The market was abuzz with rumours for quite some time that the government was mulling demonetizing the Rs 5000 note, on the pattern of India, for the last few weeks. These rumours gained the new currency after the Senate passed the resolution on 19 December, 2016 calling for demonetization of the highest-denomination note to fight corruption and curb the cash economy. While the market was reacting to such rumours in ways expected in such situations, the Ministry of Finance declared firmly on 26th December that the government had neither taken any decision nor was it considering demonetization of the Rs 5,000 note. The official statement made it clear that there was no justification for such an action and reports circulating in this regard were totally baseless. Speculation about demonetization was going on for quite some time, disturbing both the common man and business community and, therefore, a need was felt to issue a categorical denial in this regard. The value of Rs 5,000 note in Pakistan is quite smaller as compared to other currencies such as $100 and Euro 200 notes. During 2015-16, only 17 percent of the notes printed were of Rs 5,000 denomination. Given the continuing use of cash in transactions, the government believes that discontinuation of the Rs 5,000 note would adversely affect the efficiency of exchange in business and would be a major source of discomfort and anxiety for the people. National Financial Inclusion Strategy, digitalization of transactions and branchless banking are being brought to the doorsteps of people; this move would lead to reducing dependence on currency. This is the way to move forward for promoting documentation in the economy rather than cancelling the notes.

The question whether the rumours of demonetization of the Rs 5,000 note would now die down completely or continue to circulate with less intensity after the Ministry of Finance announcement has no easy answer. Belated remarks, however, would not end the guessing game entirely for at least two broad reasons. Firstly, according to many people, the resolution of the Senate carries some weight and cannot be just thrown away. As such, the government at some point of time will be constrained to think seriously about the resolution of the Senate. And secondly, the factors which persuaded the Modi government in India to face the odds of demonetization with courage are also abundantly existent in Pakistan and, therefore, Pakistan government may also be tempted to take this route in near future. It is no secret that the Rs 5,000 note is used primarily for hoarding or for use in bulk cash-only transactions and provides a depth to the black market economy and a huge opportunity to tax evaders. The high denomination cash is also used by property speculators, stockbrokers, smugglers and for a number of illicit transactions including corruption and movement of cash across the borders. Rapid depreciation of the rupee, rise in share prices in the stock exchange and some increase in property and gold prices over the last few weeks is partly attributable to the demonetization rumours. As such, it would not be a bad idea to follow India in this regard. The contrary arguments are also quite convincing. It could create a monetary crisis in the country. The Modi government, for example, is still struggling to solve this problem even after two months of demonetization announcement. The PML-N government would not be inclined to take this risk, particularly in view of the stiff opposition and elections to the assemblies after about 18 months. Moreover, it could be argued that high denomination notes simplify cash movement and there is no widespread use of the Rs 5,000 notes in retail transactions. Also, the note was considered so popular for "store of value" purposes that the State Bank at one point of time even considered the possibility of introducing the notes of Rs 10,000 denomination. However, such an idea now seems to have been shelved for the time being. The perception that high denomination notes would add to the money supply and fuel inflation is, however, not correct. Money supply consists basically of currency in circulation and deposit money and if the aggregates of these two variables are kept within reasonable limits, inflation, assuming other things unchanged, will not rise sharply. In any case, we will advise the government not to follow the Indian example but try to tackle the problems arising from high denomination notes directly and if it is found necessary to demonetize the Rs 5,000 note at some later date, enough time should be afforded to the people to change the currency with comfort and ease through proper banking channels.