After India took the radical step of voiding the majority of its currency overnight to cut corruption and the nation’s reliance on cash, other countries with similar problems have been watching closely.
Venezuala already followed suit by taking nearly half its bank notes out of circulation and now some politicians in Pakistan, India’s rival and neighbor, want their country to do the same.
The upper house of Pakistan’s parliament this week recommended the withdrawal of the country’s highest denomination currency note to counter corruption and criminal activities, and help document the country’s large informal economy.
A resolution passed by the Senate Monday echoes the reasons given for India’s swift action that caused a severe cash shortage.
Senator Osman Saifullah Khan proposed that Pakistan’s central bank should stop printing the 5,000 rupee note (worth almost $50) and then phase it out over three to five years. Sen. Khan is from the Pakistan Peoples Party, one of the ruling party’s main rivals.
But he said if Pakistan did make a move to void currency, it would do it better than India.
“I’m absolutely not recommending that we follow the steps taken in India. If this proposal is followed, we can demonstrate to them how to get the demonetization process right,” Sen. Khan said in the Senate.
Pakistan has a large undocumented economy, with varying estimates of its size. In 2013, Yaseen Anwar, then the State Bank of Pakistan governor, said by some estimates, it’s as large as the formal economy.
Successive Pakistani governments have struggled to increase the size of the documented economy, using both incentives, such as tax amnesty schemes, as well as punitive measures like financial penalties on banking transactions for those who don’t file tax returns. Officials say such action is needed to curb corruption as well as crime and terrorism, which rely on financing through informal banking and cash channels.
Sen. Khan said removing the large notes could help counter such activities. “You make it more difficult to engage in such transactions. That’s part of the rationale,” Sen. Khan said in an interview. “Physically, of course, you need more smaller notes to make up [an amount].”
Out of 3.431 trillion currency notes in circulation in Pakistan as of Aug. 30 this year, almost 30% are 5,000 rupee notes, according to government figures presented in the Senate. India’s move took 86% of its currency out of circulation.
Law minister Zahid Hamid, while opposing the resolution, said removing such a large number of notes from circulation would have a serious impact on the economy.
“You can imagine what is going to happen to the markets, not only will there be shortage of currency, I think there will be chaos in the market,” Mr. Hamid told lawmakers, asking them not to “press this motion”. Mr. Hamid said such a move would force people to use foreign currency for transactions.
Ishaq Dar, Pakistan’s finance minister and one of Prime Minister Nawaz Sharif’s closest aides, said last month that the government had no plans to ban the 5,000 rupee note. Officials at the finance ministry said Wednesday that there has been no change in that position.
The Senate resolution isn’t binding on the government, but Sen. Khan said he intends to pursue the matter until there is action.
“There is a procedure whereby the relevant government departments report back periodically to the Senate with progress on implementation of resolutions and I intend to monitor the progress or lack thereof closely,” Sen. Khan said.
Such action against large denomination notes has been taken in other parts of the world as well, including Canada and Singapore. The European Central Bank will stop printing the €500 note in 2018.
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