Pakistan should demonetise its Rs 5,000 note – the highest denomination in circulation – to come out of the current economic crisis, a Pakistani economist has suggested. Ammar Khan, an energy economist, recently said India’s demonisation worked “tremendously well” and its “tax collections” rose after that move.
“There is Rs 8 trillion of cash is sloshing around in the (Pakistan) economy,” Khan said in a podcast that has gone viral. He said this cash was driving consumption in the country but taxes were not coming to the government, which has been facing serious cash crunch and decades-high inflation. Pakistan is staring at default if it does not get funds from the IMF.
“In Pakistan, everything is happening in cash…let’s say a person is taking petrol in his vehicle, he is buying petrol which is imported in dollars…but he is paying in cash. He is boosting the formal economy by paying from cash from the informal economy, without paying any taxes. This is what the problem is,” the economist said.
“And when the cash is out of the system, the same cannot be used for productive purposes. Why don’t the banks lend? Because they don’t have the cash to lend. If these Rs 8 trillion comes back to banks, suddenly you have surplus funds available which can be reallocated. So what you need to do is to demonetise Rs 5,000 note,” the economist suggested, adding that few people will oppose but they are rich who have these notes.
Najam Ali, an investment banker, too made the case for demonisation in the cash-strapped country. In a tweet, he said a businessman told him he invested Rs 20 crore in a real estate project and was returned Rs 40 crore in all cash. “All undocumented money despite the fact that he pays all his taxes. The real estate industry is a major source of undocumented cash.”
Ali, who holds a bachelor’s degree in economics from the University of Michigan and an advanced management program from Harvard Business School, said it was time cash transactions should be discouraged. “Demonetisation in Pakistan will bypass a corrupt culture and document the economy. It will also lead to digitalisation of payments,” he said in a tweet that was retweeted by Ammar Khan.
India carried out demonetisation in November 2016 when it scrapped currency notes of Rs 500 and Rs 1,000. The government’s aim was to weed black money out of the system but multiple reports suggested that the move did not achieve its intended objectives even though digital transactions rose during the period and after.
Some users in Pakistan said Ammar Khan was “out of touch” and he wasn’t aware of the trouble that demonetisation brought in India for people and small businesses. “He is so out of touch to forget how rural population went into further chaos of unemployment after demonetizing paper currency in India,” Ali, a Twitter user, said.
Ahmad Iqbal, former mayor of Narowal district, said he suspected it would work in Pakistan the way it did in India. “The rich in Pakistan will find ways to convert their cash into gold or USD but they will not declare their true wealth,” he said.
Responding to Iqbal, Najam Ali said Pakistan should go for full demonetisation, cancelling all currency within an announced period. He said cash deposited not previously declared should be taxed at 10-50 per cent depending on the amount while exempting small deposits. “Cash already declared in tax returns should be taxed at 10 per cent adjustable against final liability. This will be needed to avoid misuse.”
Ali is currently the CEO of Next Capital, a broking and investment banking firm in Pakistan. After demonetisation, Ali said, people won’t be able to buy gold or dollar as those selling them will be taking currency that will cease to exist as legal tender. “India didn’t plan it well. This is the only way to tax untaxed money and document it for future use. It should be repeated every two years for the next six years,” he said.
Simultaneously, the banker continued, the federal government should take out the micropayment function from the central bank and set up a separate authority to promote digitisation on priority. “Enough is enough. Tax chors must be held accountable. The economy must be documented on priority,” he said.
According to World Economics, the size of Pakistan’s informal economy is estimated to be 35.6 per cent which represents approximately $507 billion at GDP-PPP levels. However, market research and consulting firm Ipsos, in a report in June last year, said the country’s shadow economy accounted for about 40 per cent of GDP, while 6 per cent of the gross domestic product was being stolen every year.
In India, demonetisation was seen as a failure because 99 per cent of the currency in circulation made its way back to the banks. Also, the move hurt small and medium enterprises that had to shut down due to a cash crunch in the initial months, leading to productivity and job loss. However, economists are still divided on the long-term benefits of demonetisation.
While former RBI Governor Raghuram Rajan said demonetisation disrupted India’s growth, former Chief Economic Advisor Dr Krishnamurthy Subramanian, while referring to a research paper, said the move had the effect of redistributing wealth from the rich to the poor. He also argued that following demonetisation, 3.8 lakh companies and 4.5 lakh directors related to shell entities had been struck off, and surveys conducted by tax authorities in over 60,000 cases revealed undisclosed income of about Rs 85,000 crore.
Source : BusinessToday