Pakistan's rapid expansion in digital payments has failed to meaningfully reduce the country's dependence on cash, with currency in circulation (CIC) reaching a record Rs 11.94 trillion in fiscal year 2025-26 — a 94% jump from Rs 6.14 trillion in FY2020, according to a report by Dawn. The figures expose a widening gap between how money moves and how it is ultimately spent.

The Cash-Conversion Paradox

Despite strong growth in mobile banking, expanding digital merchant networks, and government-led initiatives such as the Cashless Pakistan programme, analysts describe what is happening as a 'cash-conversion' cycle rather than a genuine shift toward a cashless economy. Money flows through bank accounts, mobile wallets, and instant-payment systems — but is largely withdrawn and converted back into cash before reaching the point of sale.

This presents a structural paradox for policymakers: digital infrastructure is growing, yet cash remains the dominant medium of final expenditure.

What the Data Shows

Central bank data cited in the report reveal a more nuanced picture beneath the headline CIC figure. Currency as a share of broad money supply has declined from 30.1% in FY2020 to 25.7% in FY2026, suggesting some structural improvement in the financial system's composition.

In real terms — adjusted for inflation — the purchasing power represented by cash in circulation fell by approximately 12.5% over the period. However, that progress appears to have stalled: real cash holdings began rising again after reaching a trough in FY2024.

A similar reversal is visible when CIC is measured against economic output. Currency in circulation as a percentage of GDP declined steadily until FY2024, before rebounding in both FY2025 and FY2026.

Why Digital Gains Have Not Displaced Cash

The gains from Pakistan's digital payments push have been concentrated in the movement of money — transfers, remittances, and peer-to-peer transactions — rather than in end-use merchant spending. Until digital acceptance at the retail level deepens beyond urban centres, the last mile of most transactions will continue to default to cash.

This is not a uniquely Pakistani challenge. Several emerging economies have recorded parallel surges in digital transaction volumes alongside rising absolute cash levels, as economic growth and informalisation outpace financial formalisation efforts. Notably, Pakistan's large informal economy — estimated by some researchers to be comparable in size to the formal sector — provides a structural floor beneath cash demand that policy alone cannot easily erode.

What Comes Next

The trajectory of real cash holdings and the CIC-to-GDP ratio will be closely watched in FY2027 as indicators of whether Pakistan's digital payments momentum can finally translate into reduced cash dependency at the spending level. Analysts suggest that expanding point-of-sale digital infrastructure in smaller cities and rural areas, alongside tax incentives for digital merchant adoption, will be critical to breaking the cash-conversion cycle.