Paper short abstract:

Based on extensive fieldwork in Pakistan the paper links changing risk management strategies in the everyday portfolios of ordinary people to shifting monetary regimes, showing how new strategies undermine efforts on the part of the state to establish broader financial inclusion and development.

Paper long abstract:

This paper argues that monetary governance, by which the state mediates the national currency's exposure to global markets, has important implications for financial sector development. Based on extensive field-based interviews in Pakistan, the paper links changing risk management strategies in the everyday balance sheets of ordinary people, to the shift in monetary regimes undertaken since the late 1990s. The paper shows how the uptake of what are essentially new hedging strategies undermines concurrent efforts on the part of the state to establish broader financial inclusion and development. Here the liberalization of money and markets has exposed the national currency to global markets, generating instability not only in money and pricing patterns across the economy. Utilising a methodology based on portfolio theory, field interviews show how ordinary people are actively responding to this instability. The paper shows how stalling monetization and demonitisation, declining bank intermediation and growing barter-like transactions arise out of micro risk management strategies and how, due to the subsistence goods and informal transactions that are key to these strategies, the central bank has misread this behavioural shift as a series of disparate shocks and a steep rise in the propensity to consume. With important implications for formal financial sector development, the predicament poses a set of challenges to the central bank in its efforts to manage money and improve the financial sector's engagement with ordinary people. The paper thereby highlights the importance of money and its regime of governance in establishing an enabling environment for financial sector development in low-income countries.