THE size of Pakistan’s informal economy is estimated to be as much as 56 per cent of the country’s GDP (as of 2019).

[Wood]

Why is the informal economy shattered post covid? Is it because it did not get state patronage when lockdowns were imposed?

I can only guess that Covid lockdowns (that still continue) shattered demand in the market; while the formal sectors could have Gov. support, the informal sector cannot have such luxury. Developed countries distributed free money, but India cannot afford anything like that

 

[313ghazi]

when your crypto investments (a largely new form of investment so not a mainstream option for investment by vast majority of people) become more in value than your forex reserves
You can sense something shady going on

Need to bring digitalization so our country stop being government poor, its embarrassing and bad for the country in the long run

Ultimately it boils down to govt incompetence. Not just this one - all our govts.

I think in Pakistan they need to do both carrot and stick.

Look at the mobile phone policy. It's a great example. They gave incentives to manufacturers, they introduced heavy taxes on importing phones, they used tech to shut down untaxed phones. What happened? Pakistan went from making 210,000 mobile phones in 2019 to 22 million in 2021. We're now exporting them.

Govt needs to incentive formalisation of economy AND use the stick at the same time. Like the rules around large transactions requiring ID card. EPOS should be mandatory in shops. Need to make big moves.

Like you said, we have 20 billion forex and yet a tiny part of our population own 20 billion in crypto.

All consumer indicators are up but apparently we're crippled with inflation...

I can only guess that Covid lockdowns (that still continue) shattered demand in the market; while the formal sectors could have Gov. support, the informal sector cannot have such luxury. Developed countries distributed free money, but India cannot afford anything like that

India could. Unfortunately Indian politics is not designed to support the little man. You might have a giant population but you also have a giant economy.

Imran Khan govt borrowed money to give to poor people during lockdown.

 

[Wood]

India could. Unfortunately Indian politics is not designed to support the little man. You might have a giant population but you also have a giant economy.

Imran Khan govt borrowed money to give to poor people during lockdown.

India did have a Covid relief package at 10% GDP. Most of it was in food grain. The cash in hand was very less compared to other countries. What was Pakistan's package like? I don't see any threads about Covid in Pakistan in this forum. Leads me to believe that you do not have much of a problem with it.

 

[313ghazi]

India did have a Covid relief package at 10% GDP. Most of it was in food grain. The cash in hand was very less compared to other countries. What was Pakistan's package like? I don't see any threads about Covid in Pakistan in this forum. Leads me to believe that you do not have much of a problem with it.

It's not a big issue at the moment. It was last year I think but I've not heard of any lockdown or anything.

Maybe residents can tell you about the social distancing or mask situation.

 

[Trango Towers]

I know of people in Islamabad who literally have vaults full of pounds and dollars.

 

[Chakar The Great]

Pakistan needs massive steps to formalise the informal sector so that every one pays taxes.

 

[Hakikat ve Hikmet]

BD with a population of 160m has 0.5m automobiles. Pak with a population of 220m has 25m automobiles. Officially, BD's GDP is more than that of Pak. It clearly shows how undocumented the Pak economy is....

*IMO Pak's economy is kept enormously undocumented for a strategic reason too.

 

[Bilal9]

It sounds nuts, but they've created a way of life where people just do things the right way. There are very few hurdles to setting up, you can do it all online, i started my own business, took me like an hour to do the paperwork, probably less.

They also use the stick as well too. There is a lot of regulation around finance. You can't make large purchases with cash, it has to be in an account. You make large deposits of cash and you're asked about it's source. irregular activity will see your bank account blocked as suspected fraud. most online transfers require multi factor authentication. If i want to say someone lent me money to buy a property, it can only be lent by a parent or a sibling, no cousins or aunts/uncles. They want bank records as proof.

If we take the example of undocumented income - after a certain point there isn't anything you can do with it. What do you do with £100,000 of cash? Most businesses won't take more than 2-5000 cash for a single transaction. Currency exchange guys require bank statements for large amounts or large volumes. They warn you that transactions will be blocked if too much is being sent to the same person, or the same account or from the same person. They have a £2000 limit before they require more documentation from you. Every single transaction at a currency exchange is linked to your ID. You have to start money laundering or commiting fraud to get large amounts of cash into the system. For all large transactions you need money in an account or access to finance.

They change the notes every 7-8 years too. old notes will still be valid for a good 2-3 years afterwards, so there is no sudden shortage, but it eventually forces all old notes out of circulation.

Also a big thing is the mindset of the people - we're taught to follow the rules.

Right now 90% of people consider the current covid regulations as nonsense. Despite that 90% of people also follow the rules too. That is how society functions, not by exceptionalism becoming the norm. Walk up to a zebra crossing on the road in the UK. it's just lines painted on the road, no cameras, no signals. If you set foot into it, oncoming traffic will stop until you have crossed the road. The rules state that the pedestrian has right of way on that section of road. Despite this people still cross cautiously, looking to see if incoming traffic has time to stop, if they look like they're slowing down. Also these crossings are placed in residential zones or commercial zones where there is low levels of traffic. There is consideration from govt, the people who designed the system, the drivers AND the pedestrians. That's why it functions so efficiently.

In the UK if you approach a roundabout you stop, look to your right until traffic is clear and then cross. You signal when you leave. In Pakistan, if you stop, the driver behind will crash into you "oye why did you stop in the middle of the road". You have to enter the roundabout and traffic is going in all sorts of directions, it's like a game of asteroids.

The mentality is different and it's key to the successful operation of this country.

In the US, if you make a deposit more than about $10,000 the sources of the funds will be asked.

This law was brought in after 9/11 supposedly to track sources of terror financing.

 

[Bilal9]

Biggest earners/corporations in India pay taxes. In Pakistan, only the wage earners do, everyone else is under-invoicing, understating and bribing to get out of paying taxes.

Well people won't pay taxes in the subcontinent voluntarily unless forced.

Our brilliant Finance Minister back in the day (Saifur Rahman) came up with VAT schemes in 1991 on retail and wholesale purchases to remedy this situation. But his work was left unfinished because of his untimely death. Bangladesh still has lowest revenue in per capita GDP level in the subcontinent but things are slowly changing.

His accounting firm Rahman, Rahman and Huq is currently the affiliate in Bangladesh of KPMG.

Saifur Rahman (Bangladeshi politician) - Wikipedia

en.wikipedia.org

 

[Black Tornado]

It's very low in India as well, with just one percent of the population paying taxes, now the tax to GDP ratio in India has declined too. Maybe better than Pak as India has some big conglomerates...

Yes, only 15 million Indians pay tax; but who is to blame for this?

It is Mr Modi's govt that has added to the problem, and it can resolve it, only if it has the stomach to ignore the inevitable howls of protest from a very vocal middle class, writes T N Ninan

www.business-standard.com

Why Do So Few People Pay Income Tax In India?

In a country with a population of more than 1 billion people, just 27 million paid taxes last year. Many Indians see no clear link between paying taxes and provision of government services.

www.npr.org

Thats income tax, much of the people don’t even pay income tax who work in informal sector.

 

[Maula Jatt]

Ultimately it boils down to govt incompetence. Not just this one - all our govts.

I think in Pakistan they need to do both carrot and stick.

Look at the mobile phone policy. It's a great example. They gave incentives to manufacturers, they introduced heavy taxes on importing phones, they used tech to shut down untaxed phones. What happened? Pakistan went from making 210,000 mobile phones in 2019 to 22 million in 2021. We're now exporting them.

Govt needs to incentive formalisation of economy AND use the stick at the same time. Like the rules around large transactions requiring ID card. EPOS should be mandatory in shops. Need to make big moves.

Like you said, we have 20 billion forex and yet a tiny part of our population own 20 billion in crypto.

All consumer indicators are up but apparently we're crippled with inflation...


India could. Unfortunately Indian politics is not designed to support the little man. You might have a giant population but you also have a giant economy.

Imran Khan govt borrowed money to give to poor people during lockdown.

I dont care about like trash informal sectors, like some dude making halwa in basement -who cares
I want normal stuff to be included in tax net

When people think of informal they think someone in his basement doing dumb stuff

But our informal is untaxed crap like someone with a big shiny store in a mall or any big grocery but it's black there's no gov record of it or if there is you can easily bribe it and show no record of it for tax purposes (you can bribe anywhere but you need to bring more checks and digitalization to stop this abomination)
A man with a big villa (legal Businesses, shiny building no criminal thing involved except for not paying taxes are or paying bribes) and everything can die but as far as GOP
He might as well be a homeless man cause everything is black/underground
Most of our consumer market is unchecked and there's no clean record of it due to tax issues, like some guy making a washing machine in his meduim sized factory but there's no good record of it or tracing of it by GOP
We shouldn't tax little guys like SME's but do these basic things correctly clean record, track and trace of consumer items etc these are basic things that literally every single country short of Afghanistan does in our region- so not asking for first world standards
Just keep up with the region in formalizing basic things
GOP literally sleeps and the whole thing is running on auto pilot

Need to change that and digitalize asap if we are to become a normal nation, this is clearly a national security risk at this point

 

[S.Y.A]

Ultimately it boils down to govt incompetence. Not just this one - all our govts.

I think in Pakistan they need to do both carrot and stick.

Look at the mobile phone policy. It's a great example. They gave incentives to manufacturers, they introduced heavy taxes on importing phones, they used tech to shut down untaxed phones. What happened? Pakistan went from making 210,000 mobile phones in 2019 to 22 million in 2021. We're now exporting them.

Govt needs to incentive formalisation of economy AND use the stick at the same time. Like the rules around large transactions requiring ID card. EPOS should be mandatory in shops. Need to make big moves.

Like you said, we have 20 billion forex and yet a tiny part of our population own 20 billion in crypto.

All consumer indicators are up but apparently we're crippled with inflation...

do you know that most of paksitani startups choose to register their companies in singapore etc. due to ease of doing business. they raise 100s of millions of dollars together each year. the govt and the ruling party needs to look into the causes of this situation, something must be going wrong that is pushing entrepreneurial pakistanis abroad.

 

[K_Bin_W]

BD with a population of 160m has 0.5m automobiles. Pak with a population of 220m has 25m automobiles. Officially, BD's GDP is more than that of Pak. It clearly shows how undocumented the Pak economy is....

*IMO Pak's economy is kept enormously undocumented for a strategic reason too.

Exactly what I have been saying for a very long time and it is based on my personal observation when I first visited Pak after a very long time. How the restaurants, Malls, bazars are jam packed, The number of cars on the road was unbelievable My only conclusion was that people have money and lot of it.

 

[Maula Jatt]

BD with a population of 160m has 0.5m automobiles. Pak with a population of 220m has 25m automobiles. Officially, BD's GDP is more than that of Pak. It clearly shows how undocumented the Pak economy is....

*IMO Pak's economy is kept enormously undocumented for a strategic reason too.

Lol you should read the article
There's no strategy in not collecting taxes, proffesor is pointing towards bad governance which leads to this untaxed sector
We are really suffering because of low gov revenue, there's no "strategy" in this

Exactly what I have been saying for a very long time and it is based on my personal observation when I first visited Pak after a very long time. How the restaurants, Malls, bazars are jam packed, The number of cars on the road was unbelievable My only conclusion was that people have money and lot of it.

There's no point in people having money but GOP poor
as inevitably
This will and to some extent is impacting the growth of the country and the people themselves

 

[ARMalik]

Informal sector
Lalarukh EjazPublished March 4, 2021





THE size of Pakistan’s informal economy is estimated to be as much as 56 per cent of the country’s GDP (as of 2019). This means that it’s worth around $180 billion a year, and that is a massive amount by any yardstick.

The country’s large black economy is inextricably linked to the levels and quality of governance exercised by the state. In the course of fieldwork for my doctoral research for the University of Southampton, I found that many Pakistani women who were setting out starting their own businesses did so in the informal sector. The reasons they gave usually related to their experience of dealing with the bureaucracy and government machinery in Pakistan which they found to be dominated by red tape and tedious and complicated procedures.

This is precisely what drives many people who want to engage in economic activity towards the undocumented economy. The headache of having to deal with a large bureaucracy, of complying with complicated and long registration procedures, of getting approvals and licences from various government agencies and departments make it difficult for most people to operate within a documented framework.

A large black economy is an indication of misgovernance and indicates a failure of the government to ensure that all businesses and entrepreneurial ventures are included in the formal sector. This failure in turn leads to reduced tax revenue collection since all entities outside of the formal economy do not pay any tax to the government.

Given that the size of the black and informal economy is estimated at over half of the country’s GDP, bringing it under the documented net would bring hundreds of billions in tax revenue. Those funds would then be spent on social sector development projects and help the FBR meet its annual revenue collection targets.
The solution is to increase the size of the formal economy and this can be done by making transparent and efficient those institutions tasked with registering and regulating businesses. Instead of harassing businesses and entrepreneurs, agencies like the FBR should act as facilitators and make it easier for new ventures to be registered and come under the documentation net. This would in turn be good for the FBR because achieving the tax collection target would be easier than if they were in the black economy.

Government requirements for new businesses are linked to the general level of governance. A state whose primary aim is to improve the lives of its citizens will prioritise good governance over all other things and will formulate and implement policies that enable this. In fact, such a state will also be able to realise that having such priorities ends up helping it as well, not least because a happy populace is a more economically productive populace.

Unfortunately, in a country like Pakistan, so far, this has not been the case. A multitude of licences and permissions are required from a wide variety of federal, provincial and local government departments to operate a business or a store. Having to comply with all of these requires not only a lot of time on the part of the entrepreneur but also funds for greasing the cogs of the bureaucratic machinery that regulates businesses and commercial enterprises in Pakistan.
The result of this is that a significantly growing number of entrepreneurs, and especially those that happen to be female, are increasingly veering towards the informal sector. This is both good and bad — good because it enables economic activity to take place, and jobs to be created, away from the unwanted glare of government inspectors and officialdom, and bad because the incomes generated from such activity don’t end up getting counted in the national GDP and nor are taxes paid on it.
The size of Pakistan’s informal sector is inversely linked to the quality of governance in the country. The higher the quality the smaller is likely to be the size of the informal sector because better governance means more citizen- and business-friendly measures and policies, ones that encourage entrepreneurs to register their businesses with the government and hence become part of the documented economy. That is welcome because having an accurate size of the documented and legal economy allows for more effective policy and decision-making with regard to the macroeconomy as a whole.
Resistance is likely to come from the entrenched bureaucracy because it stands to lose the most when this kind of change happens. It is very much in the interest of the state to institute policies that make it easier for businesses and entrepreneurs to become part of the documented economy and which facilitate their operation and growth because that fosters GDP growth.

It is time that the political parties in charge of running the centre and the provinces understand the benefits of this and help realise this much-needed change.

The writer is assistant professor of economics at IBA, Karachi.
lejaz@iba.edu.pk
Published in Dawn, March 4th, 2021

Informal sector

Pakistan’s black economy is linked to governance.

www.dawn.com

It is NOT 56%. It is much, much higher than this !!

Officially Pakistan's GDP per capita is US $1193 which equals Rs 2-LACS.

Here is the question -- minus kids, DO YOU THINK PEOPLE OF PAKISTAN DO NOT HAVE MUCH MORE SAVINGS/INCOME/Gold THAN Rs. 2 LACS???