A recent report by Karandaaz Pakistan, titled “Transforming Pakistan’s Payment Landscape,” highlights the transformative potential of digital payment adoption in the country. According to the report, nationwide adoption of digital payments could enhance Pakistan’s GDP by 7% by 2025, create 4 million jobs, and add $263 billion in deposits to the formal banking sector.
Cost Savings from Reduced Cash Dependency
The shift to digital payments would also alleviate the significant financial burden of cash management faced by the State Bank of Pakistan (SBP). In the financial year 2023-24, SBP spent Rs. 31 billion on printing, logistics, and replacing damaged currency.
The report emphasizes that reducing reliance on cash could provide substantial savings for the central bank while addressing inefficiencies in the economy. Currently, the size of Pakistan’s documented economy is $341 billion, while the informal economy is estimated to be 64% larger than the formal economy, a factor that exacerbates fiscal and monetary challenges.
High Currency in Circulation Limits Economic Growth
Despite efforts to formalize the economy, the level of Currency in Circulation (CiC) in Pakistan remains high. As of 2023, the CiC stands at PKR 9 trillion, with total bank deposits at PKR 30 trillion, resulting in a CiC-to-deposit ratio of 34%. This is significantly higher than regional peers such as India (17.8%) and Bangladesh (16.7%).
High CiC levels reflect the dominance of cash-based systems and liquidity challenges within Pakistan’s economy. The report warns that excessive cash outside banking channels undermines the SBP’s ability to control inflation and stabilize the economy.
National Financial Inclusion Strategy Progress
Pakistan’s National Financial Inclusion Strategy (NFIS), introduced in 2015, aimed to address these challenges by promoting digital transactions and financial inclusion. The NFIS set ambitious goals, including establishing 65 million active digital accounts by 2023, with 20 million of these accounts to be held by women. However, these targets remain unmet.
The introduction of RAAST, Pakistan’s National Payment System, marked a significant milestone. Prior to RAAST’s launch, Pakistan lagged behind in digital payment adoption, with just 1.3 transactions per person per year in 2019 compared to 16 in Indonesia, 21.3 in India, and 89.6 in Mexico. E-banking channels accounted for only 8% of transactions, and just 16% of government payments and receipts were digital. Additionally, 2.6 million remittance transactions, totaling Rs. 14.8 billion, were still conducted in cash.
P2M Model Targets Retail Sector
The RAAST Person-to-Merchant (P2M) module is a key initiative aimed at addressing these gaps. Pakistan’s wholesale and retail sector, which accounts for 18% of GDP and 31% of the services sector, consists of an estimated 3 to 5 million merchants. These include grocery stores, eateries, electronics retailers, apparel shops, petrol stations, and more.
The P2M model is designed to cater to the unique economic and social context of Pakistan, offering an inclusive solution to digitize payments for small businesses and merchants. By overcoming the limitations of existing digital payment methods, the P2M module is expected to drive financial inclusion and enhance economic growth.
Regional Comparison Highlights Opportunities
Compared to regional peers, Pakistan has significant room for improvement in its digital payment ecosystem. With increased adoption of platforms like RAAST and continued efforts under the NFIS, the report suggests that Pakistan can unlock substantial economic benefits, enhance fiscal stability, and reduce the dominance of the informal economy.
As the country moves towards a more digitized financial landscape, the report calls for a concerted effort from policymakers, financial institutions, and technology providers to achieve its financial inclusion and economic development goals.
