The Pakistan Economy- A different Perspective

*Simple summary before you read the article 👇

Main idea in 30 seconds: 

Pakistan’s money supply grew way faster than its GDP since 2021. That gap didn’t disappear — it leaked into cash + undocumented economy. So the “real” economy stayed flat while trillions moved outside banks.

You’ll learn:

1. Why Pakistan fell behind

 → Political instability + cash economy vs countries like South Korea, Vietnam, Bangladesh who digitized and documented.

2. M1 vs GDP problem

 → M1 = cash + demand deposits you can spend today. Pakistan’s M1 grew 52% since 2021 but GDP only 17%. The 35% gap = more cash under mattress, more black economy, less multiplier.

3. Cash kills growth

 → Documented money in banks multiplies via loans → factories → jobs. Cash in hand doesn’t. That’s why GDP per capita, exports, and industry are lagging vs peers.

Key takeaway line: 

“Bigger wallet ≠ bigger income.” If money sits as cash or in non-productive spending, GDP won’t grow even if M1 looks huge.

The Pakistan Economy: A Different Perspective

Every country’s economic story is shaped by policy choices. Pakistan’s story is one of missed turns.

There was a time we were compared to South Korea. Then South Korea sprinted ahead. Thailand, Vietnam, and Taiwan caught up to us. Then they left us behind. The Philippines, Malaysia, and even Nigeria joined the race. Pakistan lagged again. Turkey and Egypt were at our level for years. Today, Pakistan trails them too on GDP per capita, exports, and industrial base.

Two structural gaps explain this drift: 

1. Political instability 

Frequent policy U-turns kill investor confidence. Pakistan had 24 finance ministers in 34 years vs South Korea’s 18 in 60 years.

2. Undocumented/digital economy gap:

 While peers digitized tax + banking, Pakistan’s cash economy kept growing.

Growth in Pakistan did happen, but it was uneven. The documented, tax-paying economy stayed flat while the undocumented economy exploded across sectors: agriculture, poultry, dairy, meat, fisheries, real estate, retail food, garments, jewelry, and now crypto/Bitcoin. 

IMF + SBP data show “Currency in Circulation/GDP” rose from 10.7% in 2021 to 14.7% in 2025. That 4%  jump means trillions in transactions moved outside banks to avoid documentation.👀

Why? Two pressures: 😔

1. Revenue shortfalls:😩

 Forced the FBR to raise corporate tax rates to among the highest in the region — 29% + super tax + levies. 

2. Power sector mismanagement:🙏🏻

Pushed costs so high that formal businesses couldn’t compete. Result: businesses chose cash to stay alive.

So M1 money supply grew 52% since 2021, but documented GDP grew only 17%. The 35% gap didn’t vanish — it went into cash, into the informal economy.

This isn’t just a tax problem. It’s a growth problem. Documented economies scale. Cash economies don’t. 

I’ll break this down in detail in the next part: how cash intensity kills productivity, and what countries like Vietnam + Bangladesh did differently 😊

1.  What is GDP - Gross Domestic Product?

The total value of everything a country produces + services it provides in 1 year.  

Think of it like:

 A country’s “annual income report”. If Pakistan makes cars, wheat, software, and haircuts worth $400B in a year, that’s the GDP.  

Why it matters: Bigger GDP = bigger economy = usually more jobs + higher living standards.

2. What isMoney Supply?

All money available in the economy 

Central banks divide it into “M” buckets from most liquid to least liquid:

M1

 “Money you can spend TODAY”

It include; Cash + coins + money in current/saving accounts you can withdraw anytime. Also called “Currency in Circulation + Demand Deposits”. Cash in wallet + money in ATM card. Most liquid.

M2

 “M1 + money you can spend SOON”

It include; everything in M1 + fixed deposits + short-term savings <1 year. M1 + your 3-month TDR/term deposit. Easy to convert to cash.

M3

 “M2 + big institutional money”

It include; everything in M2 + deposits of financial institutions, big term deposits >1 year. M2 + company/ bank fixed deposits. Less liquid.

M4

“M3 + everything else”

Everything in M3 + small savings, post office deposits, other near-money assets. M3 + NSC, prize bonds, small savings. Broadest definition.

Key point:

 M1 → M4 goes from “cash now” to “money locked up”.  

SBP tracks M2 most in Pakistan. If M1 grows much faster than GDP, it means more cash is moving outside banks → informal economy.

The Bitcoin is  not included in M4 definition as not under control of any central bank. The rationale is debatable.Likewise amount in Fintech wallets like Paypal is also not a part of M4 definition.😊

A Fintech and crypto currencies are in actual a firm step towards digital economy and do not fall in " Money in circulation" definition.😩

And the "Greenback cash" or $ outside USA is also not included as not a legal tender in Pakitan by SBP. So these are all the missing numbers from Money in circulation definition.

Silly question from Readers😊!!!

Quiz time: 

If SBP bans new 5k notes + ATMs stop spitting them out, what happens to M1?

A) M1 crashes  

B) M1 stays same  

C) 5k notes become Eid ‘new note’ level commodity” with "on Money"😩

Punchline answer:

Answer: B + C* 😊  

M1 won’t crash because M1 = Cash + Demand deposits. You’re just changing the _denomination_, not total cash. 1x 5000 note = five 1000 notes. Total PKR value in M1 stays same.

But the 5k note itself? It’ll become a commodity overnight 😂  

Just like crisp new notes before Eid, people will start trading “old 5k” at premium. 

“Bhai 5k note chahiye? 5500 do” -

 that’s literally commodity pricing. Shopkeepers will hoard them, black market will pop up, and your wallet will feel lighter but M1 won’t.

1-line takeaway for readers:

 Restrict 5k notes and M1 stays chill… but the 5k note gets VIP status like Eid ka naya note.

Lets move ahead.

Here’s Pakistan M1 split at 31 Dec each year, converted to billion USD at year-end PKR/USD rates

1.Year  2. Bank Demand Deposits 

3.Currency in Circulation 4. Rate $/PKR

( Amount in billion $)

1                            2               3            4

2021                  93.3          37.2     178.0

2022                105.0          39.8     228.0

2023                108.5         44.6      283.0

2024                123.8          52.5     278.0

2025                 139.1          60.1    279.5

Key trend:

 Currency share of M1 is rising. 2021: 28.5% cash, 2025: 30.2% cash. SBP itself notes “high cash usage reflecting informal economy + inflation”. 

And PKR exchage rate has both upward and downward trend.Maybe it is more related to BOP rather inhouse C1-C4.

Here you go with extended view😊

 Pakistan M1 splits at 31 Dec each year, 2021-2025. All in billion USD and there is corresponding GDP as well.

1.Year 2.Bank Demand Deposits 3.Currency in Circulation  4.Total M1  5.Annual GDP 6.Rate $/PKR each 31 Dec.

(Amount in Billion USD)

1.          2.        3.        4.             5.         6.

2021   93.3   37.2   130.5    348.5     178.0

2022  105.0  39.8   144.8    374.9     228.0

2023  108.5  44.6   153.1    336.6     283.0

2024  123.8  52.5   176.3    372.2     278.0

2025  139.1  60.1   199.2    407.8     279.5

Quick insight:

# M1/GDP ratio stayed  37-48% over 5 years.

Cash share of M1 rose from 28.5% in 2021 to 30.2% in 2025. That tracks SBP notes on high cash preference during inflation years.

#Strong catch:

 M1 is increasing every year vs 2021 base, but GDP is NOT keeping pace. See in below data.

1.Year   2.M1 Growth vs 2021(base)  3.GDP Growth vs 2021   4.Gap

1                   2                  3             4

2021          100               100        100

2022      +11.0%        +7.6%       +3.4%

2023       +17.3%        -3.4%       +20.7%

2024        +35.1%       +6.8%      +28.3%

2025        +52.6%       +17.0%    +35.6%

Result:

 1. The excess M1 growth is not showing up in documented GDP. That means more money is sitting as cash outside banks → economy is shifting into undocumented cash / black economy. Or maybe the PKR once coverted in kerb currency market,  now in either bank lockers or already converted in real estate outside Pakistan.And pressure of capital expenditure still appears in M1.😩

2 drivers: 

 i) High inflation pushed people to hold cash,

ii) Tax/documentation gap means cash transactions don’t enter GDP. 

SBP itself flags “Currency in Circulation/GDP” rising as sign of informal sector growth.I mean the major reason behind the disturbance.

Think of it like: 

Wallet size is growing 52% since 2021, but declared income only up 17%. The 35% gap = cash economy.

Now just focus  M1, bank deposits part, which

jump from $93.3  billion to $139.1 billion durimg 2021-2025 ;didn’t happen in a vacuum. Here are the main drivers based on SBP monetary data + BoP:

Why Bank Demand Deposits ↑ 49% since 2021?

1. Credit Expansion: ( Not Good)😩

When banks lend, they credit borrower’s current account. New loan = new deposit. 

M1 created instantly.

SBP data: Private sector credit went from 8.6T PKR in Dec 2021 to 12.1T PKR Dec 2025 ; 3.5T PKR = 12.5B USD new deposits created by banks. Biggest driver post-2022 as SBP kept rates high but govt borrowing crowded in.🙏🏻🙏🏻🙏🏻. Its a negative impact on economy GB>CB ( Govt Borrowing vs Corporate Borrowing);

And this borroring was only for revenue expenditure; no dam, no university, no hospital and no Social Development here.

2. Workers Remittances: ( Splendid)😂

Remittance arrives in USD → SBP converts to PKR → credited to receiver’s bank account as demand deposit.

Remittances 2021-2025: Amount in billion usd

2020-2021       29.4

2021-2022       31.2

2022-2023       27.3

2023-2024       30.3

2024-2025       38.3

A funny debate about increase in workers remittance:🙏🏻🙏🏻🙏🏻

The economist version:

“Brain drain = our smartest people leave, so GDP falls, hospitals empty, and only uncles who give life advice remain.”  

The street version:  

“Brain drain = our people go abroad, send dollars home, build houses in DHA, and every 3rd Uber driver in Toronto is ‘Engineer Sahab from Lahore’.”🙏🏻

My take with a wink:

i. Short term: 

Yeah, we lose doctors & engineers. Hospitals say “Sorry, token khatam” and No doctor available

ii. Long term: 

We gain something called “brain gain”. Remittances > $30B/year. 

That’s like oil, but the oil is our  family working 12-hour shifts in Dubai + in UK, USA and in othe4 countries doing job. Those dollars keep PKR from free-fall and fund half the houses in Pakistan.🙏🏻🙏🏻🙏🏻

So is it “brain drain” or “brain ATM”? 🤔  

We export brains, import dollars. It’s not perfect, but until we fix local salaries + opportunities, remittances are basically Pakistan’s unofficial export item #1.

Punchline:

Critics call it “brain drain”. Remittance receivers call it “EMI paid”. 

3. Govt Borrowing from Banks: (Not good🙏🏻)

Govt borrows via T-bills/PIPs → banks pay by debiting govt account, crediting bank reserves → then govt spends → money lands in contractor/salary accounts as demand deposits. Fiscal deficit financed by banks: 2023-2025 heavy. Govt domestic borrowing 9.2T PKR in 3 years. That money circulates → ends as deposits.

4. FDI + Portfolio Inflow: ( Superb)

 Foreign investor brings USD → converts to PKR → credited to company/bank account.

FDI 2021-2025: 2.3B + 1.5B + 1.2B + 1.6B + 2.1B USD. Plus IMF/World Bank loans/IMF tranches. All first hit SBP → then commercial bank deposits.

5. FCY Loans & Grants ( No Comments 😔)

Govt/PSDs borrow USD from China, KSA, ADB → converted to PKR → deposited in govt/bank accounts.

2023-2024: 3B USD KSA deposit, 2.3B USD China rollover, 1.1B USD ADB, IMF tranches. All converted to PKR deposits.

6. Monetization of Exports: Nice😊

 Exporters bring USD → banks buy USD → credit exporter PKR account.

Exports 2021-2025: 25B → 28B → 27B → 29B → 32B USD. Export proceeds = fresh deposits.

The catch:

Bank deposits grew for “good” reasons 1,2,4,6. But reason 3 “Govt borrowing” + high inflation also forced people/businesses to keep more money in current accounts for working capital. That’s not productive M1. It just circulates faster without creating GDP.

Key SBP signal:

“Currency in Circulation” also grew 62% 2021-2025. So both deposits AND cash grew. Means part of the deposit growth is leaking out as cash withdrawals → informal sector. That’s why M1/GDP ratio blew up to 48.8% in 2025 vs 37.4% in 2021.

Bottom line:

Deposits ↑ due to remittances + credit + govt borrowing. But GDP didn’t match because much of that money went to: 1) debt servicing, 2) imports, 3) cash hoarding for inflation hedge.

Now just focus  M1, Money in Circulation Growth part, in details

 “undeclared/black economy” isn’t the only reason for that 35.6%  gap. Here are the other strong drivers per SBP + IMF data:

Below are Other reasons M1 ↑ faster than GDP, apart from undeclared economy:

1. High Inflation = Cash Hoarding: Not Good

 Pakistan CPI 2021-2025: 9% → 20% → 29% → 23% → 12%.

 When inflation is 25%+, people withdraw deposits and hold cash/notes for daily expenses. Cash doesn’t vanish, but GDP doesn’t rise 1:1. Currency in Circulation grew 62% vs deposits 49%. “Precautionary cash demand” inflates M1 without raising output.

2. Financial Inclusion Push  Nice😊

SBP + banks opened 60M+ new bank accounts 2021-2025 via Asaan Accounts, Raast, branchless banking. Money that was “under mattress” moved into bank deposits for first time.

M1 rises as cash enters banking system, but GDP unchanged. It’s just formalization of existing money, not new production.

3. Hoarding Money in FCY and cross border migration and real estate transaction.

 “Strong Catch” note:

M1 +52.6% vs GDP +17.0% 2021-2025. Gap = 35.6%.

Caused by below forces, not just black economy:

1. Structural: 

Inflation + low trust → cash hoarding 

2. Measurement: Financial inclusion + remittances formalization → old cash now counted in M1

3. Fiscal: Govt borrowing creates deposits but weak GDP multiplier 

4. Behavioral: Falling velocity of money → more M1 needed for same GDP.

5.Cash cross border trade with Afghanistan and Iran.

6.Hospitals, private universties and schools prefer cash or currency receipt.

7.The religious festivals open big avenue for undocumented economy, specially Eid Ul Adha.

8.The Zakat payment is mostly on cash basis specially in Ramazan.🙏🏻🙏🏻🙏🏻.

A Further Ahead:

Now we move towards a slightly technical aspect, maybe strange for  Non Finance related readers.

1. Multiplier Effect

Simple:1 rupee spent → becomes >1 rupee of total income in the economy.

How?

 You get paid 100 → you spend 80 at shop → shop owner pays 60 to supplier → supplier pays 40 to worker and so on the process will continue within the economy.

"Even the process will not end, if God forbid one loose money on "Gun point" while withdrawing  from Karachi based ATM.🤣"

Formula: `Multiplier = 1 / (1 - MPC)`  

MPC = Marginal Propensity to Consume = % of extra income you spend. If MPC = 0.8, then multiplier = 1/(1-0.8) = 5.  

So SBP spending 1B can create 5B total GDP if people keep spending.

Rationale:

 Money doesn’t sit still. It “multiplies” as it changes hands. And once it start moving in undocumented sector of economy" it won't leave this Red light area in a short run".🙏🏻🙏🏻🙏🏻

2. Accelerator Factor

Simple:

 When GDP/income grows → businesses invest MORE than the growth.

How?

 If demand for cars jumps 10%, Toyota won’t just make 10% more cars. It’ll build a new plant = 50% more investment.  Or arrange bigger network of vendor management.

Formula idea:`Investment = Accelerator × Change in GDP`  

If accelerator = 3, then 1% GDP growth triggers 3% rise in investment.

Rationale:

 Businesses “accelerate” investment when they expect demand to keep rising.

3. Significance for M1-M4 / Money Circulation ( Both Multiplier and Accelerator.)

Multiplier:

 Works through M1 → M2 → M3. When we deposit cash in bank, bank keeps 24%(Both CRR+SLR) as reserve and lends 76%. 

That loan becomes someone else’s deposit. M1 turns into M2/M3.

 If people hoard cash M1, multiplier dies. 

If money sits in M4 long-term deposits, it multiplies less. So SBP wants money in M1/M2, not under mattress.

Accelerator:

Needs M2/M3 money to be “loanable”. Banks can’t invest without deposits. If M2 grows, banks have more funds to fund new factories = accelerator kicks in.

 If all money is stuck in M4 long-term or sent abroad as Eurodollars, accelerator is weak. No new plants, only consumption.

1-line link:  

`M1-M4 = size of money pool. Multiplier + Accelerator = speed of money pool.`  

Big pool + slow speed = low GDP. Small pool + fast speed = high GDP. 😊

Or to be more simple. Take the example of Pepsi Cola and Rooh Afzha😊.

The 2 liter bottle will serve only 7 or 8 glasses even you add ice cubes.

But A Roh Afzha bottle will serve 20 plus glasses by adding water.Multiplier factor  works superb here.

Pakistan example:* We have M2 ∼32 trillion PKR, but velocity is low because cash stays in M4 deposits or USD cash abroad. 

So multiplier is weak. That’s why SBP tries to push money into M1/M2 via branchless banking, Roshan Digital.

The Take Home Points

Below are some important hilights of this article.

1.Cash based economy grows in informal sectors only.

2.The Govt spending must have multiplier tendency.

3.The 240 million population must have 80% locally produced items.

4.The Economic Management is not a rocket science nor a ghost story.

5.Fintech can play better to move national GDP.

6.A paper currency is not a commodity no real value like gold and silver, so one has to refrain to consider it commodity.And the non ethical currency rate mechanism will play its nasty game. Same paper with different value without any rationale behind.( Many currencies having strong conversion rate against $ without local economic growth and GDP).

7.Centrally control crypto currency or payment solution for Pakistan and extended SAARC  region with Mynmar and Iran, trading ACU or only region cross border invoicing currency without any relation to outside regional trade.It will boast regional trade and reduce around 20-30% on $ dependency.

8.The  Political stability within region specially among Pakistan, India and Bangladesh.

9.Regional Ali Baba or Amazon model market places are much needed.Where goods of every SAARC country could be available in local currency setup.

10.Supply Chain companies are needed for easy access across the country.

12.Number of ATM's should be gradually reduced.

13.Resonable bans( not taxes) on corporate cash withdrawls frombank.

14.Eventually "Bank without cash counter" could be the target.

15.Avoid cash transactions on religious festivals, family events etc.

Below are some global  related data.

1.Country  2.M1 Dec 2025  3.GDP 2025

4.M1 as % of GDP. - ( Amount billion $)

1.                     2.           3.                4.

USA         19,089.6   30,616        62.3%

China      15,961.8   19,399        82.3%

 Germany 3,461.6     5,014        69.0%

Japan         7,141.7    4,280       166.9%

UK               3,127.5   3,959         79.0%

 France       1,916.5   3,362         57.0%

Notes:

1. Japan outlier : M1 > GDP at 167%. 

Reason: decades of low rates + cash hoarding + huge postal savings. Money sits in M1, velocity dead → accelerator weak despite big M2.

2. China 82% vs USA 62%: 

China’s M1/GDP is higher because households + firms hold more in demand deposits vs long-term. More M1 = more potential multiplier if it moves. But actual velocity is lower due to capital controls.

3. USA 62% “sweet spot: Large M1 base, but money moves fast. That’s why 1B Fed spending can still create 4-5B GDP via multiplier.