People withdraw hundreds of billions of rupees in cash from bank accounts every year to finance Eidul Azha-related purchases.
But the most natural proxy to measure the volume of withdrawals has its own limitations. “If you look at the drawdown on deposits say a month before Eidul Azha, you cannot say precisely how much money has been withdrawn to purchase animals or finance animal trading and ancillary businesses,” says the treasurer of a large local bank.
Data related to deposit withdrawals also comes with a time lag. One needs to wait for a couple of weeks after Eid to just look at how bank deposits depleted. The basic issue of quantifying the withdrawals related to Eid remains even after the data is released.
Besides, money flows in and out of bank deposits rapidly during Eidul Azha due to increased business activities, thanks to e-payment systems. So one is left with no clue about how much money gets out of the banking system ahead of Eidul Azha, what portion of it returns to the system and how long the whole cycle takes to complete.
A large number of primary owners of sacrificial animals operate in the parallel economy and have no bank accounts
This is an exciting area for researchers and maybe our central bank and institutions, like the Lahore University of Management Sciences (Lums) or the Institute of Business Administration (IBA), can join hands to launch a research project to assess the size of the Eid economy, bank executives and treasurers say.
Based on their observations, bankers say a drawdown on deposits generally begins six weeks before Eidul Azha. During these six weeks, one can see a declining trend in overall deposits. But as part of that money keeps coming back into the system as well, some deviation can also take place in a particular week.
“This is a generalised statement based on what I’ve been observing for some years,” says a senior executive of the state-run National Bank of Pakistan. “One should keep in mind that a drawdown on deposits can happen for lots of reasons, including withdrawals by companies and organisations to pay their contractors and employees ahead of the holy occasion.”
In 2017, bank deposits started declining from July 28, six weeks ahead of Eidul Azha. During each of these six weeks, tens of billions of rupees were withdrawn on a net basis.
“Now we cannot say how many billions of rupees were taken out exclusively on account of the purchase of sacrificial animals. Nor can we say what part of the money withdrawn eventually returned to banks and what part kept circulating outside the banking system.”
Have we seen a decline in total deposits of banks six or seven weeks prior to Eidul Azha this year? Between July 6 and August 10, banks’ total deposits declined by Rs316bn, according to official data. “In the next two weeks — ie up to August 24 — more depletion in deposits can be expected. But to what extent, I can’t say,” says the treasurer of a large local bank.
Cash withdrawals from banks ahead of Eidul Fitr and Eidul Azha take place alongside the digital movement of money from one account to another. But as long as there are enough incentives available for cash transactions, massive cash withdrawals will continue regardless of the improvement in the e-payment systems.
There are some reasons for this pessimism. First, it is easier to hide cash transactions from tax collectors. Second, almost all modes of e-withdrawals and e-payments come at a cost. Third, our informal economy is large and those operating therein cannot enter into transactions that they know will ultimately be recorded somewhere. Fourth, this informal economy, estimated no less than half of the national economy, keeps flourishing with active support from powerful groups.
So can we expect that the parallel economy will shrink during the next five years under the Imran Khan-led government? That depends on how soon Mr Khan’s party does away with its populist stance and embraces a pragmatic approach to steer the economy ahead.
One important thing to note is that there are quite a few differences between money withdrawals before Eidul Fitr and those before Eidul Azha. Before Eidul Fitr, the flow of money is largely into formal markets unlike Eidul Azha, bankers say. Hundreds of thousands of animals are brought from the remotest places to be sold into towns and cities. A large number of primary owners of these animals operate in parallel local economies and have no bank accounts.
“What happens then is that their income through the sales of animals either does not come into the banking system or comes with a major time lag. Only a part of this income flows back to the system,” explains a senior executive of Habib Bank.
Some buyers of sacrificial animals are also known for their preference for cash. They like to deal with banks on an as-and-when-required basis. For them, Eidul Azha is the time to draw down on their bank deposits and empty their secret coffers of cash.
Growth in the currency in circulation occurs also for this reason. There is, therefore, an urgent need to document animal trading on Eidul Azha.
But for that to happen, policymakers must have reliable information. Normally, they rely on less-reliable and half-heartedly gathered information that government-run agencies collect. Availability of credible data is necessary for banks, too.
“If we know exactly how many temporary animal markets are set up and who own the animals being sold, we can find out why some traders and customers love cash. Only then a bank can decide to install ATMs and banking booths in those markets to promote formal payment systems,” says a senior official of a big local bank.
Published in Dawn, The Business and Finance Weekly, August 20th, 2018