Digitalisation: avenues, hurdles
Listen to article
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
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Business Recorder
2 hours ago
- Business Recorder
Punjab's debt stock rises Rs25bn YoY
LAHORE: The Punjab government's total debt stock has increased by Rs 25 billion, year-on-year increase of 1.5 percent, during the current fiscal year (FY). According to the Punjab Budget 2025-26 documents released on Monday, at the end of June 2025, Punjab's debt stock stood at Rs 1,710 billion, out of which Rs 1,709 billion was from external lenders, while Rs 1.29 billion was from domestic sources. Collectively, these loans represent 2.7 percent of Punjab's Gross State Domestic Product (GSDP). Moreover, Punjab's total debt stock surged from Rs 1,685 billion (reported in June 2024) to Rs 1,710 billion (reported in June 2025) in 12 months. However, the domestic loans showed a decline from Rs 1.7 billion (reported in June 2024) to Rs 1.29 billion, a decrease of 22.5 percent. In contrast, external loans witnessed a gain from Rs 1,683 billion (reported in June 2024) to Rs 1,709 billion (reported in June 2025); in dollars, it amounts to US $6.10 billion. The government's external debt primarily consists of concessional, long-term loans in foreign currency, acquired from various multilateral creditors like the World Bank, Asian Development Bank, Japan International Cooperation Agency and International Fund for Agricultural Development. Additionally, it includes loans from bilateral creditors such as China, Japan, and France. These funds are borrowed by the federal government and then channelled to the Punjab government. This debt can be categorised broadly into project loans, which are intended for long-term public infrastructure investments and programme loans, which provide medium-term budgetary support and are often tied to specific expenditure and/or policy reforms. The report highlighted that the government's external debt is derived mainly from two key sources: USD 4.81 billion from multilateral creditors, including the World Bank and the Asian Development Bank, as well as other sources; and US $1.29 billion from bilateral creditors, including China and other sources. These figures consist of the US dollar equivalent value of the outstanding debt (which is denominated in various currencies) at the end of the current Financial Year. The external debt was denominated mainly in US dollars (68 percent), followed by Special Drawing Rights (23 percent), Japanese Yen (5 percent) and other currencies (4 percent). As per the report, the agriculture, irrigation and livestock sector remained the major recipient of government borrowing, as its share constitutes 24 percent of the total outstanding followed by transport and communication 20 percent, education 19 percent, urban and community development at 17 percent, governance 11 percent, health 5 percent, energy 2 percent, tourism 1 percent, and industries and infrastructure 1 percent. Copyright Business Recorder, 2025
Business Recorder
2 hours ago
- Business Recorder
World Bank flags drop in FDI to developing countries
WASHINGTON: The World Bank said in a report Monday that foreign direct investment (FDI) into developing economies has hit the lowest level since 2005, citing growing trade and investment barriers. Developing countries received just $435 billion of such investment in 2023, the Washington-based development lender added, noting this was the latest year for which data was available. As a share of gross domestic product (GDP), FDI flows to developing economies were at 2.3 percent in 2023 — about half the level of their peak in 2008. 'What we're seeing is a result of public policy,' said World Bank chief economist Indermit Gill, noting that investment is falling while public debt is reaching new highs.
Business Recorder
2 hours ago
- Business Recorder
Policy rate kept unchanged at 11pc
KARACHI: Amid evolving macroeconomic indicators and emerging risks, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has decided to maintain the benchmark interest rate at 11 percent, signaling a cautious stance to ensure price stability and support economic recovery. The committee observed that the external outlook remains vulnerable to several risks, primarily driven by escalating geopolitical tensions, volatility in global oil prices, potential adverse effects of proposed budgetary measures, and the possibility of shortfalls in anticipated financial inflows. The meeting of the MPC held on Monday at SBP head office and chaired by SBP Governor Jameel Ahmed. During the meeting the committee noted that the increase in inflation in May to 3.5 percent y/y was in line with its expectation, whereas core inflation declined marginally. Meanwhile, inflation expectations of both households and businesses moderated. However, going forward, inflation is expected to trend up and stabilize in the target range during FY26. The committee has also emphasized the timely realization of planned foreign inflows, achievement of the targeted fiscal consolidation and the implementation of structural reforms as essential to maintain macroeconomic stability and achieve sustainable economic growth. The MPC also assessed that economic growth is picking up gradually and is projected to gain further traction next year, supported by the still-unfolding impact of earlier policy rate cuts. At the same time, the Committee noted some potential risks to the external sector amidst the sustained widening in the trade deficit and weak financial inflows. It was observed that some of the proposed FY26 budgetary measures may further widen the trade deficit by increasing imports. In this regard, the Committee deemed that unchanged decision appropriate to sustain the macroeconomic and price stability. The Committee noted the following key developments since its last meeting. First, the real GDP growth for FY25 is provisionally reported at 2.7 percent, and the government is targeting higher growth of 4.2 percent for next year. Second, despite a substantial widening in the trade deficit, the current account remained broadly balanced in April. Meanwhile, the completion of the first EFF review led to the disbursement of around $1 billion, which increased the SBP's FX reserves to $11.7 billion as of June 6. Third, the revised budget estimates indicate the primary balance surplus at 2.2 percent of GDP in FY25, up from 0.9 percent last year. For next year, the government is targeting a higher primary surplus of 2.4 percent of GDP. Lastly, global oil prices have rebounded sharply, reflecting the evolving geopolitical situation in the Middle East and some ease in US-China trade tensions. Taking stock of these developments and potential risks, the MPC assessed that the real interest rate remains adequately positive to stabilize inflation within the target range of 5–7 percent. As anticipated, headline inflation increased to 3.5 percent y/y in May from 0.3 percent in April. This reversal largely reflected the phasing out of the favourable base effect from food prices, along with persistence in core inflation. In contrast, energy prices continued to remain lower than last year, mainly reflecting the impact of moderation in global oil prices. Further, the MPC's initial assessment indicates the recent budgetary measures to have a limited impact on the inflation outlook. Nonetheless, some near-term volatility in inflation is expected, before it gradually inches up and stabilizes within the 5-7 percent target range. This outlook, however committee believed that, remains subject to multiple risks emanating from potential supply-chain disruptions from regional geopolitical conflicts, volatility in oil and other commodity prices, and the timing and magnitude of domestic energy price adjustments. According to provisional PBS estimates, the economy gained momentum during the second half of FY25, with real GDP growth accelerating to 3.9 percent from 1.4 percent in H1-FY25, broadly in line with the MPC's earlier expectations, though with compositional differences. The agriculture sector underperformed relative to FY24 due to a sizable decline in the production of major crops. In contrast, the industry and services sectors contributed to the uptick in real GDP growth, particularly in H2-FY25. Looking ahead, the MPC anticipates the industry and services sectors to continue to drive economic growth in FY26 and this assessment is supported by the sustained momentum in high-frequency indicators, including credit to private sector, imports of machinery and intermediate goods, and business sentiments and easing financial conditions. On balance, the Committee expects real GDP growth to increase further during FY26. According to monetary policy statement, on external front, the current account was almost balanced in April 2025, taking the cumulative surplus to $1.9 billion during July-April FY25. Imports continued to grow in line with improving economic activity; while export growth decelerated, partly due to the challenging global trade environment. However, workers' remittances continued to remain strong and more than offset the impact of the widening trade deficit on the current account. Based on these trends, the current account is expected to remain in surplus in FY25. Nonetheless, the uncertain global trade environment, coupled with expected continued strong import demand, is projected to turn the current account into a moderate deficit in FY26. Meanwhile, the MPC noted that despite net financial inflows remaining weak so far, the SBP's FX reserves are expected to increase to around $14 billion by end-June 2025. Going forward, external outlook is susceptible to multiple risks, which mainly stem from heightened geopolitical tensions, volatility in international oil prices, possible adverse impact of proposed budgetary measures, and potential shortfalls in planned financial inflows On Fiscal side, the revised budget estimates indicate that both the overall fiscal and primary balances improved further during FY25. This improvement came on the back of an increase in revenues and relatively contained expenditures, especially PSDP. Copyright Business Recorder, 2025
