Cash in Circulation Reaches Rs9.4 Trillion: Rising Liquidity and Economic Challenges

January 25, 2025 Mahi Bukhari

Introduction

The cash economy in Pakistan has reached unprecedented levels, with cash in circulation (CiC) standing at a staggering Rs9.4 trillion. This trend signals increased reliance on physical currency despite global shifts toward digitization. Additionally, record-high gold prices and a weakening rupee against the US dollar add further complexity to the economic landscape.

This article explores the implications of rising CiC, the factors driving this trend, the impact on the financial sector, and associated developments in the gold and currency markets.

Cash in Circulation Hits Rs9.4 Trillion: Key Insights

1. The Growth of Cash in Circulation

As of January 17, 2025, Pakistan’s cash in circulation reached Rs9.376 trillion, representing 26.9% of the country’s Broad Money (M2), which totals Rs34.9 trillion. This surge marks a year-on-year increase of Rs2.7 trillion, as reported by the State Bank of Pakistan (SBP).

Since mid-2023, CiC has exhibited a consistent upward trend, rising from Rs9.1 trillion in June 2023 to its current record high. This sustained growth reflects a cash-dependent economy where liquidity remains a significant factor despite increased adoption of digital payment methods.

2. What Drives the Rise in CiC?

a) Low Banking Penetration

One major contributor to high cash dependency in Pakistan is limited access to formal banking systems. A significant portion of the population remains unbanked, which drives reliance on cash for everyday transactions.

b) Informal Economy

The informal sector accounts for a large share of Pakistan’s economic activities. This sector predominantly operates in cash, further fueling the rise in CiC.

c) Political and Economic Uncertainty

Periods of uncertainty prompt individuals and businesses to hold cash reserves as a precaution. This behavior has contributed to higher liquidity needs and, consequently, increased CiC.

d) Tax Avoidance

Cash transactions are harder to track, which enables tax evasion and encourages informal financial practices.

e) Cultural Preferences

Many individuals and small businesses in Pakistan prefer cash over digital payment methods due to convenience, mistrust of banks, and a lack of digital literacy.

Broad Money (M2) and Cash Dependency

1. Broad Money Trends

The SBP’s latest data highlights that M2 has expanded by Rs2.7 trillion year-on-year, with cash making up a significant 26%-27% of this figure. While digitization efforts have seen growth in non-cash transactions, the persistently high share of CiC underscores the economy’s dependence on physical currency.

2. Digital Banking Growth

Despite cash dependency, digital banking adoption has steadily increased. However, its growth remains insufficient to offset the dominance of cash.

Gold Prices Reach Record Highs in Pakistan

1. Local Gold Prices

Gold prices in Pakistan have surged to record highs, with per tola gold priced at Rs289,600 and 10-gram gold at Rs248,285, according to the All-Pakistan Gems and Jewellers Sarafa Association (APGJSA). This represents an increase of Rs2,900 per tola in a single day.

This sharp rise mirrors international gold price trends, which climbed to $2,772 per ounce with a premium of $20.

2. Driving Factors Behind Gold Prices

Several factors have driven the increase in gold prices:

Global Inflation: Rising global inflation has made gold an attractive hedge for investors.
Weakened Rupee: The depreciation of the Pakistani rupee has made gold more expensive in local markets.
Investor Uncertainty: Gold remains a safe-haven asset during times of economic and political instability.

Currency Market Update: Rupee Marginally Weakens

1. Rupee vs. US Dollar

The Pakistani rupee slightly depreciated against the US dollar on Friday, closing at 278.75, down by 3 paisa from the previous session.

2. Global Currency Trends

Globally, the Australian and New Zealand dollars gained value, while the yen remained cautious ahead of a Bank of Japan (BOJ) rate decision. Comments from the US President suggesting a softer approach to tariffs on China contributed to the gains in major currencies.

Implications of Rising CiC

1. Challenges for the Financial Sector

Limited Formalization: High CiC reflects challenges in transitioning to formal banking and digital payment systems.
Tax Revenue Loss: Increased cash transactions often lead to lower tax compliance.
Policy Constraints: A cash-heavy economy complicates monetary policy implementation.

2. Impacts on Economic Stability

Inflation Pressures: High liquidity can contribute to inflationary pressures if not managed effectively.
Reduced Investment: A preference for cash holdings diverts potential funds away from productive investments.

What Can Be Done to Address Cash Dependency?

1. Expand Financial Inclusion

Increase banking penetration by establishing more branches in rural areas.
Promote financial literacy programs to build trust in digital banking.

2. Strengthen Digital Payment Ecosystems

Improve infrastructure for online banking and mobile wallets.
Offer incentives for businesses and individuals to adopt digital transactions.

3. Enhance Tax Enforcement

Implement measures to monitor and regulate cash transactions.
Strengthen tax collection mechanisms to formalize the economy.

FAQs

1. What is Cash in Circulation (CiC)?

Cash in Circulation refers to the total amount of physical currency (coins and notes) circulating within an economy.

2. Why is CiC rising in Pakistan?

CiC is rising due to limited banking penetration, a large informal economy, political uncertainty, and cultural preferences for cash transactions.

3. How does high CiC impact the economy?

High CiC can lead to inflationary pressures, reduce tax compliance, and hinder the formalization of financial systems.

4. Why are gold prices so high in Pakistan?

Gold prices have surged due to global inflation, the depreciation of the Pakistani rupee, and increased demand for gold as a safe-haven asset.

5. How can Pakistan reduce cash dependency?

Expanding financial inclusion, promoting digital payments, and enhancing tax enforcement are key strategies to reduce cash dependency.

Conclusion

The rise in cash in circulation (CiC) to Rs9.4 trillion highlights Pakistan’s growing liquidity needs and reliance on physical currency. Coupled with record-high gold prices and a weakening rupee, these trends underscore the need for comprehensive policy measures to address economic challenges.

Promoting financial inclusion, strengthening digital payment systems, and formalizing the economy are essential steps toward reducing cash dependency and fostering long-term economic stability.

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