Pros and Cons of Discontinuing the 5000 Rupee Note in Pakistan
- Abeera Marium Siddiqui
- February 29, 2024
- 6:01 pm
The State Bank of Pakistan recently announced that it will discontinue the 5000 rupee note by the end of 2024. This move aims to curb illicit financial flows and transactions. However, it has also raised questions about its potential impact on the economy and daily transactions. Let's examine the key pros and cons of Pakistan's decision to discontinue the 5000 rupee note.
Pros of Discontinuing the 5000 Rupee Note
1. Reduces Illicit Activities
The 5000 rupee note is the highest denomination note in Pakistan. Discontinuing it makes it harder to store and transport large sums of illicit or black money. The government believes this will help reduce unlawful activities like tax evasion, money laundering, terrorist financing, and counterfeiting.
2. Promotes Digital Payments
With the 5000 rupee note gone, people may shift to digital modes of payment. This can boost digital financial inclusion in the country. Reports show only 21% of Pakistanis use digital payments currently.
3. Brings Unaccounted Money into the System
Those holding large sums of undeclared cash in 5000 rupee notes will have to deposit it into their bank accounts to avoid losing the value. This can help bring billions of rupees of unaccounted money back into the formal financial system.
4. Aligns with Global Trends
Phasing out high-value notes is a global trend, with countries like India and EURO zone discontinuing notes of 500 USD or higher denominations. Pakistan's move aligns with international best practices.
Cons of Discontinuing the 5000 Rupee Note
1. Short-term Cash Crunch
The sudden removal of a key note can lead to a severe cash shortage or crunch in the economy. Long queues were seen at ATMs in India when they discontinued 500 and 1000 rupee notes in 2016.
2. Burden on Lower Income Groups
Poorer citizens who rely on cash for daily needs may face challenges due to lack of smaller denomination notes. There are risks of financial exclusion of lower-income groups. According to World Bank data, nearly 25% of adults in Pakistan do not have a bank account, which could make transitioning to digital payments difficult.
3. Logistical Challenges
Collecting, transporting and replacing 3000 billion rupees worth of 5000 rupee notes can pose huge logistical challenges for banks. There are over 600 million such notes in circulation currently. According to the State Bank of Pakistan, the total value of Rs 5000 banknotes in circulation is Rs 3.034 trillion.
4. One-time Costs
Printing new notes, recalibrating 2 million ATMs, and other transition costs can be financially draining. India spent over 15 billion rupees when they demonetized high-value notes.
5. Limited Impact on Illicit Activities
Crime often finds new ways to thrive. Eliminating one note may not reduce unlawful activities like terrorism in the long run. There are fears that black money may shift to USD or gold. A report by the International Narcotics Control Board found that demonetization in India only had temporary effects on curbing criminal finances.
While discontinuing the 5000 rupee note can deliver benefits like controlling tax evasion and fake currency, its real impact remains uncertain. Proper planning and ensuring financial inclusion of the poorest citizens will be vital for smooth demonetization. The government needs to weigh the pros and cons before fully committing to this move.
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