n recent years, digital financial ecosystem has experienced significant advancements in Pakistan. According to the State Bank of Pakistan, the number of mobile banking users surged to 16.3 million by 2024, marking an approximately 8 percent increase from the previous year. Moreover, internet penetration has reached 45.7 percent, with over 111 million internet users as of January 2024 cited by DataReportal.

The launch of Raast, which is instant digital payment system in Pakistan by the State Bank of Pakistan, aims to facilitate efficient, cost-effective, and secure digital transactions. The expansion of branchless banking has significantly contributed to promoting financial inclusion and accessibility of financial services.

The growing trend in digital financial services indicates growth in real-time online branches, the number of automatic teller machines (ATMs), points of sale (POS) machines, and issued payment cards, including debit and credit cards. The value of branchless banking agents and the number of branchless banking accounts have also increased significantly.

For the past two decades, Pakistan has implemented a progression of tax reforms emphasising digital and technological advancements to enhance tax administration and broaden the tax base. In 2000, the introduction of a computerised audit process for tax returns significantly increased taxpayer registration.

During 2001 to 2005, reforms included the modernisation of taxpayer databases and structural improvements within the Federal Board of Revenue. In the period spanning from 2009 to 2012, the adoption of an integrated IT system and the development of risk-based compliance strategies were introduced.

Efforts focused on enhancing the national data warehouse and further digitising tax processes were completed between 2013 and 2016. Recent developments from 2019 to 2022 were aimed at harmonising sales tax across the provinces and improving tax administration through the introduction of additional taxes on digital transactions and imported mobile devices as well as the expansion of withholding taxes to various electronic payments. These measures reflect a concerted effort to influence digital technology for more efficient and effective tax collection.

Since 2020, various regulatory and infrastructural frameworks have been introduced, encompassing digital banking regulations, digital customer onboarding processes, mobile application security protocols, and QR code standardisation.

The State Bank of Pakistan has significantly strengthened its supervisory framework for digital financial services, focusing on cybersecurity, financial stability, and consumer protection. Additionally, the launch of Raast has enhanced market interoperability.

The digital transformation in Pakistan has the potential to evidently enhance financial inclusion, efficiency in revenue collection, and overall economic growth. Integrating advanced digital financial services can streamline tax collection processes, minimise leakages, and expand the tax base.

According to the World Bank, improving tax collection efficiency could substantially raise Pakistan’s tax-to-GDP ratio, which currently stands at approximately 8.5 percent, as cited by the Finance Division.

Despite these advancements, substantial gaps persist in digital literacy, infrastructure, and regulatory frameworks, which hold back the full potential of digital financial innovations.

To fully employ the benefits of digital financial innovations for revenue mobilisation, several key challenges including digital literacy, regulatory barriers, inadequate infrastructure, trust and security regarding data, and high transaction costs must be addressed.

The low levels of digital literacy, particularly in rural areas, restrict the adoption of digital financial services. Regulatory barriers, including inconsistent regulatory policies can hinder the growth of fintech innovations.

Inadequate digital infrastructure, containing unreliable internet connectivity in remote regions, hinders seamless digital transactions. Concerns regarding data security and privacy can deter individuals and businesses from adopting digital financial services.

With the potential to significantly improve its economic and social structures, Pakistan is on the brink of a digital transformation. Fueling the digital future through financial innovation holds immense potential for enhancing revenue mobilisation and raising economic growth.

By addressing existing challenges and implementing strategic interventions, Pakistan can build a dynamic digital financial ecosystem that can lead to sustainable development.

Collaborative efforts among government bodies, private sector stakeholders, and international partners is a crucial element for the intersection of digital technology and financial innovation for improving revenue mobilisation and economic growth in Pakistan.

The writer is an Islamabad based project assistant at the Centre for Private Sector Engagement