Cash in circulation (CiC), a ratio to broad money -M2, in Pakistan is amongst one of the highest in the world, for decades. Its historic reasons for being high are low banking penetration in the masses and widespread prevalence of informal economy. There was an exceptional rise in CiC/M2 in the last nine years (since FY16) after the imposition of tax on banking transaction for non-filers and fear of sharing banking data with the FBR.

To translate the above in numbers, CiC/M2 ratio averaged at 22 percent (range 21%-23%) during FY06-15 and there was a sudden jump in FY16 to 26 percent and there is no stopping in the growth since then – the ratio averaged at 28 percent during FY16-23 and stood at 29 percent in FY23.

That is history. Interestingly, there is a varying trend being observed in the CiC in the last quarter (1QFY24). There is a sharp decline – the CiC is down from its peak of Rs9.1 trillion on 30th June 2023 to Rs8.4 trillion -a decline of Rs877 bn and the ratio (CiC/M2) is down from 29 percent to 27 percent.

There is a case of seasonal decline, as the cash circulation is usually high around meaty Eid and wheat harvesting season, and later some of that cash is back into the system. That happens every year; but in 2023 the post-seasonal decline (during Jul-Sep) in cash is higher than usual.

However, the seasonal increase (in April-June) in 2023 was higher than usual as well. The CiC is increase was Rs1,089 billion in the quarter. Thus, a sharp increase earlier is perhaps resulting in the sharp decline later, and the CiC is likely to move up in the coming quarter.

That is one theory. However, there might be a case where the recent decline in CiC/M2 may continue. Let’s try to probe why CiC was exceptionally high in April-June in 2023. Infact, the increase in FY23 was exceptionally high – CiC increased by Rs1,576 billion in FY23 which was 2.4 time the increase of the previous year.

Well, the fear of people losing savings in PKR has compelled them to move to other asset classes, as the PKR depreciated sharply in FY23. When someone buys gold or foreign currency, the person usually takes the money out of their bank account and pay cash to gold/currency trader, as most of these traders operate in the informal economy and don’t deal in cross cheque, bank drafts, RTGS or IBFT. The person buying gold/foreign currency would keep it in lockers (private or banking) and the cash being transferred to gold/currency traders to become part of the informal economy.

In the yesteryears, transactions of files in real estate were using similar mechanism and overall partial transactions in the real estate market were happening in the open market, and that is one of the reasons for historic high in the CiC in Pakistan and its exceptional rise in the last decade.

Anyhow, the real estate market (especially files trading) is almost dead, lately. And more business was happening in gold, currencies, and commodities. The exceptional rise in commodity prices – such as sugar, wheat, and urea, last year have also attracted baking deposits in its trading.

One theory is that part of the money that was invested in gold, currencies and commodities is coming back to the banking system. The punters perhaps expect the return in PKR (at 20.5% of saving deposits) is enough to beat the expected return in other asset classes. That could be true as there is some appreciation in the PKR, while gold and commodities prices are coming down as well.

Some argue that the fear of crackdown on smuggling and foreign currency is diverting the liquidity in these businesses into the formal system. Then some say that its fear of demonization is into the play as well.

These are all theories and are in retrospect. The fact of the matter is that CiC after all the fall is at April 2023 levels. And this may continue to have its higher ratio, going forward.