Estimating primacy of cash in the economy

There has been a lot of hype to build a 'cashless society' in Bangladesh for the last few years. The increased use of debit, credit and pre-paid cards has made online transactions easier. Besides this, electronic transfer of money has been growing, and digital wallets are also gaining popularity. Thus, the various components and basic infrastructure to build a cashless society are already there, thanks to the digitalisation of a large portion of payment services where mobile financial services (MFS) play a significant role.

The cashless society is one of the critical characteristics of the government's ambitious goal to make 'Smart Bangladesh' by 2041. In his budget speech in June last, the finance minister also mentioned that through introducing universal Bangla QR, steps had been taken to bring all merchants, including small and marginal traders, under digital payment to create a 'Cashless Bangladesh'. He also had expectations that the rate of cash usage will be reduced by 75 per cent in the next four years. Notably, the country has already introduced an interoperable digital transaction platform named 'Binimoy'. The central bank launched 'TakaPay', the country's first local currency debit card. All these have strengthened the required infrastructure to support the path of a cashless society.

Theoretically, a cashless society is one where cash, in the form of paper notes and coin currency, is no longer used for financial transactions. Instead, all transactions occur through digital and electronic systems using cards or payment gateways. In reality, no country in the world is fully cashless, although a good number of countries have significantly reduced the use of cash currency. For instance, the presence of cash transactions in advanced countries like Norway, Sweden, Finland and Hong Kong is minimal. So, these nations, along with some others, are now turned into a cashless society as more than 90 to even 95 per cent of the transactions are non-cash or digital. In other words, if a country can bring down the use of cash currency below 10 per cent of the total transactions, it can be labelled as a cashless society, although there is no such universally recognised threshold. 

Thus, a cashless society is a highly ambitious goal, especially in a country or society where 'cash is king', and it will be king for many more years for obvious reasons. The term mainly reflects the belief that cash money is always more valuable than other forms of investment tools, like stocks and bonds. It also means that people prefer to keep cash and feel comfortable using cash or banknotes in any transactions. Cash also has the advantage of being the most liquid asset. 

So, where does Bangladesh stand in the use of cash? A common standard to measure the use of cash is the currency in circulation (CIC) as a ratio to nominal Gross Domestic Product (GDP). The level of a country's domestic economic activity is reflected in GDP, whereas CIC represents the demand for cash.

Bangladesh's annual average CIC-GDP ratio is estimated at around 6.50 per cent in the last decade. Bangladesh Bank statistics showed that the amount of CIC was Tk 1.32 trillion in the fiscal year 2015-16 (FY16). According to the Bangladesh Bureau of Statistics (BBS), the country's nominal GDP was Tk 20.75 trillion in the same year. Thus, the ratio stood at 6.38 per cent in FY16. In the following years, the rate hovered between 5.75 per cent and 7.0 per cent and stood at 7.02 per cent in the last fiscal year (FY23).

The figures indicate that the country's cash-GDP ratio is not as high as in many other developing nations. In India, the ratio was above 12 per cent, and in Pakistan, it was 11 per cent last year.

Again, by using the 'cash base of the economy' or CBE instead of CIC to measure the status of the cash-GDP ratio, the figure will be higher than the CIC-GDP ratio. The cash reserve requirement (CRR) and excess reserve make the total cash balances with Bangladesh Bank. The central bank derives the CBE by adding these cash balances to the total CIC. The CBE-GDP ratio is estimated to be around 9.30 per cent in FY16, which came down to 8.63 per cent in FY23.

It appears that CBE-GDP ratio is a more realistic yardstick to estimate the prevalence of cash in an economy than the CIC-GDP ratio. Nevertheless, both the ratios have some limitations.  

A working paper of the International Monetary Fund (IMF), titled 'Cash Use Across Countries and the Demand for Central Bank Digital Currency' in 2019, argued that only the lower-valued consumption goods and services that are generally purchased with cash and cash substitutes should be considered to estimate the uses of cash or the cash market. As the CIC-GDP ratio considers all the consumptions and almost all the money in circulation, the ratio of CIC to GDP is not a reliable yardstick.

The paper also mentioned that there are two other measures. One takes the value of household consumption, subtracting the value of all non-cash payment instruments used in consumption, and estimates cash use as the residual. Another is the value of cash withdrawn from automated teller machines (ATMs) and over-the-counter at banks as a ratio to household consumption. Finally, the paper prepared another method: using the value of all cash withdrawals as a ratio to cash plus the value of payment instruments that substitute for cash (cards plus e-money). Though all three measures have limitations, the paper used all these to calculate the cash-GDP ratio of 11 developing and developed countries - Australia, China, Denmark, Germany, Netherlands, Norway, India, Japan, Singapore, United Kingdom and the United States of America.

Bangladesh also needs to apply all these measures to get an extensive picture of the cash market and the extent of cash use in the economy. Moreover, before reaching the destination of a fully 'cashless society', a 'lesser cash' culture is vital.

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