Pakistan’s economy is beginning to show signs of stabilisation, as recent data on inflation and forex inflows suggest. While this is indeed a positive development and brings some much-needed optimism, steering the country towards sustainable high growth will require significant structural changes.

In FY25, the federal government anticipates collecting nearly Rs13 trillion in taxes, with three-fourths of this amount being used solely for interest payments, leaving minimal fiscal space for other initiatives. To alter this trajectory, we must broaden, not just deepen, our tax base. However, Pakistan’s informal economy is almost as large as its documented sector, with currency in circulation close to Rs9.2tr.

To break free from this cycle of instability, Pakistan must integrate its informal economy into the formal sector. Achieving this requires adopting digitalisation as a national agenda and transitioning towards a cashless economy by expanding access to digital financial services. Fortunately, we are on the right track, with financial institution accounts increasing by approximately 118 per cent between FY19 and December 2023.

While the progress in account opening is impressive, there is still significant ground to cover in terms of digital payments adoption. Where India processed 114 billion transactions in FY23 and China’s scale ran into trillions, the corresponding volume for Pakistan was just over 4bn, highlighting room for improvement. To change the status quo, we need to start from the basics and ensure universal access to digital financial tools.

A digital economy could bridge the gap between the formal and informal sector

This could be achieved by issuing smartphones, SIM cards, and digital wallets or bank accounts alongside computerised national identity cards. The Universal Service Fund could potentially help mobilise resources, or another fund could be established to equip every Pakistani with the tools needed to participate in the digital economy.

Furthermore, we need to adopt a balanced approach towards digital payments by rewarding adopters and discouraging evasion. Reducing taxes on digital transactions for both customers and merchants is a step in the right direction, though there is room for stricter enforcement and nationwide implementation.

This aspect is critical, considering that most digital payments in Pakistan are peer-to-peer transfers, while the retail segment remains outside the tax authorities’ reach. Despite more than five million micro, small, and medium enterprises, only 93,000 unique merchants in the country have a point of sale machine, with the overwhelming majority operating on cash. Consequently, this massive sector is unable to access credit from formal financial institutions.

To ensure the sustainability of the merchant payment business, it’s crucial that acquirers are able to recover their costs and continue investing in the merchant ecosystem. This involves creating a fair pricing model that balances affordability for merchants with the financial viability for service providers. By doing so, we can foster long-term growth and encourage further innovation in the digital payments space, ultimately supporting a more robust and inclusive economic environment.

With the launch of Raast person-to-merchant and the direction from the State Bank of Pakistan, we have an opportunity to supercharge this segment of the economy by enabling seamless digital payments for millions of merchants. Fortunately, we can learn from markets like India, where the United Payments Interface transformed how even the smallest retailers conduct business, while fintechs built credit and data solutions on top of it.

As the private sector warms up to digital transformation, the government needs to lead by example. The state has a large retail presence, from the Utility Stores Corporation to the Pakistan Post. Digitising their payments would send a strong signal to other stakeholders and encourage incumbents and new entrants to build new products.

The benefits of this transition are manifold. A cashless society would bring more transactions into the formal economy, enhancing tax compliance and boosting government revenues. More importantly, it would provide financial services to underserved populations and open up new economic opportunities for them. According to McKinsey, widespread adoption and use of digital finance could increase the GDP of emerging economies by 6pc.

Fortunately, we are not starting from scratch. The groundwork has been laid by the supportive policies of the State Bank, the Pakistan Telecommunication Authority, and the Securities and Exchange Commission of Pakistan. We already have a robust network of over 651,000 branchless banking agents providing payment services across diverse geographic and economic segments, and the instant payment rails under Raast are in full swing. However, the road ahead requires a concerted effort from all stakeholders.

The government’s recent move to set up a committee to promote a cashless economy is a promising start, as a dedicated forum to monitor progress, recommend policies, and address challenges is essential. With sustained commitment and active participation from all stakeholders, we can fully embrace this digital shift, unlocking significant economic growth.

The writer is President of JazzCash and a member of the Forbes Finance Council

Published in Dawn, The Business and Finance Weekly, September 9th, 2024