Pakistan’s $83 billion informal economy

pakistan economyKARACHI – The growing influence of informal economy, especially in developing countries, has created a great concern and is a big challenge for political and economic managers. Pakistan’s informal economy is believed to have grown to more than half the formal economy which yields a GDP of $166 billion. According to research reports, the size of informal economy stands at $83 billion and that it could yield the national exchequer revenue of $8 billion if taxed at 10 per cent.

Challenges for growth

This was said by Mian Abrar Ahmed, President, Karachi Chamber of Commerce and Industry (KCCI), while speaking at the business policy roundtable on informal enterprise in Pakistan – Challenges for Growth, jointly organised by KCCI and CIPE here on Friday. He explained that there are many factors behind people in Pakistan preferring not to register businesses or declare actual income. At present most of the tax burden is on industries and businesses. Agriculture which accounts for 22 per cent of GDP, contributes only one per cent in taxes while the Industry which accounts for 25 per cent of GDP contributes 63 per cent of taxes, he maintained.

Transit trade

Mian Abrar said that Afghan Transit Trade is also a major source of informal economy. According to FBR over the period of two and a half years 35,000 containers entered into Pakistan out of which 29,000 about 83 per cent could not reach their destinations. This he argued results in a huge loss to the national exchequer through tax evasion. Informal economy grows along with corruption, speed money smuggling, narcotics, government contracts and tax evasion. A study by Lahore University of Management Sciences showed that out of Rs100, the government receives only Rs38 and Rs62 is pocketed by the tax payers, tax collectors and tax practitioners. It means Rs720 billion tax collection in 2005-06 and Rs1.558 trillion in 2010-11 was only 38 per cent and if corruption is controlled the revenue could be increased to a gargantuan Rs4.10 trillion.

Ease of doing business

President KCCI stated the World Bank reduced Pakistan’s rank, in ease of doing business, to 105 while last year it was 96. This discrimination encourages people not to register businesses and to avoid paying taxes. There is also a trust deficit between people and the government. Massive corruption in government departments, embezzlements and wastage has been reported by auditor general of Pakistan. Coupled with this the corruption perception report by Transparency International also reflects the fact that people do not trust government officials and they rather prefer to pay directly to welfare organisations in huge donations, charity, zakat etc. Pakistan is one of the lowest ranked countries in tax to GDP ratio while it is one of the top ranking countries who spend more on charity and welfare activities. According to a survey Pakistan spends 2.3 per cent of its GDP in charity as compared to America (2.2 per cent), UK (1.3 per cent), and India (0.2 per cent). If stern measures are taken to curb corruption then the confidence would be restored and tax to GDP ratio has the potential to be enhanced considerably. Giving amnesty to black money holders reflects the state’s tax machinery failure in performing its main function of collection of tax where it is due. It is unfair to those who have been paying their taxes honestly, at much higher rates than those offered to tax evaders.

Discouraging informal economy

President KCCI urged the government to take remedial measures to discourage informal economy and tax evasion. Those responsible for colossal revenue losses to the national exchequer, tax evaders and their partners in tax machinery should be punished and debarred from holding any public office. He voiced that smaller formal or shadow economies appear in countries with higher tax revenue that are achieved by lower tax rates, business friendly policies, fewer laws and regulations combined with consistent enforcement and less bribery facing countries. The major driving force behind the size and growth of the informal economy appears to be an increasing burden of taxation combined with pervasive anti-state activities. In Karachi for the last couple of years due to activities of some pressure groups and political parties; extortion, land grabbing, kidnapping incidents have increased to alarming levels. It is estimated that in Karachi alone about Rs10 million worth of extortion is carried out on a daily basis. Supreme Court, armed forces and government agencies have taken serious notice of it and the graph of these incidents has fallen but it is still adversely impacting the economy.

Trade, not aid

He urged the West and USA to give Pakistan trade access rather than aid which will enable the informal sector to indulge in export thus bringing them into formal sector net. President KCCI was of the view that every country has its own idiosyncrasies while in Pakistan’s case we have been historically and chronically an aid dependant country. He opined to substitute aid with market access and trade. He underscored that all the segments of society especially the government, business community, media, civil society, and intellectuals should join hands so that our tax to GDP ratio could improve considerably. This would, in turn, get rid of huge burden of internal and external debt that would enable the government to generate ample resources to run the state’s affairs and to provide more health and education facilities to the masses.

Trust deficit

Chairman Businessmen Group and former President Siraj Kassam Teli was of the view that the main reason of unwillingness of informal sector to get formalised was the trust deficit in the system bureaucracy and establishment. He gave the example of Ashura (Bolton Market) incidence where almost a majority of the claimants were from the informal sector who despite having trusted the KCCI, reviewed the claims forms with actual claims. He said if the informal sector is given proper chance and trust they will get formalised. He suggested Country Director CIPE Moin Fudda to invite the government officials in the consequent roundtables on informal sector.

Addressing core issues

Chairman Sindh Board of Investment and former President KCCI Muhammad Zubair Motiwala while exchanging views stressed upon the need to address the grass root cause of informal economy. To encourage the informal sector to get formalised, he suggested the government should introduce the reward a penalty policy which is the need of time. He suggested supporting the corporate sector which was contributing the major share of revenues to the national exchequer in the form of some rewards so that the unregistered persons may get inspired and register themselves to avail same benefits.
Former President KCCI Majyd Aziz, in the panel, discussion articulated that the private sector and the government’s departments lack “cooperative” approach. He pointed out the illiteracy factor which was also discouraging in the informal sector to formalise. Country Director CIPE, Moin Fudda, Regional Director CIPE Andrew Wilson, eminent businessmen, representatives of State Bank of Pakistan and managing committee members of KCCI also participated and exchanged their views in the said roundtable.