The currency in circulation has always been high in Pakistan and it is a cause of concern for an economy where lack of documentation has swayed it from true potential. The CIC to M2 ratio has been growing at a higher pace ever since Dar introduced the concept of banking transaction tax with higher rate for non filers. (Read “Doing away with the transaction tax”, published on 30th October, 2018).

This government came up with an agenda of crackdown on corruption and black economy. It is not just the PM’s passion against corruption but also the imperative of FATF compliance where terror financing and money laundering work under the wrap of benami accounts. But these benami accounts are a norm in businesses operating across the country and have some sort of legal cover and bankers help people create such accounts.

Now with this round of crackdown, the CIC ratio is even increasing at a higher pace as people are taking money from benami accounts and keep as cash. Three quarters in this fiscal year, the CIC flow increased to Rs317 billion versus Rs142 billion in the same period last year. This is 70 percent of M2 flow this year versus 50 percent in the same period last year.

The overall money supply is increasing this year as the government borrowing from the banking system has increased along with higher credit to the private sector. Thus the NDA build up is almost double the same period last year but at the same time the fall in NFA is more than double as well. That is not a good omen and is reflecting in the foreign exchange reserves.

The private credit growth is reflecting from higher working capital need due to currency adjustment and some growth in exports. That is good, but the bank deposits building on the liability side is not complimenting the credit growth both by government and private sector. The hunch is that many businesses and individuals operating in the shadow of undocumented economy through benami accounts are now taking the money out of the formal system by keeping in cash.

While it is hard to take the money out of the country sooner or later the money that is being kept as cash will have to come back to formal system.

Billions are parked in real estate too where non-filer distinction and FBR valuation have lowered the transactions significantly. All these have to come back in the formal system and that has to be routed to production sector - from where the domestic supply expansion can take place. This has to be done by some sort of amnesty scheme.