Pakistan Has a Bigger Informal Economy Than Bangladesh, India

The documented currency in circulation (CiC) has increased to over Rs. 8 trillion in Pakistan, representing the growth in the size of the economy and the use of cash to do business.

Meanwhile, total deposits with local banks have risen to Rs. 23 trillion, representing a CiC-to-bank deposit ratio of 34 percent which is higher than Bangladesh and India, and shows that Pakistan has a bigger informal economy than its South Asian counterparts.

As of 2022, Bangladesh has BDT (Bangladeshi Taka) 2.5 trillion CiC against total bank deposits of BDT 15 trillion, representing a CiC-to-bank deposit ratio of 16.7 percent. Meanwhile, India has INR 32 trillion in circulation and roughly Rs. 180 trillion in total bank deposits (17.8 percent).

Liquidity, PKR Drop, and the Real Estate Joke

Parts of our economy that are not under the tax net usually accept cash and the volumes are growing. The majority of the people, especially from real estate, Kiryana stores, freelancers, plumbers, doctors, dentists, electricians, jewelers, and citizens refuse to pay taxes on income.

Pakistan’s service sector which contributes more than 50 percent of the country’s GDP is mostly cash-based and least documented. Compared to Bangladesh and India, there is a lot more currency in circulation as a percentage of the overall money supply in Pakistan.

The financial year 2022-23 has been particularly hard on Pakistan due to exceptionally high pressures on rupee liquidity in the interbank market. A combination of macro indicators led to this liquidity crunch which caused a slowdown in deposit growth rate and a rise in currency in circulation. They include high inflation, extortionate interest rates, weak deposit mobilization efforts, and seasonal withdrawal of large sums from deposits due to increased public demand for cash to meet expenses.

The State Bank of Pakistan’s (SBP) open market operations (OMOs) aren’t helping either due to PKR depreciation against US Dollar. The central bank has injected Rs. 8.9 trillion through OMOs in 2023 alone, which is one of the major reasons for inflation spiking to 50-year highs and money moving out of banks and into the informal sector.

Lastly, the biggest benefactor of the currency moving out of banks is real estate. A poor taxation regime, massive distortion in reported and transaction value of real estate assets, and amnesty schemes to further accelerate capital movement to real estate rather than actual productive avenues have ensured that plots remain a safe haven for the preservation of grey capital.

A largely cash-based market also ensures that fire sales are few and far, as investors prefer to stay underwater because real estate is a safer structure than investing in the formal economy.

Way Forward?

Over the last ten years, a decline in the savings rate has been accompanied by an increase in CiC as a percentage of GDP in Pakistan, indicating that an increasing amount of economic activity is conducted in cash rather than through formal financial institutions such as banks.

If Pakistan’s CiC was to be brought down to the same level as regional peers (average of 17.25 percent), that would mean a reduction in CiC of Rs. 4 trillion ($15 billion). While speculative, many experts have opined that SBP should discipline banks and avoid extending an ‘OMO olive branch’ if one of them runs out of petty cash.

All things considered, Pakistan’s undocumented cash economy is rapidly expanding even without banks. The catch is that the cash economy must be restricted. Since 2015, the amount of currency in circulation has increased and indicating that cash is not returning back to the system. It is transforming into its own mini-economy.

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  • Is this propaganda? Yes curreny may have increased, did you take into account the drop in value of rupee?? Since last 10 years over 100%. What about inflation adjusted numbers??

    • Hi Zubair, thanks for your comment.

      Officially, our publishing rules prohibit encroachment beyond a certain level of sarcasm, if readers can take a hint.

      This isn’t propaganda, we’re not experts. Truth be told, professionals give us their two cents, we get the data, and then build a report with whatever limited brains we have.

      Hope that helps. Cheers!

  • Every country has a shadow economy, Pakistan is no exception and the official GDP stats that are presented to World Bank IMF already factor that informal economy into their calculations. To suggest that there is another ‘hidden empire of gold and treasures’ beyond those official figures is hoodwiking investors.

  • regarding capital gain tax,you only pay some percentage in excise office and that is off,or they take 5k to get you filer and your tax gets half and again they make you non filer

  • Ground Position is absolutely different. . Gimmicks cannot give enough to people

  • This is peak copium. Who cares if we have a bigger informal economy? No country can exist as an island, only relying on its own domestic and informal economy separate from the world.

  • Thank you for posting this. From the comments I see that we still are in denial. It’s people like you who can help the next generation be more financially literate, that we were. People need to start paying taxes, property as an “investment” idea needs to die.

    • I appreciated your idea but who does it nowadays and we should do something for our generation.

    • Thanks for your comment. Had a thought:

      Property needs to be categorized into ‘home’ and ‘agriculture’. Selling or hoarding real estate crucial for agri growth is a problem. While Rupee is losing value, it is being quantified through informal means.

      Collecting more taxes doesn’t make sense if trillions are left undocumented.

    • How could you expect public to pay tax when they don’t reap any benefits in return from government?
      Everything needs to be balanced otherwise.

  • Pakistan can save its economy through a digital currency or digital payment system. SBP launch RAAST payment system but not yet started person to business system. Rs10, 50 and 100 notes should be in use. Higher payments can be made digitally only.

  • Maybe it’s because of the fact that we don’t pay taxes and other govt liabilities

  • My neighbours came from the UK ….on marriage ceremony of their son…they only throw Rs 50 million on Dancers/mehendi..they have 2 …40story buildings in London…Reserves of about 1.4 billion pounds estate on UK…but not want invest in Pakistan…about 2 dozen families in out city have same assets in UK but come once in years we should motivate these pooples to bring some Reserves …

  • Informative article though the heading is misleading. The use of the word ‘relative’ would have made the title more accurate (though less sensational).

  • This is the most dangerous factor that “Cash is not returning back to the system”. It is failure ofkour system and it clearly shows that BLACK MONEY is basically present in Real Estate and imported car business.
    Unless this is controlled Pakistan economy will not come forward.

  • Hi dear writter,
    I appreciate your work time and efforts you put in, but my dear you and me both knows the reality. Why people doesn’t want to put their money in banks. Why they dont want to adopt digitalisation in daily life.
    Those factors will not be publish, but its naked truth reality.
    I am victim of banking hooliganism, dispite being a salary class tax file, i have to give documentation of my leagal income.
    While our country politicians and elite class are above policy as per their own benefits.
    We are just living a false life.

  • In Pakistan inflation rate is too high and the most possible reason for high cic is that people put money in purchase of stable foreign currencies and gold etc. Inflation is the main reason of CiC increase.

  • The remedy is de-monitization. It’s high time that demonetization is announced with out delay to curb corruption & ill gotten wealth. Though it is a uphill task as this step will hurt many interests but it’s the step in the right direction to take Pakistan out of the economic impasse.
    I wonder why the leading economists of the country r not demanding this……

  • Whatever excuses, explanations and silver lining are there, when talking about the topic, the thing is wether Pakistan’s economy (Currency rate, for-ex reserves, local and foreign balance of payment, exports, inflation and poverty) is improving or receding as compared to what you called it’s regional counterparts. If you see local currency increases it’s mainly due to multiplication of the same size of currency market, major example is selling real estate in multiple hands with manifold increase in price, inflation and printing of currency without considering the market margins. At least be honest and do not juggle the figures that seems more like self created or manipulated. Your assessment should be based on field and real life facts.

  • Bringing half of population under tax net is simple.
    Put tax on shops.and on whilesale dealers.
    Doctors.even barbers.
    Why thy dont collect incometax from these giants.
    Why only salaried person?

    Only 10% pay income tax.

    Govt dont do so coz of votes.

    Still theres tons of space to squeez onto gaints.

  • Who is the author of the article, what is his credibility. What is the source of the information? Please provide credible evidences and references.


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