THE Overseas Investors Chamber of Commerce (OICCI), representing 200 multinational companies, has recommended discontinuing the Rs. 5,000 currency note for 2024-25 budget. This proposal is aimed at curtailing the cash economy, reducing corruption and managing inflation.
This is not the first such suggestion, as similar concerns were previously raised by PTI Senator Mohsin Aziz and former FBR chief Shabbar Zaidi, who linked high denomination notes to lower currency circulation and increased storage of wealth in cash. It has been observed that Rs 3.5 trillion of 5,000 notes were issued and Rs 2 trillion worth are not in circulation but stored in safe deposits.
A dip in the circulation of cash can trigger substantial financial challenges, especially in areas with underdeveloped banking systems, complicating large transactions and straining banks in regions with developed networks. This scenario also complicates the performance of central banks, as traditional levers like interest rate changes become less effective in navigating economic downturns or curbing inflation.
The traditional Quantity Theory of Money connects the circulation of money to nominal GDP and velocity–how frequently money changes hands. Yet, today’s monetary landscape is shaped by public and bank behaviours, fiscal and monetary policies and global economic trends and trade dynamics. This complex process requires continuous currency monitoring in circulation and adjustments to ensure a stable financial environment conducive to sustainable growth.
In response to the evolving economic landscape in 2006, Pakistan introduced the 5,000 rupee note, the highest currency denomination to date, in response to economic growth and the need for greater transactional efficiency. This new denomination helped streamline business operations, reduced the logistical burden of managing smaller notes and improved overall financial system efficiency.
In a country like Pakistan, high-denomination currency notes pose risks such as counterfeiting. Advocates suggest discontinuing the Rs 5,000 note to disrupt tax evasion and money laundering. They argue that this move would channel transactions through traceable banking systems, boosting tax compliance and the banking sector. Proponents believe it would curb corruption and inflation, aligning with global economic reform efforts.
Globally, financial systems are shifting from high denomination notes to more prevalent digital transactions, prompted by the need for modernization, increased transparency, and crime reduction. Notably, the European Central Bank ceased issuing 500 euro notes in 2019 to combat money laundering and terrorism financing, maintaining their legality but curtailing new circulation. Similarly, the U.S. discontinued larger bills like the $10,000 note by 1969, now capping at $100 to hinder financial crimes.
In a review of 53 high-income nations categorized by the World Bank, only five countries issue the highest denomination notes of 10,000 or more. These are Chile, South Korea, Japan, Iceland, and Hungary. Additionally, six countries circulate notes of 1,000 denominations, five have 500, and one features 250. Meanwhile, the most common highest denomination among these countries is 100, found in 31 nations, with the remaining five having notes of less than 100.
In many high-income economies, there’s a notable shift towards preferring lower denomination currency, reflecting a move towards digital transactions and diminishing the need for high-value notes. If Pakistan phases out the Rs 5,000 note, it could ensure a smooth transition through thoughtful policy reforms, ensuring lower denominations are accessible. This change aims to enhance financial transparency, reduce corruption, and curb inflation, aligning with global trends. By promoting digital and traceable transactions, this shift could disrupt unregulated cash flows, improve tax compliance, and strengthen the banking sector, fostering a more transparent and inclusive economy.
—The writer is Lahore-based economist working as a research associate at the Centre of Economic Planning and Development (CEPD), Minhaj University Lahore.
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