Pakistan and cashless economy: A guide from Cuba where the majority is feeling its impacts

Cuban officials say new banking measures necessary for transparency, taxes collection

LAHORE/HAVANA (Web Desk/Reuters) – Will a cashless economy help Pakistan expanding tax base and enhance revenue collection while also tackling the black market issue? Won’t it solve the challenge of documentation of economy? Yes, it will.

But what would be its effects on society as a whole? How the low-income groups, like daily wagers and labourers, who are a large majority in the country, will sustain themselves? What about the small businesses and farmers?

These questions along several others needed to addressed before embarking upon the journey to achieve the goal as the cash has been the main mode – sole for the overwhelming majority – of transaction. A country like Pakistan can’t have a completely cashless economy in a rush for being too painful for an overwhelming majority, especially amid the current economic turmoil.

In this connection Cuba is an example in progress because it is a developing nation like Pakistan with similar socioeconomic problems.

So Reuters in a report says when Cuba in early August announced it was taking a major step towards electronic banking and a "cashless" society, the offices of fledgling small businesses across the communist-run country were left scrambling to figure out how to respond.

Most alarming to many budding entrepreneurs was a new 5,000 pesos ($20) daily cap on cash withdrawals for businesses, one of several measures the government said were aimed at forcing Cubans to do their transactions electronically, via transfer, online payment and bank cards.

The changes were needed to stem a cash shortage, Cuban central bank officials said, as the fast-falling peso and soaring consumer prices combined to drain bank reserves and ATM machines.

"The demand for cash was growing faster than what we could provide to our bank branches," said Alberto Quinones, vice president of Cuba's central bank. The changes are being rolled out gradually over the next six months, officials say.

But concerns over their impact are already causing difficulties, said Yulieta Hernandez, founder and manager of Pilares Construction, a private, Havana-based builder that employs 60 people.

"We understand there is a crisis, and the need for banking, but this is our money," Hernandez said. Her business had already adopted electronic banking but she often needs quick access to cash to pay for emergencies on job sites, she added.

Even before the new restrictions, Cuban entrepreneurs faced what might seem insurmountable hurtles anywhere else: spotty electricity and internet, widespread fuel shortages, and no practical way to legally exchange large amounts of local currency into the dollars needed to import merchandise from abroad.

Just three days after the rules were put in place, Hernandez said, more bad news rolled in: Many of her suppliers, once amenable to electronic transfers, were now only accepting cash, for fear of losing access to the paper money they needed to operate - the opposite of what the law intended.

That has put businesses like Pilares Construction in a bind: The company needs cash to operate but is prohibited from extracting it in sufficient quantity from its local accounts.

"Right now the effect ... is like paralysis," Hernandez said, adding that many business owners were already freezing investments. "People are waiting to see ... if a solution is found for the problems (the rules) have created."

Five entrepreneurs Reuters spoke with said the measures could dampen enthusiasm for investment in private businesses that sell food, fix cars, build houses and provide other goods and services where state-run enterprises have faltered.

GROWING PAINS

Privately incorporated enterprise re-emerged in Cuba just two years ago. Beyond renting rooms to tourists or some small-scale services, such business was effectively frozen for decades following a ban by former leader Fidel Castro. The government has since green-lighted the establishment of thousands of small companies.

For many Cubans born and raised in communism after Castro's 1959 revolution, that has represented a major cultural shift, said Leonardo Rodriguez, who runs Kaibocu, a Havana-based small business that produces processed foods.

Rodriguez said he and many other entrepreneurs began using electronic banking long before the new measures were announced to comply with tax laws that have evolved with the growing private sector.

But for many smaller businesses and mom-and-pop stores in Cuba, the formalities of doing business, like paying taxes, remain novel concepts, he said.

"(Cubans) have been doing business on the street for years, without ever knowing what a tax system is," Rodriguez said in an interview in Havana, noting that most operated illegally or on the fringe.

"Declaring our sales, declaring our income ... these concepts are very new."

Cuban officials have said the new banking measures are necessary for transparency, to assure transactions are recorded and taxes are paid.

In Santiago de Cuba, the unofficial capital of the country's eastern farm provinces, the government this week recruited members of local "computer clubs" to hit the streets and train passers-by on the basics of cellphone payments.

But Ronald Venero, a 34-year old Havana street vendor who sells fruit and vegetables he buys from farmers outside the city, said most farmers he meets from the countryside remain a world apart from the modern conveniences of mobile internet and electronic payments.

"The farmers who come to sell us merchandise deal in cash," he said. "You tell them that you are going to pay by card or a transfer and they tell you no."