State Bank of Pakistan (SBP) Governor Ashraf Mahmood Wathra called India’s clampdown on cash an “extreme” step to boost financial inclusion, tax collection and battle graft, as the neighbouring nation implements its own plans to double the number of people using banks within four years.
“To my imagination that is a very, very extreme measure,” Wathra said in an interview after speaking at a Bloomberg forum in Karachi on Wednesday. “It’s the enabling environment which has to get better in the economy.”
Indian Prime Minister Narendra Modi invalidated Re 500 and Re 1,000 rupee bills in a single move announced on November 8, sucking out 86 per cent of the nation’s currency in circulation.
Described as the world’s most sweeping currency policy change in decades, the step has earned India’s government both admiration for its boldness and criticism for its chaotic execution, with queues spilling from banks in a country where cash dominates day-to-day life. Opinions are mixed on the impact on tax evasion and graft.
“There are both cultural issues and the tendency of evading taxes, these two are combined,” Wathra said. “It’s just like a mindset of our populations that they like to keep money with them instead of passing it to a bank or a financial institution. This is perhaps in the DNA, which we need to change.”
About a quarter of Pakistan’s adult population has a bank account and the central bank wants that to double by 2020 and the nation’s more than 14,000 bank branches aren’t enough, he said. “That is where the digital internet technology is going to help us in achieving our objective.”
Wathra expects the nation’s growth to be just under the government’s target of 5.7 per cent for the year that started in July. The current account gap is forecast at 1.5 per cent of gross domestic product for previous fiscal year, as overseas shipments fell to $21 billion, the lowest level since 2010.
“We have to expand and refine our export model” beyond traditional industries such as textiles, and find new countries and regions to market them to, he said. “The present model is not working well enough for us. We have a great potential in services and great potential in information technology which is not being fully realized.”
The decline in exports has added to doubts over Pakistan’s economic stabilization after it completed an International Monetary Fund loan programme in September that boosted foreign exchange reserves to a record level after a balance-of-payments crisis in 2013.
Nevertheless, the government is seeking to boost growth and end power shortages by 2018 with the help of China’s pledged $46 billion investments that were announced last year.
“Our economists are researching and considering a few models which will facilitate us to switch to inflation targeting,” he said. The central bank is working with the government and the Planning Commission on the ranges as the inflation targeting could not be started in isolation.”
