ISLAMABAD: Documenting the informal economy remains one of the greatest challenges for the policy planners in Pakistan, not only from the perspective of regulating the business and labour, but also from the perspective of revenue collection, report WealthPK.
Dr. Lalarukh Ejaz, Assistant Professor at the Institute of Business Administration (IBA), while talking to WealthPK said, “As the informal sector in Pakistan has grown over the past few decades, alarm bells have started ringing, considering its growth that threatens to negatively impact tax collection.”
“There are reasons that many operating in Pakistan’s informal economy may not want to be documented. The most obvious is having to pay income tax to a state that is generally seen as not making efficient use of tax revenue. Another reason is more intense scrutiny by the government officials after coming on the documented radar.”
She said persistent fiscal deficits, rising inflation, rapid devaluation, lacklustre export performance, energy shortages, and a weak regulatory environment added to Pakistan’s woes. Pakistan also suffers from a chronic inability to collect income tax, and hence remains reliant on foreign aid to finance its fiscal deficits.”
“These challenges, accompanied by a lack of employment opportunities for Pakistan’s growing population, are leading to an increased reliance and shift towards the informal sector,” Lalarukh said.
“The informal economy also thrives on the border, specifically the western border through a barter system. In case of Iran, the informal cross-border trade results in cheaper petrol for Pakistani consumers than that of the more expensive, formally imported petrol. However, since Iranian petrol is ‘smuggled’ into Pakistan, there is no quality control. Since it exists outside the documented economy, the end user can suffer. The need for a deeper understanding of these legal and illegal informal sector operations is requisite on the part of policymakers,” she added.
The IBA academic said it was essential, especially for Pakistan, to collect statistics on the informal economy in order to be able to raise tax revenue and promote government reinvestment. However, it must be accompanied by increased monitoring of the official bureaucracy, in particular the tax and licensing apparatus which oversees the business and commercial activity, so that those who undertake it could contribute to the national economy without any hindrance or red tape.
According to the International Labour Organization (ILO), Pakistan’s informal economy is a primary source of employment for manufacturing, wholesale and retail sectors, transportation, personal care, and cottage and handicraft industries. Despite being neglected by the policymakers, the informal and small-scale sector’s contribution to the country’s output is almost 56 percent. The informal sector makes up 72 percent of employment outside the agricultural sector in Pakistan.
