), launched in 2019, aims to create a robust, interoperable, and inclusive digital payment ecosystem.
Key components
Raast instant payment system: Introduced in 2021, Raast is Pakistan's first instant digital payment platform, enabling real-time, low-cost transactions across banks and digital wallets. Raast supports person-to-person (P2P), person-to-business (P2B), and government-to-person (G2P) payments, reducing reliance on cash for small transactions. By 2024, Raast had processed over 200 million transactions, with a focus on financial inclusion for rural and underserved populations.
Electronic money institutions (EMIs): The SBP's EMI Regulations (2019) allow non-bank entities, such as fintech companies, to offer digital payment services, including mobile apps and e-wallets. Licensed EMIs like JazzCash and Easypaisa have expanded digital financial services to millions, particularly in rural areas. Interoperability and open banking: The NPSS mandates interoperability among banks, fintechs, and payment service providers, ensuring seamless digital transactions. The SBP's Open Banking Framework encourages data sharing to foster innovation and competition.
Taxation and cash transaction limits
To discourage cash usage and enhance tax compliance, the FBR has introduced measures to limit cash transactions and incentivize digital payments:
Section 21(l) of the Income Tax Ordinance, 2001: This provision disallows tax deductions for business expenses exceeding PKR 250,000 if paid in cash, encouraging businesses to use banking channels.
Withholding tax on cash withdrawals: Under Section 231A, a 0.6% withholding tax is imposed on cash withdrawals exceeding Rs50,000 per day from bank accounts, incentivising digital transactions to avoid additional taxation.
Point of Sale (POS) integration: The FBR's POS Integration Rules (2021) require large retailers (Tier-1) to install POS machines linked to the FBR's system for real-time transaction reporting. Non-compliance results in penalties, pushing businesses toward digital payments.
Tax incentives for digital transactions: The FBR offers reduced tax rates for merchants accepting digital payments, encouraging the adoption of card and mobile-based transactions.
The digitalisation of currency in Pakistan, supported by initiatives like Raast, EMI regulations, and tax policies, holds immense potential to transform the economy. By promoting financial inclusion, enhancing transparency, and reducing the costs of cash handling, digital payments can drive economic growth and integrate millions into the formal financial system. However, challenges such as the digital divide, low financial literacy, and cybersecurity risks must be addressed to ensure an equitable transition.
Pakistan's laws and regulations to discourage cash transactions, including POS integration, cash withdrawal taxes, and AML/CFT measures, are steps in the right direction. Yet, their success depends on robust implementation, public awareness, and infrastructural improvements. By learning from global models like India's UPI and investing in inclusive policies, Pakistan can build a digital economy that benefits all citizens, from urban elites to rural farmers.
As the country moves toward a cash-light future, it must balance innovation with regulation, ensuring that the benefits of digitalisationfinancial inclusion, transparency, and efficiencyare accessible to all. The journey is complex, but with strategic reforms and collective effort, Pakistan can harness the power of digital currency to create a more inclusive and prosperous economy.
THE WRITER IS A TRADE EXPERT WITH OVER 35 YEARS OF EXPERIENCE IN INTERNATIONAL TRADE, A COMMODITIES CONNOISSEUR & FORMER VICE PRESIDENT OF KCCI
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