ISLAMABAD: Pakistan Peoples Party Senator Osman Saifullah Khan has submitted a resolution in the upper house of parliament, seeking demonetisation of Rs5,000 and Rs1,000 currency notes to reduce illicit money flows and encourage people to use banking services.
The private member resolution comes at a time when the country’s population is gradually shifting to cash economy due to the government’s ill-conceived taxation policies.
“The house urges the government to take steps to withdraw from circulation as legal tender the high denomination Rs5,000 and Rs1,000 notes so as to reduce illicit money flows, encourage the use of bank accounts and reduce the size of undocumented economy,” reads the resolution.
This is the only way that will compel people to use banking channels and launch a crackdown on black money circulating in the economy, said Khan, while speaking at a meeting of the Senate Standing Committee on Finance on Thursday.
However, Committee Chairman Senator Saleem Mandviwalla underlined the need for taking the views of all stakeholders.
The General Pervez Musharraf-led government had introduced the Rs5,000 denomination notes despite resistance from the State Bank of Pakistan (SBP). The notes made it easy for the people to keep cash instead of depositing money in banks.
Leaf out of India’s book
The resolution was moved in the Senate a couple of days after Indian Prime Minister Narendra Modi announced the demonetisation of Rs1,000 and Rs500 banknotes, making these notes invalid in a major assault on black money, fake currency and corruption.
“At this point, we do not see a reason to withdraw the Rs5,000 currency note,” said Abid Qamar, chief spokesman for the SBP.
Those who are in favour of the note say it facilitates the people in areas where banking services are not available. Private commercial banks are mainly concentrated in the urban areas and main towns.
A World Bank report says about 100 million adults in Pakistan do not have access to formal and regulated financial services.
However, those who wish to see withdrawal of the note argue that high denomination notes have reduced the value of currency and fuel inflationary expectations in the economy. They say these notes are also a barrier to growth in the banking sector.
Pakistan’s economy has already started making a gradual shift to cash as protection against the government’s taxation policies, official statistics reveal.
In fiscal year 2015-16, the growth in banking sector deposits was far lower than the previous year while the currency in circulation increased at a much rapid pace, revealed minutes of the last Monetary Policy Committee (MPC) meeting.
Currency in circulation
In 2015-16, “the currency in circulation expanded 30.5% compared to 17.3% a year before, which reflects that private businesses are using cash to settle their transactions,” according to the MPC.
In absolute terms, the currency outside scheduled banks increased from Rs2.555 trillion in 2014-15 to Rs3.334 trillion last year, a net addition of Rs779 billion in a single year.
In the last fiscal year, the federal government imposed a 0.6% withholding tax on all banking transactions worth over Rs50,000 carried out by non-filers of income tax returns in a single day, aimed at increasing revenue collection but without analysing its impact on the economy.
After protests, the government lowered the rate to 0.4%, but people still remain more reliant on cash.
The MPC noted that factors contributing to the trend included “low rate of return on deposits and imposition of withholding tax on banking transactions”.
However, Federal Board of Revenue Chairman Nisar Mohammad Khan on Thursday insisted that in an era of financial inclusion, people could not avoid using banking services. “People cannot keep money under their pillows,” he said.
However, the increase in currency in circulation in the last fiscal year does not support his argument.