With PKR 9.4 trillion in circulation, Pakistan struggles to curb cash reliance

Pakistan’s efforts to digitize its economy and reduce cash dependency have largely fallen short, as nearly PKR 9.4 trillion remain in circulation, fuelling an undocumented economy and tax evasion.

Despite ambitious pledges from successive governments, including the Pakistan Muslim League-Nawaz (PML-N), Pakistan Tehreek-e-Insaf (PTI) and the Pakistan Peoples Party (PPP), the transition to a cashless economy remains sluggish.

Economic estimates suggest that nearly 40% of Pakistan’s gross domestic product (GDP) operates outside the formal banking system. Small businesses, vendors, and even large enterprises prefer cash transactions to evade taxes and regulatory oversight.

Pakistan, the world’s fifth-most populous country with over 230 million people, has the third-largest unbanked adult population, with more than 100 million people lacking access to banking services.

According to the State Bank of Pakistan, 53% of the country’s population does not have a bank account, with women disproportionately affected—only 13% of them hold accounts.

A recent World Bank survey ranking financial inclusion in 135 countries placed Pakistani women near the bottom, at 131st place. In contrast, women in 131 other nations have greater access to digital and banking transactions.

A tech-savvy population, but a cash-driven economy

Despite having 120 million broadband users, 190 million mobile subscribers, and 140 million people using 3G and 4G technology, Pakistan has failed to shift to a documented economy. Digital payment solutions, such as online banking and mobile wallets, remain underutilized.

Cash in circulation now represents about 16% of the country’s annual GDP and nearly 30% of the State Bank’s total money supply. By comparison, neighboring India has a cash circulation rate of 19% and Bangladesh 15%. Some European Union nations, including France and Spain, have imposed strict cash transaction limits to curb illicit financial flows.

In contrast, Pakistan still relies heavily on large-denomination notes, including 5,000-rupee bills, further enabling untraceable transactions.

Tax evasion and economic distortions

Heavy reliance on cash has contributed to chronic tax evasion, illicit trade, and smuggling, depriving the government of trillions in tax revenue. Pakistan’s tax-to-GDP ratio is approximately 10%, compared to India’s 17% and Nepal’s 18%.

Authorities have attempted to encourage digital transactions through incentives for debit and credit card purchases, mandatory digital receipts, and requirements for large businesses to use electronic payment systems. However, these measures have had limited success due to weak enforcement and low consumer trust in financial institutions.

Unlike India, where the Unified Payments Interface (UPI) has revolutionized digital transactions—even among street vendors—Pakistan’s financial digitization remains hindered by a lack of regulatory clarity for fintech companies.

Many high-income professionals, including jewelers, doctors, lawyers, beauty salon owners, fashion designers, and event planners, still prefer cash payments, leaving little to no financial record of their earnings.

Digital tax system faces hurdles

While the world moves toward digitized tax systems, Pakistan’s Federal Board of Revenue (FBR) struggles with fragmented digital platforms, including IRIS, POS invoicing, and eFBR, which lack coordination and data integration.

Experts argue that until Pakistan streamlines its tax collection system and incentivizes digital financial participation, the country’s reliance on cash will continue to stifle economic growth.