The data as laid down below is from SBP website. The first observation is those giving their views against my suggestion of abolishing the Rs 5,000 currency note are quoting wrong figures. Currency in circulation has increased four times since the issuance of the Rs 5,000 note. The data in State Bank of Pakistan’s website is from 2008 to 2018. The first point to ponder is that there has been a substantial increase in currency in circulation after 2006. This was an obvious fact and numbers were unnecessarily twisted to confuse people. I quote from the website as under:
Pakistan’s SBP: MB: Currency In Circulation data was reported at 4,594,051.049 PKR mn in Sep 2018. This records a decrease from the previous number of 4,860,145.229 PKR mn for Aug 2018. Pakistan’s SBP: MB: Currency In Circulation data is updated monthly, averaging 2,119,814.836 PKR mn from Jun 2008 to Sep 2018, with 124 observations. The data reached an all-time high of 4,860,145.229 PKR mn in Aug 2018 and a record low of 1,045,857.499 PKR mn in Jun 2008. Pakistan’s SBP: MB: Currency In Circulation data remains active status in CEIC and is reported by State Bank of Pakistan. The data is categorized under Global Database’s Pakistan – Table PK.KA001: Analytical Accounts of State Bank of Pakistan.
I am actually amazed with the objections being raised against my suggestion to withdraw the maximum currency note of Rs 5,000 denomination and maintain Rs 1,000 note as maximum denomination. In fact, there is no argument except that economic activity will slow down. I will deal with that aspect later; however, I will first seek to tackle the other illogical and factually incorrect arguments. There are:
That such a step by India had a disastrous effect on its economy; and
That such a step will fuel dollarization of Pak economy.
Both these arguments are not based on correct understanding of facts of the case. In India all the big denomination notes were demonetized and abolished without any prior notice. Furthermore, there was a condition that exchange of present notes with the new notes will be made only where cash in hand is declared. This is fundamentally different from what I am saying. What I am saying that we will announce at least 6 months before the action that from July 1, 2021 the Rs 5,000 note will not be legal tender and persons having such notes can exchange the same from the banks without any enquiry. This is an effort completely different from what India did. History will decide whether ultimate results in India were good or bad; however, the BJP-led coalition government that did it got a 2/3rd mandate after this action. One Indian politician informed me that through this action BJP has actually curtailed a large junk of undisclosed money that was supposed to be used in the election. This clearly means that whatever some ultra conservative economists say, the action was not resented by public at large and the Indian people realized the sincerity behind the effort. Without prejudice to the same what we are suggesting in Pakistan is simple, easy and productive in the long-term.
The second argument about dollarisation is completely wrong and is based on incorrect understanding of facts. It appears to be an attempt to intentionally create a smoke screen on the basis of a normal fear about dollarisation. It is assumed that when the Rs 5000 note will be abolished then people will convert the same to dollars. Even if it is true, as far as existing dollars in the country are concerned they would merely change hands. If for argument’s sake it is considered that there will be inflow of dollars in Pakistan for such conversion, even that is not bad for the country; it will help improve rupee-dollar parity. In short, the fear of dollarisation is an intentional attempt to camouflage a sincere effort.
With regard to perceived slowdown of economy, the assertions of the opponents are misconceived or are being made to defer the correction in the economy. This action is inevitable if Pakistan intends to be out of FATF grading for the reason that the size of cash economy is a major risk factor for money laundering for terrorism. Even after discounting this factor, the opponents are ignoring two major considerations behind this proposals. Before dilating on those it is to be noted that this suggestion is not a brain wave out of thin air. This is based on my experience on all the three sides of economy. The accountant, the regulator and the owner of business [family business]. It will be against my professional duties if I do not suggest what I consider necessary for the state.
The economic slowdown is actually anti-Pakistan. If a higher denomination note is the vehicle to accelerate the economy then I would suggest a Rs 50,000 and even a Rs 100,000 denomination currency note. Let me sound a warning that if we do not stop this fast conversion towards cash economy with huge budget deficits then we will definitely need notes worth Rs 50,000. Look at the currency devaluation in Iran. I am not an economist but I suggest people to read the history of economics in various countries and identify a single country with economic stability having cash economy of this size. This is suicidal. I am totally shocked by the arguments being raised without any substance.
In Pakistan, through a construction package this government has been able to divert the most chronic problem of cash in housing and construction sector. It has been laid down in the law that the cash sum which will be brought into the system will be required to be deposited in an identified bank account. I expect over Rs. 3000 billion investment in that sector. It will be completely suicidal if we are ready to facilitate the people who have been brought to documented sector again to be encouraged for cash transactions through a higher denomination note.
The biggest issue the country is facing is high prices of agricultural commodities and food items. There is a huge margin being financed by the cash economy, facilitated by high denomination notes between the prices of growers and the prices at which such products are available to consumers. There is a complete, comprehensive, organized informal banking system that charges interest at a very high rate [ranging from 20 to 36 percent per annum] on such financing. This interest is loaded in the prices which results in increase in the available price of such commodities. Anybody can study the same in any product say potato, onion, etc., etc. This informal financing flourishes on the funds in cash made available from corruption money. In case if our so called economists are not aware of such practices then it means that they do not visit ‘Mandis’ in the country. There is an immediate need to curb that informal financing market to bring down the prices of commodities. Let me assure you that the biggest resistance against digitalization and abolishing high denomination notes comes from these financiers who are also middlemen in such commodities. Through this process both the agriculturists and poor consumers are exploited and these middlemen flourish with reasonable number of seats in the parliament on account of their capability to spend money in elections.
I will not dilate on the denomination in other countries like the USA, the UK, India and Bangladesh as that will be embarrassing. We had the courage to say in the SBP circular whilst issuing such notes that a high denomination note will save the printing cost. There is nothing much to say about history.
In short, what I have suggested is based on empirical evidence. It will be better that there should be an active debate on the matter.
Copyright Business Recorder, 2021
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