The 2010s brought with them the promise of a digital future, of seamless connectivity, and painless transactions. The digital future is here across the globe; the valuation of fintech companies is greater than the Big Six banks in the Unites States. Ant Group, the Chinese financial technology giant, is vying for a public listing. Meanwhile, in Pakistan, cash is still king. The digital dream in the context of finance has been buried under myriad regulations, the predatory eye of the taxman, and policy inaction. Cash as a percentage of GDP has been steadily growing, particularly in the last five years. Currently it stands at 15.5 percent, increasing by more than 6.2 percentage points since 2015.

Similarly, currency in circulation as a percentage of broad money has also reached an all-time high of 31.3 percent. The digital dream is potentially on a ventilator. Its revival is not possible with half-hearted policy prescriptions; a complete overhaul is warranted in how financial transactions are executed in the country. The goal of financial inclusion was novel, and the same is often touted as a success when the number of mobile banking accounts is tallied. But the increase in such accounts has also led to a concurrent increase in currency notes relative to size of GDP, as an increasing number of transactions are carried out in cash.

Policy prescriptions which do not take into consideration intended and unintended consequences are to be blamed here. From imposing a tax on withdrawal of cash (which over subsequent financial quarters resulted in the withdrawal of cash from the system), to arbitrary imposition of taxes on retailers, and wholesalers (only to be overturned later) leading to an increase in distrust, and resulting in higher reliance on currency notes. The recent FATF fiasco only made things worse as it has now gotten increasingly difficult to open a bank account even for the most innocuous purposes, given the absence of a centralized KYC (know-your-client) system, and a lack of motivation among financial institutions, to make retail banking more efficient. The process of opening a bank account (other than a fairly basic Level-0 account) requires a plethora of documents, and more than a dozen signatures, in a country where the literacy rate is low.

Currency notes have stood the test of time. They are tangible, do not incur any storage or transaction cost (for reasonable denominations), and are easily exchangeable, or transferrable. A transition away from currency notes is only possible when the right set of incentives are in place encouraging the adoption of digital media, whether it be cards, QR codes, or even direct transfers. The incentive structure needs to have broad ranging features from low transaction costs, to trust and security, while making it simpler, and easier to open banking accounts.

Cash is inefficient, and drags growth of a wide array of sectors, and the economy at large. Policy inaction and ignorance towards unintended consequences of arbitrary decisions may only make things worse, and within a few years, cash would make up one-fifth of the country’s GDP. Cash needs to be de-throned, and that requires coordinated, and calibrated policy action from all quarters.