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Dynamics of black economy

Every economic indicator shows a negative graph of the economy, but the country seems to be developing at a fast rate. How?

Dynamics of black economy

Pakistan is the land of opportunities, the land of self-created controversies and the land of economic woes as well as some blessings at the same time. The local and international media projects the economic growth as dismal with low per capita income, low tax-base and low tax collections. Persistent energy crisis is haunting its industry, corruption is the business as usual and trade balance is uneven and is mostly in the favour of the partner countries.

However, the actual Pakistan is entirely different from the Pakistan in the news. New branded housing societies are springing up in major cities, expensive cars are choking the city roads and large and sprawling shopping malls are full of imported items. Every other individual in the city has a smartphone in hand, wifi is available everywhere and fast food restaurants are swarming with customers.

Many people have better lifestyles than the individuals of a developed country. Every economic indicator shows a negative graph of the economy, but the country seems to be developing at a fast rate.

This is the dynamics of black economy.

An underground or black economy covers the whole scheme of illegal activities, including smuggling, tax evasion and corruption — and all these factors cannot go along without support of the government machinery in any part of the world. Pakistan, which does not have very good record on the World Corruption Index, is not only facing rampant smuggling, corruption and tax evasion, but also challenges of terrorism and money-laundering.

Every political or military government had its own agenda, expediencies and set of priorities, and had largely ignored the administrative affairs. As a result, the country’s institutions failed to act in accordance with standard operating system and weak writ of the government opened a Pandora’s Box of maladministration. The nation could not devise a mechanism to synchronise the operations of the related or unrelated departments. A strong industrial base is the guarantee for revenue generation, but if it is pressured, it would not only stop revenue generation, but also cause recession.

What is the exact size of the country’s black money is difficult to ascertain but reports, investigations and research made by local and foreign financial institutions put it equal to the legal economy.

Unfortunately, a large portion of the economy is undocumented whether it is business, trade or industry and even the service sector is not fully and duly registered with the taxation authorities. Pakistan is the 24th largest economy of the world with regard to purchasing power parity having over $250 billion gross domestic product.

In a country of 200 million people, this is the modest figure with per capita income less than $1,300. The tax-to-GDP ratio in the country is not only the lowest in the region but also in the world. The pathetic part of the situation is that it is decreasing every year as the number of the taxpayers is also dwindling.

All the efforts made by the government to document the economy have so far ended in smoke. Instead of looking for the reasons behind low tax-base and plugging the loopholes as well as fixing anomalies in the tax collection system, the government looks for other options to increase its revenues. Trade deficits have already crossed 8.4 per cent to reach $23.9 billion during the previous financial year as exports have been nose-diving for the last three years. The deficits increased to $9.3 billion during the first four months of the current fiscal year alone after the imports grew by six per cent during the period. During 2015-16, the country imported goods worth $40.3 billion, but the total exports remained at $21.9 billion.

After the tax evasion, smuggling has the major share in black economy which is thriving despite various government institutions are busy operating to seal borders with Iran, Afghanistan and India. As a matter of fact, smuggling thrives when the governments opt for the protection of the local industry and imposes heavy customs duties on foreign-origin goods.

The Customs Anti-Smuggling Organisation has stepped up its activities to stop smuggling of diesel and petrol from Iran, but non-duty paid oil is still available in various parts of the country. The Chinese goods are dumped across the country and hundreds of industrial units have been either closed down or being closed.

The government had introduced withholding tax on bank transactions a couple of years ago to punish the businessmen who were not registered with the taxation authorities. As a result, the move put the entire banking industry in trouble as the account-holders stopped using banks for transactions. In the budget for the current fiscal year, withholding tax was introduced for the real estate sector but all of a sudden the thriving business came to a grinding halt. The prices of properties in big cities and prime localities sharply came down and out of 18,000 real estate developers operating in two major branded housing schemes, a few were left in the business.

What is the exact size of the country’s black money is difficult to ascertain but reports, investigations and research made by local and foreign financial institutions put it equal to the legal economy. When opposition members are arrested for corruption charges, it is regarded as witch-hunting, putting question mark on the ability of the government to launch anti-corruption operations in an effective manner.

Recently, many in the political, social and official circles have raised eye-brows on a high-profile mega scandal, which appeared in Balochistan. Again, it is not only questioning the size and volume of black economy in Pakistan, but also the performance of the institutions which are meant to control this menace. Balochistan, the largest of province of the country in terms of land area, is a test case for the government to check corruption. Other than corruption, the province has been facing multiple issues due to ill-conceived policies of the successive governments since independence.

Balochistan has a prime geographical location and is rich in mineral and human resources, but has appeared as the most underdeveloped and ignored province marred by ethnic conflicts, armed insurgency and the last but not the least corruption.

The land has especially become the basin of international conspiracies after the construction of China-Pakistan Economic Corridor. Earlier, the erstwhile USSR had always been blamed for the driving force behind insurgency in the province due to its desire to reach ‘warm waters.’ Now India is allegedly involved in the internal affairs of Pakistan and has set up a network of spies to fan insurgency in Balochistan through Afghanistan. Misgovernance and corruption are providing fertile land to international conspirators to operate in the province.

The first thing the government will have to do is the capacity building of the officials responsible for implementing the policies devised at the highest levels. The government institutions at the federal and provincial levels will have to be depoliticised, including taxations authorities, for effective implementation of the policies.

The trend to increase tax rates should be stopped and the procedure to file tax returns should be made as simple as paying a utility bill. If flexible laws are difficult to be implemented, tough laws are equally dangerous. When interpretation of laws is left at the mercy of officials, every government effort to curb corruption is bound to fail.

Aftab Afzal Ranjha

aftab zain
The writer is a Lahore-based journalist. He may be reached at [email protected]

3 comments

  • The government should make sure just one thing: stop capital flight. clean and dirty money both are the assets of this nation and these should be kept in Pakistan.

    • First of all the government should depoliticize the FBR and the provincial revenue authorities. Instead of putting pressure on the taxpayers, the government should check the electricity bills of tax officials and their children’s school fees slips. If they are on rent, their rent receipts to analyze that their sources of income matche with their expenditures.

  • If corruption is institutionalized in Pakistan, it should be materialized. It will unrealistic to think that corruption will end, rather it will multiply with passage of time. However, corruption should not be unbridled at any stage.

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