Pakistan’s economy is grappling with a formidable adversary: a shadow economy valued at approximately $457 billion, constituting over 40% of the nation’s Gross Domestic Product (GDP).
Read More: Future of Gwadar Coal Power Plant in Doubt Amid Rising Costs and Policy Shifts
This vast informal sector not only deprives the government of essential tax revenues but also poses significant threats to economic stability and national security.
The Scope of the Informal Sector: The informal economy in Pakistan encompasses a wide array of activities, including unregistered businesses, smuggling, and illicit financial transactions. A report by ACE Money Transfer highlights that black market operations, such as currency trade, oil, and gold smuggling, cost the economy a staggering $23 billion annually.
These activities distort exchange rates, fuel inflation, and erode public confidence in the financial system.
Tax Evasion and Revenue Losses: Tax evasion remains a critical issue, with the government losing approximately $10 billion annually due to unregistered businesses and undeclared income.
The Federal Board of Revenue (FBR) estimates that over 75% of the workforce operates informally, and around three million businesses remain unregistered. This significant revenue loss hampers the government’s ability to invest in public infrastructure, healthcare, and education.
Global Implications and Security Concerns: The shadow economy’s impact extends beyond economic parameters, intersecting with global security concerns. Informal financial networks, such as the hawala system, facilitate money laundering and can potentially finance terrorism. These issues have attracted scrutiny from international bodies like the Financial Action Task Force (FATF), which previously placed Pakistan on its grey list due to deficiencies in combating money laundering and terrorism financing.
Government Initiatives and Reforms: In response to these challenges, the Pakistani government has initiated several reforms aimed at curbing the informal economy. The 2024-25 budget introduced significant tax hikes, targeting various sectors to raise $47 billion in revenue, aligning with the International Monetary Fund’s (IMF) conditions for a substantial loan.
Additionally, the government is implementing strict fiscal reforms to combat tax evasion, including prohibiting non-taxpayers from purchasing property or opening bank accounts.
The Path Forward: Addressing the shadow economy requires a multifaceted approach, including simplifying tax structures, leveraging technology for financial transparency, and strengthening enforcement mechanisms. Public-private partnerships can also play a crucial role in formalizing the economy and expanding the tax base. Rebuilding public trust through transparent governance and improved public services is essential to encourage voluntary compliance and integrate the informal sector into the formal economy.
