The ‘cash cow’ of bakra-onomy

Economic activity and consumer spending during the festive season of Eidul Azha can be deemed a barometer for the overall health of the economy. Higher household incomes generally lead to higher spending during the season, and vice versa. Since almost all spending during the festive season is purely cash-based, it is difficult to fairly estimate the size of spending during the weeks leading up to Eidul Azha.

The Pakistan Tanneries Association (PTA) does provide an estimated number of animals slaughtered during the season, providing a supply-side estimate. The PTA is able to collate these numbers based on the number of animal hides collected — since the hides act as a raw material for the leather that is produced by tanneries.

However, over the years, the price of hides has significantly reduced, mainly due to a shift in global leather buyers’ preferences from natural leather to synthetic leather. This has resulted in lower demand for hides, resulting in a considerable drop in prices. Until earlier this decade, collecting hides had a political economy angle, as funds raised from selling hides could be used for funding political activities. However, the political economy angle has slowly diminished as prices have reduced.

The PTA estimates that around 6.2 million animals were sacrificed during the season, reducing from 7.2m animals in the previous year. It is to be noted that the number of animals sacrificed has a strong correlation with economic growth — with the maximum number of animals sacrificed in the range of 9m animals in 2021, as a consequence of higher growth in a post-pandemic environment.

More than $1bn worth of cash was sloshing around in the three weeks leading up to Eidul Azha without any documentation

As the season is largely driven by cash, it is possible to estimate the quantum of economic activity through a monetary approach, through evaluation of changes in currency in circulation before the beginning of the season. A sudden increase in currency in circulation before a festive season, relative to its long-term average, signifies the availability of more cash in the economy being utilised for spending.

A review of broad money and currency in circulation over the last ten years demonstrates that the average weekly growth of currency in circulation is in the range of 0.3 per cent. It has been observed that three weeks before the festive season, there is a sudden surge in growth in currency in circulation — that can be largely attributed to spending for procurement of animals and other incidental expenses.

Growth in currency in circulation before Eidul Azha on a three-week basis is an average of 4.71pc over the last eight years (since 2016), which is much higher than the long-term average of 0.3pc. The availability of excess currency in the economy can be broadly attributed to spending related to Eidul Azha. The three-week rolling growth rate reached a high of 6.7pc in 2016, against a low of 3.22pc in 2022.

The difference between the three-week rolling growth rate and the long-term average growth rate can be deemed as the excess availability of currency in the economy attributed to festive spending. On the basis of excess currency available in the economy, it can be seen that spending in 2024 would be in the range of Rs330 billion, while we had reached a peak of Rs425bn in 2021, as a consequence of post-pandemic recovery.

The spending numbers largely align with animal procurement spending as estimated by PTA. It is also important to adjust it for inflation, and for that, we can convert it into US dollars. In terms of US dollars, spending hit a peak of $2.62bn in 2021, and since then has stagnated in the range of $1.1bn, largely aligning with low economic growth during the period. Any increase in economic growth will inadvertently increase to higher spending during the season, as overall household incomes increase.

Spending during the season largely remains a function of overall economic growth. However, despite sluggish growth, it can be seen that the economy is able to maintain a floor spending over $1bn, as can be seen in the last three years. Considering this business’s cash-oriented nature, there is a strong case to regulate it and eventually start taxing it.

More than $1bn of cash is simply sloshing around in three weeks leading up to Eidul Azha without any documentation or trail. Considering the abysmally low tax-to-GDP ratio of the country, there exists a case to regulate livestock trade in a way such that any transactions done for procurement of animals over a certain threshold are conducted through formal banking channels.

There are more than 83m unique banking accounts in the country, the growth largely through an uptick of mobile wallets. The season is an opportunity to capture the livestock value chain through the restriction of cash transactions over a certain threshold.

There will be strong pushback, given resistance to change. However, it is possible to execute since animals are sold in designated areas across various cities. Facilitating formal transactions in those designated areas can be done through the rollout of temporary banking services in those areas, facilitated by the tax authorities.

It is to be noted that such transactions do not need to be taxed or be made part of an obscure non-filer regime, but the intent should be to document this economy, such that currency in circulation is reduced, and the value chain can be formalised.

Passively accepting that at least $1bn of cash just changes hands multiple times during the festive season is lazy. Many interventions can be done to document the same, such that more value can be generated across the board while the industry can be further formalised. Cash is a drag on the economy; the sooner we realise this, the better it will be for the economy across the board.