Should SBP consider a Fiat Based CBDC UBI for social security?

A replacement for all social security programs?

A central bank digital currency (CBDC) is a digital form of a country’s fiat currency that is issued and backed by the central bank. It is a new form of currency that is gaining traction globally, with many central banks exploring the possibility of issuing a CBDC.

The Islamic Republic of Pakistan presently introduces new money into the economy through a process in which the State Bank of Pakistan purchases government securities through open market operations. This process is called quantitative easing. One potential application of CBDCs is to support a universal basic income (UBI) system and replace open market operations as the primary means of quantitative easing by the State Bank of Pakistan.

What is UBI?

A universal basic income is a policy proposal that seeks to provide a basic income to all citizens, regardless of their income level or employment status. The purpose of a UBI is to provide a safety net that ensures all citizens have access to a minimum level of income to meet their basic needs. A UBI could help reduce poverty, promote equality, and provide financial security to those who are unable to work or unable to find a job.

According to the World Bank, as of 2020, the poverty rate in Pakistan was estimated to be around 24.3%. A UBI system can provide a minimum income to every citizen, ensuring that no one falls below the poverty line. This can be especially beneficial for marginalized and vulnerable populations, such as women, children, and the elderly.

The implementation of a fiat-based CBDC UBI system in Pakistan could have numerous benefits. First and foremost, it would help reduce poverty and inequality. Pakistan is a developing country with a large population living in poverty. A UBI system could provide a safety net for those living in poverty and ensure that everyone has access to a basic standard of living.

Liquidity in Phases of Economic Shock

A CBDC-based UBI system can provide a safety net during times of economic hardship or crises. For example, during the COVID-19 pandemic, the government of Pakistan provided cash transfers to vulnerable households to help them cope with the economic fallout. A CBDC-based UBI system can provide a more efficient way of helping those in need during times of crisis.

A fiat-based CBDC UBI system could also be an effective way to stimulate the economy. By providing a basic income to all citizens, the government could boost consumption and demand. This would increase economic activity, leading to job creation and higher economic growth. In addition, a CBDC UBI system could reduce income inequality, which has been shown to hinder economic growth.

A CBDC-based UBI system can also provide a significant boost to economic growth. When people have a guaranteed basic income, they are more likely to invest in education and training, start their own businesses, or take risks that they would not have otherwise taken. This can lead to an increase in productivity and innovation, which can help drive economic growth and create more job opportunities.

Eliminating Corruption Leakages

Another potential benefit of a fiat-based CBDC UBI system is that it could help reduce corruption. In Pakistan, corruption is a major problem that has been difficult to eradicate. A UBI is simpler to administer than a means-tested program. A UBI does not have any eligibility requirements, which reduces the administrative burden and associated costs.

A UBI system that is based on a CBDC could help reduce corruption by ensuring that payments are made directly to citizens and are not subject to intermediaries. This could reduce the opportunities for corruption and ensure that payments are made fairly and transparently.

Cost Effective

Moreover, a fiat-based CBDC UBI system could be a more efficient way to distribute social welfare payments. Currently, the government distributes social welfare payments through a variety of channels, including cash, vouchers, and bank transfers. These channels are often inefficient and prone to errors and fraud. A CBDC UBI system could streamline the distribution process, making it more efficient and cost-effective.

Banking the Unbanked

Additionally, a fiat based CBDC UBI system could help improve financial inclusion in Pakistan. Pakistan has a large unbanked population, with many people lacking access to formal financial services. By providing a CBDC UBI system, the government could ensure that all citizens have access to a digital payment system.

According to the World Bank, as of 2017, only 21% of adults in Pakistan had a bank account. A CBDC-based UBI system can help promote financial literacy and encourage more people to participate in the formal financial system. This can also help reduce the reliance on cash transactions, which can help reduce corruption and money laundering.

Gender Outcomes

A fiat-based CBDC UBI system can also have a positive impact on gender equality. According to the Pakistan Bureau of Statistics, as of 2020, the female labor force participation rate in Pakistan was only 22.8%. A UBI system can provide women with a guaranteed income, which can help reduce financial dependence on men and encourage more women to enter the workforce. This can also help reduce gender-based income inequality.

Concerns

there are also some potential harms associated with a CBDC-based UBI system. One of the biggest concerns is the potential for inflation. The creation of new money to fund a UBI system can lead to an increase in the money supply, which can lead to inflation. However, this can be mitigated by proper management of the money supply and ensuring that the UBI payments are not excessive.

Then there is the potential for a negative impact on work incentives. Some critics argue that providing a guaranteed income to everyone can lead to a disincentive to work. However, studies have shown that UBI systems do not necessarily lead to a reduction in work incentives, and in fact, can provide people with the opportunity to pursue work that they are truly passionate about, leading to greater productivity and job satisfaction.

Finally, there are concerns about the potential for fraud and abuse in a CBDC-based UBI system. However, this can be addressed by implementing strong security measures and incorporating technologies such as biometrics and blockchain to ensure that the system is secure and transparent.

In conclusion, a fiat-based CBDC UBI system has the potential to provide numerous benefits for the economy and society, including reducing poverty and income inequality, promoting economic growth, encouraging financial inclusion, and promoting gender equality. If implemented properly, a fiat-based CBDC UBI system could have significant benefits for the people of Pakistan and could serve as a model for other countries looking to increase financial inclusion and reduce poverty.