In the absence of foreign inflows, in the form of donors' pledges, war related reimbursements or private investments, the week ending January 23 was dry and inactive on the monetary front.
The flow in currency-in-circulation, which surpassed that in FY09 in a little more than half year, declined by Rs 15 billion during the week in question to settle year-to-date increase at Rs 158 billion. With no major event to spur cash economy in the pipeline, based on historic data, CIC is likely to hover around similar levels.
Nonetheless, amid tight liquidity condition owing to a dearth of foreign inflows, the government is making efforts to spur domestic savings which have declined by 650 bps to mere 14.3 percent of GDP in the span of last six years. Increase in domestic savings will not only help the government plug in its deficit but will also provide much-needed liquidity to the private sector.
However, the objective cited by Zafar Sheikh, Director General National Savings, for the launch of NSS bond is a mission to curb the problem of a persistent rise in CIC - which is at 22 percent in Pakistan, versus below 15 percent in India and at 4-5 percent in developed countries. But it's just a humble effort.
Without taking such platforms into small towns and villages, savings of large number of people residing in remote areas cannot reach formal banking channels. The launch of new government tradable bonds may help develop domestic capital market, but that is likely to be confined to the largely documented wealth of big cities.
But then, high cost of banking channels to tap small but large number of rural savers is hindering conventional instruments to reach rural population. One way around, this limitation is to focus on non-bank banking model that has been found quite successful in Kenya and Philippines, where services like M-Pesa and G-Cash (respectively) have been offered solely by telecom operators without any sort of bank intervention.
Given Pakistan's resemblance to both these countries, perhaps the non-bank model can be adaptable in Pakistan as well. Branches per hundred thousand people in Pakistan and Philippines are 7.50 and 10.53 respectively, according to Financial Access. Similarly, a 2008 UN report noted that mobile density in Pakistan is 10 percent higher than Kenya, meaning that there is enough need and potential to sow the seeds of m-banking in Pakistan.
But this will only resolve a fraction of cash economy's problem. The devil lies in the huge black economy; money that evades taxes, and used for smuggling and other illegal businesses at large.
This is evident from the yawning gap between US dollar's open market rate and interbank rate versus the rupee. The spread has lately hovered around 170-190 paisas, compared to its historical average band of 15 - 20 paisas. And, one of the reasons cited for this demand of foreign currency in cash economy is of changing high denomination rupee notes.
How to address this problem of high parallel economy is more of an administrative and enforcement issue than that of policy making, as the recent demand of dollar in the open market comes at time of low vigilance on part of the FIA owing to some changes at top.
Thus, in the absence of foreign flows or to reduce dependence on donors and to regain self reliance, it is imperative to channelize domestic undocumented money for fiscal spending and private sector project financing. Else, the State Bank is bound to keep interest rates high to attract documented savers' money to help meet government's expenditure needs.
Feedback at ali.khizar@br-mail.com)

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KEY MONETARY AGGREGATES
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Rs (mn)                                AS OF
                                      23-Jan     16-Jan     Change
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Currency in Circulation              164,403    181,010   (16,607)
Total Demand & Time Deposits          86,924     94,114    (7,190)
Broad Money (M2)                     252,959    276,755   (23,796)
NFA                                  114,598    129,245   (14,647)
NDA                                  138,362    147,511    (9,149)
Net Government Borrowing             146,138    142,499      3,639
Borrowing for budgetary support      167,235    164,326      2,909
from SBP                             (13,914)   (16,622)     2,708
from scheduled banks                 181,149    180,948        201
Commodity operation                  (19,776)   (20,523)       747
Credit to non-govt sector            185,866    184,340      1,526
to private sector                    113,277    101,358     11,919
to PSEs                               72,834     83,766   (10,932)
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