Digital currency: a game-changer for documenting the economy

In recent years, digital money and payment systems have become the significant tools for improving the tracking of economic transactions and documentation of the economy throughout the world.

Pakistan, like numerous other nations, is gradually realising the importance of implementing digital payment channels to prevent the expansion of its undocumented or unregulated economy.

This growing acceptance of digital money and payment systems may be associated with a number of reasons, such as increased access to smartphones, the availability of 3G/4G connectivity to the internet, a growing number of e-commerce platforms, and government attempts to encourage the digitisation process.

Transitioning to electronic money as well as means of payment is crucial for documentation efforts for a variety of reasons.

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To begin with, digital transactions leave an electronic imprint, making it more straightforward for governments to keep track of and trace financial transactions, thereby aiding in economic documentation. A greater level of transparency has the potential to reduce tax evasion and illicit financial transactions substantially, broadening the tax base and increasing revenues for the government.

Furthermore, adopting electronic means of payment allows people who do not have access to banking facilities in order to attain financial inclusion. In Pakistan, where more than half the population lacks a bank account, adoption of digital payment methods can bring such people into the official banking system, allowing them to access financing, insurance, and other financial amenities.

China is one of the most prominent electronic money adopters. The Chinese government vigorously encourages the usage of digital currency. According to a Computer World study, China’s electronic-first economy has grown in its e-currency ambitions, leaving the United States of America behind.

China’s digital currency, also known as the Digital Currency Electronic Payment (DCEP) or e-CNY, is based on blockchain technology and is designed to be a more efficient and secure means of payment.

Financial inclusion remains a pipe dream

The DCEP is a digital form of Chinese’s fiat currency that is insured by People’s Bank of China (PBOC) yuan deposits. By substituting some of the currency in circulation, it is aimed at competing against existing payment systems such as Alipay and WeChat Pay.

Pakistan, on the opposite hand, continues to lag behind in relation to electronic currency use and advancement. According to the Karandaaz Financial Inclusion Survey (K-FIS) in 2022, the nation has one of the world’s poorest levels of financial inclusion, with just about 30 percent of the population having access to banking services and only 16 percent utilising mobile banking.

The informal economy in Pakistan is an urgent issue. The shadow economy accounts for 35.6 percent of the country’s economy, or approximately $507 billion at GDP PPP levels, as estimated by World Economics’ Quarterly Informal Economy Survey (QIES).

The informal economy, excluding agriculture, comprises 71.7 percent of employment in Pakistan, according to the Pakistan Labour Force Survey (2017-18). Retail and wholesale trade, industry, construction, and transport sectors are the key sub-sectors of jobs that are informal. It also means that a substantial amount of Pakistan’s business activity takes place outside of its formal economy, making it challenging to detect and tax.

Digital and payment system in Pakistan: Future landscape

Fintech and digitalisation can help address Pakistan’s informal sector dilemma. Fintech can assist with attracting greater numbers of companies and people into the formal sector through rendering financial services readily available. The rise of technology has the capacity to boost transparency while diminishing corruption.

In Pakistan, electronic money utilisation is in its nascent stages. However, certain initiatives are being implemented to promote the usage of electronic payment methods.

The State Bank of Pakistan (SBP), for instance, has made numerous initiatives to make mobile banking more accessible, and the government of Pakistan has unveiled the RAAST ID programme, a digital identity system aimed at making it simpler for Pakistani residents to access banking services.

The shift towards an electronic payment system carries an opportunity to provide Pakistan with numerous advantages. It can help with economic documentation, corruption diminution, and transparency promotion. It may also make it easier for low-income people to get banking services, thereby decreasing poverty.

The government should continue to encourage the use of electronic payment methods while implementing policies which encourage the growth of the digital economy.

To encourage firms and customers to conduct monetary transactions using lawful pathways, the government could offer cashback incentives, tax exemptions, or lower transaction fees on online payments. Furthermore, implementing an adequate digital payment ecosystem may discourage payments in cash, making it more challenging for businesses to operate discreetly and reducing the likelihood of tax fraud.

Pakistan ought to formulate a clear electronic money strategy, increase financial literacy and education, create a legal framework for fintech goods and solutions, create support and incentive mechanisms to encourage fintech startups, and learn from international examples of excellence to promote digital currency and electronic payment systems.

This will assist in advancing awareness and encouraging innovation in the financial sector.

Finally, electronic transaction technologies are reshaping the global banking system offering a tremendous opportunity for countries such as Pakistan to strengthen their economies while accomplishing its development objectives. It just requires rigorous planning, organisation, collaboration, and devising enforcement mechanisms.

The article does not necessarily reflect the opinion of Business Recorder or its owners