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The incidence of cash holdings in Pakistan is too high, and it is growing fast - be it local or foreign currency. The utmost need is to bring the money back into the system for productive use. India did it through a demonetization exercise couple of years ago which largely failed. A better option could be to follow what Sudan did lately - declaring a limit to hold hard currency.
The currency in circulation which is tantamount to hard cash holdings, was always high in Pakistan, and ever since, the tax on cash withdrawal on banking transaction for non-filers was imposed by Dar in 2015-16, the cash holding increased significantly. Lately, amid fear of crackdown on the 'benami' accounts, the currency in circulation accelerated to another level. And in case of foreign currency holding, it could be anyone's guess, experts opine, the foreign currency cash runs in billions of dollars.
The government wants to increase the abysmally low national savings rates to feed the much needed higher investment, as investment to savings gap is fueling the current account deficit. The Finance Minister is of the view that keeping higher real interest rates may entice people to save more, but that might not happen, without reducing banking spreads or having better mechanism of individuals investing directly in government papers.
Even these factors might not entice people hoarding cash to bring back into the system, as it is not interest rates, but the fear of taxmen and that makes people keep hard cash. First, the currency in circulation, has to be brought back into the system, and then better saving instruments may lure a few to not invest informally
The government needs to put an end to cash hoarding. Since many legitimate businesses in Pakistan operate informally including real estate, and many individuals maintain undeclared [benami] accounts for long. It has become a norm over the period of time and bankers usually guide account holders to hide money in benami accounts.
Now with increased scrutiny on FATF amid PM Imran's resolve on cracking down money laundering, the era of benami accounts is close to its end. That is fueling the cash hoarding further. Government can take a leaf out of Sudan's book where President Omar-al-Bashir banned government officials from possessing more than 5 million Sudanese pounds [$105,000] in hard currency while ordinary citizens are barred from keeping cash over one million Sudanese Pounds.
Here at home, before taking such a step, the government should offer one amnesty scheme for people to document their grey wealth and cash holdings. Once done, come up with a restriction of cash hoarding - both for local and foreign currency, and implement it in letter and spirit.
Rs 4.8 trillion is circulating as cash in Pakistan which is 29 percent of broad money, and 41 percent of total bank deposits. Apart from that, a good chunk must be held in foreign currency. Even the local currency holdings are huge, as in developed world, the cash holdings are around 5-7 percent of the broad money while in India the ratio is less than half of Pakistan. The number was always high in Pakistan but the growth is unprecedented in the past three years. The CIC stock was Rs 2.5 trillion in June 2015 which was 22 percent of broad money, and this had increased to Rs 4.4 trillion or 27 percent of broad money in June 18, and by March 2019, the cash holding increased to Rs 4.8 trillion or 29 percent of broad money.
Taking the ratio back to Jun 2015 level, Rs 1.1 trillion can be brought back into the system. But the government should aim the ratio to come back to 15 percent and by doing so an additional Rs 2.4 trillion could be fetched into the formal system. Once banks have these deposits, the loans to private sector can grow substantially. That will increase the investment to GDP ratio and may reduce the saving investment gap.
The government should enact a law to limit the cash holding per person. For instance, any individual should have a limit to keep cash at one crore rupees [Rs 10 million] or equivalent foreign currency. The existing cash is either piled at people home or in bank lockers. The hunch is that most of the cash - be it in local or foreign currency is parked in bank lockers. Anyone having a bank locker, must have an account in the same bank. Why is the cash not in the account? One can open FE25 accounts, why not keep foreign currency in t?
There should be a blanket ban on keeping cash in bank lockers and the technology is there which can tell whether any cash is in a locker without opening the locker. The note counting machines should be registered with SBP while unauthorized import of note counting machines should be banned.
The plan could be to offer an amnesty scheme, and soon after, impose restriction on cash holding. Check all the bank lockers, and control the note counting machines. The world is heading towards digital era, an effort is required to make the economy cash less, and it does not have to be Modi-style.

Copyright Business Recorder, 2019


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