he recent execution of the United Arab Emirates first government transaction using the digital dirham marks a significant moment in the global evolution of digital finance. It signals that central bank digital currencies, or CBDCs, are no longer hypothetical whiteboard scribbles in policy think tanks. Instead, these are becoming active tools of financial transformation in real-life government operations. The UAE, never one to shy away from techno-glory, is moving swiftly to integrate digital currencies into its financial infrastructure, including cross-border transactions and state finance. At home, the State Bank has announced it will be launching a pilot for a digital rupee. The question arises: could a CBDC help Pakistan reduce its dependency on the US dollar?

In theory, it could, just as drinking green tea could theoretically help you become a better marathon runner. A sovereign digital currency, issued and backed by the State Bank, carries a host of potential benefits for a country navigating complex structural and monetary terrain. A digital rupee could streamline government payments, reduce leakage and curtail corruption in subsidy programmes, effectively putting fewer rupees in the pockets of middlemen and more into the hands of actual beneficiaries. It could improve the efficiency of G2P (government-to-person) transfers, such as those under the Benazir Income Support Programme, by making it harder for funds to disappear mysteriously. With traceability and control baked into the system, the central bank would be better positioned to monitor money flows, discourage the use of informal cash channels and gradually push the rupee back into the spotlight in domestic transactions. If, and it’s a big as well as complicated if, the digital rupee were linked to secure and interoperable systems, it could eventually facilitate international settlements in regional currencies, reducing the need for dollar clearing in some bilateral trade arrangements.

But let’s not get carried away. A digital rupee, as exciting as it sounds, is not a magical antidote to Pakistan’s economic migraines. The country’s dependency on the US dollar is driven not by a lack of digital options but by other realities: persistent trade deficits, ballooning external debt and the global dominance of the dollar in trade and finance. Pakistan imports more than it exports and most of its imports; oil, machinery, industrial materials are priced in dollars. Debt repayments also require dollars. Sadly, digital rupees may not be accepted at the IMF checkout counter soon. A CBDC is like a digital coat of paint on an old car: it doesn’t fix the engine. Without serious fiscal reform and credible trade policy, a digital rupee will not shield Pakistan from dollar shortages or reduce the need for external borrowing anytime soon.

That said, there are valuable lessons to be drawn from the UAE. The UAE Central Bank is already some way into Project mBridge which is a digital currency collaboration with China, Thailand and Hong Kong designed to reinvent how cross-border transactions work. The mBridge allows participating central banks to settle trade directly in their own digital currencies, skipping the traditional dollar-based systems like SWIFT. It’s like setting up your own private express lane at the global checkout counter. The platform promises faster, cheaper and more transparent transactions. Importantly, it also offers a way to reduce dependency on the dollar in strategic trade corridors. For the UAE, this kind of involvement reinforces its ambition to become a regional fin-tech leader, adding a slick arrow to its de-dollarisation quiver.

If Pakistan were to hop on the mBridge bandwagon, or set up bilateral CBDC corridors with trading partners like China and the UAE, it could begin to reroute some trade flows through digital rupee settlements. Pakistan’s imports from the Gulf and China make up a large share of its trade bill. Settling even a portion of that in local digital currencies could reduce pressure on dollar reserves. This requires more than enthusiasm and a pilot. Pakistan will need to legally recognise the digital rupee as tender for international contracts, ensure its CBDC system is technically compatible with others and enter into binding agreements on exchange mechanisms. It will also need to convince its partners that the rupee is stable enough to be worth holding.

Even domestically, there will be challenges. A large share of Pakistan’s economy operates off the grid; informal, cash-based and not particularly excited about anything that involves registering with the government. Many citizens have limited access to digital infrastructure, don’t trust banks and are not lining up to volunteer their biometric data. To make the digital rupee work, the state will need to provide strong incentives for adoption, ironclad cyber-security and firm privacy protections. Otherwise, the public may continue to prefer good old-fashioned cash, or worse, tuck their savings away in paper dollars. You can’t usher in a digital currency revolution if half the country is still waiting for a stable internet connection.

There are, however, tools Pakistan could use to support a CBDC rollout, like Raast for payment clearing and NADRA for identity verification. These systems could anchor digital wallets and make the currency more accessible, especially for welfare and financial inclusion initiatives. But integration must be carefully planned to avoid worsening the digital divide or enabling overreach. A CBDC will also require legal and regulatory reforms to define its status as legal tender, set issuance and redemption rules and build safeguards against misuse or excessive centralisation of power.

At the end of the day, a digital rupee is not a silver bullet, nor should it be treated as such. It is, at best, one instrument among many in monetary modernisation toolkit. If designed and deployed with purpose, and in coordination with regional partners, it can help digitise public finance, support the rupee’s use in large-value transactions and enable alternatives to the dollar in specific trade corridors. The UAE’s launch of the digital dirham and its integration into platforms like mBridge provide a functional, real-world model. For Pakistan, the more important question is not whether it can issue a CBDC, but whether it can do so in a way that builds trust, supports economic resilience and lays the groundwork for reduced dependence on foreign currencies. A digital rupee won’t replace the dollar, but it could, if handled wisely, give Pakistan a better seat at the table.

The writer is an advocate of the High Courts and governance lead at a fin-tech. She can be reached at [email protected]