Karachi, April 28, 2025 — The State Bank of Pakistan (SBP) has emphasized the urgent need to refine tax policy to avoid unintended consequences that fuel higher cash circulation (CiC) in the economy.
In its report on Pakistan’s economic performance during the first half of fiscal year 2024-25, the SBP underlined that poorly designed tax measures can discourage banking transactions and promote the use of cash, weakening efforts toward a documented economy.
The SBP recalled its 2017 findings which showed that the introduction of a withholding tax (WHT) in 2015 on banking transactions by non-filers resulted in a significant 3.7%age point increase in the growth of currency in circulation between July 2015 and April 2017. As non-filers moved away from formal banking to cash-based dealings, the economy saw a surge in currency held outside the banking system, hampering transparency and tax compliance. After the removal of the WHT, CiC growth slowed, validating concerns that such tax policies, if not carefully crafted, can backfire.
Highlighting the risks, the SBP stressed that tax policy should be aligned with the objectives of increasing financial inclusion and minimizing cash reliance. Instead of imposing punitive measures that drive individuals towards cash, the government should focus on creating incentives that encourage the use of digital financial services.
Pakistan’s large informal sector remains a key driver of cash transactions. According to the SBP, the informal economy’s preference for cash stems from the ease, privacy, and lack of regulatory scrutiny associated with currency-based dealings. The central bank called for comprehensive strategies to promote the use of formal banking channels and to bring undocumented sectors into the mainstream economy.
The SBP also pointed out the gender disparity in financial access, noting that only 47% of Pakistani women have formal bank accounts compared to 81% of men. Closing this gap through women-focused financial programs, better mobility, and enhanced access to technology could substantially boost economic participation and reduce cash dependency.
Furthermore, the SBP highlighted that the ongoing push toward digitalization — through branchless banking, Asaan Mobile Accounts, Roshan Digital Accounts, and RAAST — is helping curb excessive reliance on physical currency. However, challenges such as limited internet penetration and cybersecurity threats must be addressed.
In conclusion, the SBP stressed that a refined tax policy, coupled with strengthened digital infrastructure and secure digital currency initiatives, is vital for reducing cash circulation and building a resilient, cash-light economy.