The Friday Economist is a collaborative blog series between LUMS MHRC and the CNM Department of Economics at LUMS.

As discussions and developmental work on central bank digital currencies (CBDCs) pick up pace across the world, watchers of Pakistan's economic evolution are interested in whether we might see a CBDC issued by the State Bank of Pakistan (SBP). In this blog post, we explore the progress and perspectives surrounding a potential Pakistani CBDC, evaluating whether such an initiative holds promise for the economic landscape in Pakistan. We argue that while an SBP-issued CBDC is certainly plausible, its prospects remain ambiguous.

CBDCs in Pakistan's Neighborhood: A Comparison 

Central banks in Pakistan's neighborhood are exploring CBDCs with a variety of motives, such as enhancing domestic payment systems and encouraging financial inclusion. China, a leader in this area, launched the digital yuan (e-CNY) in response to concerns over monetary sovereignty. Despite the distribution of USD 26.5 million worth of e-CNY and integrating it into civil servants' salaries, uptake of the digital currency has been limited due to the dominance of platforms like Alipay and WeChat, which facilitate online payments. Consequently, China is now focusing on using e-CNY for major cross-border transactions, aiming to challenge the dollar's global dominance.

More recently, India has entered the CBDC space with the "digital rupee," gaining quick interest with over a million users and significant merchant participation. The Reserve Bank of India is testing the digital currency in both retail and wholesale markets, targeting a transaction volume of 1 million by the end of 2023, indicating a major shift in India's digital finance landscape.

Developments and Views on a Pakistani CBDC

In early 2022, then SBP governor Reza Baqir gave a speech ("The Rise of Digital Currencies and the Road Ahead") in which he discussed Pakistan's transition to digitization in the monetary sphere, especially in the area of payments and payments systems. As alluded to in the speech and as seen in the Payment Systems Review 2022-2023, Pakistan's transactions through digital channels have been growing.

While we could potentially consider digital transactions as an indicator of the willingness to adopt a digital currency, and while the SBP has launched person-to-merchant payments under Raast (a digital payments system), this trend in digitization does not necessarily translate into enthusiasm for private digital currencies at the central bank. In fact, the issue of a CBDC was not thought by Baqir to be related to private digital currencies or cryptocurrencies at all. This is not entirely correct. According to a recent executive summary on CBDCs published by the Bank of International Settlements, "[a] key design choice is whether a CBDC should rely on a trusted central authority to maintain the transactions ledger, or whether it should be based on a platform with decentralised governance as provided by distributed ledger technology (DLT)." Arguably it is the increased interest in DLT-based private digital currencies like bitcoin which has driven the interest in CBDCs, and as we will see below, the SBP has risks of unregulated digital currencies on its radar. Nevertheless, Baqir was of the view that the development and deployment of CBDCs should be assessed based on their relevance to regulation, financial stability, inclusion, and innovation. (PRIME Institute has also argued in early 2023 that a CBDC could help improve social security in Pakistan.)

The SBP Vision 2028 (the central bank's five-year strategic plan) suggests that the central bank isn't very interested in a CBDC, at least not publicly. It has nothing to say about what might or might not determine the viability of a CBDC in Pakistan, or in fact, its use value or where the demand might come from. Instead, the central bank seems to be watching what others are doing and trying to see, like the rest of us, what this might mean for Pakistan. (It is also wary of "risks related to cloud storage, cybersecurity, unregulated digital currencies, protection of data storage systems, and unauthorized access to information and data [which] may undermine the growth of digitalization in Pakistan.”) Given the implications of CBDCs which are now being discussed outlined in the emerging literature (see, for example, the chapter on monetary policy transmission in the IMF's CBDC Virtual Handbook), due diligence and prudence require that central banks, especially in the Global South, do their homework.

We suspect that there isn't any widespread demand for an SBP-issued CBDC, except perhaps in pockets like fintech for purposes of financial inclusion. As the Karandaaz Financial Inclusion survey (K-FIS) from February 2023 estimates, financial inclusion was still only at 30% in 2022 despite having risen from 21% in 2020, and mobile money wallet registrations were still only at 19% of the surveyed adults compared to 9% in 2020. While these are significant changes, they don't suggest to us that there is a pressing demand for a CBDC, or that a CBDC would be an easy sell. As Baqir said in his speech, CBDCs are simply "central bank liabilities in digital form." What, then, will be different about an SBP-issued liability in digital form which will boost its demand? People are barely interested in holding the rupee as it is because of its poor performance as a store of value following the recent inflation surge. The SBP has even had to remind the public that the physical Rs. 75 note is a valid legal tender. Furthermore, a CBDC will also likely be contested as a state-issued monetary form just as, post-2008, the rupee's performance has been contested by commodities like wheat, land, and cattle performing monetary functions (see Antonia Settle's book, Risk and the Rupee in Pakistan's New Economy).

The Social Character of Money

The above analysis of the uncertain prospects of a Pakistani CBDC prompts some reflection on the socio-political character of money, and more specifically, the socio-political character of the rupee. Just as a bank failure in the US can prompt a discussion of who gets to create dollars, we might also ask exactly who will get to create digital rupees, and what the benefit of holding them will be, especially if digital cash will not pay interest (something which former Bank of England economist Andy Haldane calls 'the real scandal of central bank digital currency').

In a textbook sense, money is commonly understood to be a means of exchange of goods and services. It facilitates transactions, enables the purchase of goods, and serves as a means of financing governments and other institutions within the economy. Traditionally, central banks are thought to serve as the guardians of money, armed with the authority to create and regulate the money supply. Considered more broadly, money is a social relation of debt founded on trust in the sovereign. A banknote, serving as a promise to pay and hence as a claim on a central bank, represents arguably the most secure form of money. The question for Pakistan, then, is whether an SBP-issued CBDC as a digital promise to pay will have the necessary backing of the Pakistani public's trust in the sovereign – a question impossible to answer in a single blog post.

Crypto-mania has been tempered following developments such as the bankruptcy of cryptocurrency exchange FTX and brought the conversation on digital currencies back to earth. Prospects for an SBP-issued CBDC in Pakistan remain ambiguous, partly because of Pakistan's peculiarities and partly because CBDC prospects remain ambiguous globally. Economist Barry Eichengreen argues that CBDCs 'are the bad idea that won't go away. There are simpler, more straightforward ways of solving the problems that CBDCs are deemed to address.' 

These are, however, still early days in what could be a new capitalist regime, and it certainly won't hurt Pakistan to explore if there is something about the country which makes it uniquely placed to benefit from the adoption of a CBDC. Beneficial or not, if CBDCs become the global norm, Pakistan may have no choice but to follow suit regardless of the consequences. If a Pakistani CBDC is issued, economists in particular but also the public in general will want to keep an eye on its design, which may reflect the unique specificities of the Pakistani public's relationship with the sovereign. It is also possible that the SBP will simply follow global norms and best practices and adopt a cookie-cutter approach to the design of the CBDC. That may not be a problem in itself; late movers often have the advantage of learning from the experiences of first movers. But that might also mean that such a CBDC fails to be the solution to the country's unique problems. The motivation behind an SBP-issued CBDC will be consequential, and the way the SBP issues a CBDC and what sort of CBDC it issues will suggest which problems Pakistan's central bank wants to solve, or whose. 

Daniyal Khan is an Assistant Professor at Department of Economics (LUMS) 

Eeman Shahzad Qureshi is a Teaching Fellow at Department of Economics (LUMS)

Rimsha Arif is a Teaching Fellow at Department of Economics (LUMS)