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Pakistan’s Informal Economy: The Way Forward (Strategies to Change the Status of Informal Economy)



The informal economy refers to the undocumented economy that is not on government record. The state cannot monitor such type of economy since it is not listed on the official account. According to the statistics of the World Bank, about 36% of Pakistan’s economy is undocumented, which is an alarming situation. This percentage is equivalent to agriculture and industrial contribution to the GDP of Pakistan. Without the inclusion of the informal economy in our current GDP, the prosperity of the country is just an elusive dream.

The informal economy consists of the income earned by laborers, vendors, daily wagers, home businesses, small businesses, etc, and also it contains the profits received through illicit activities. All such wealth is mostly not registered on government records. World Bank predicted that if this informal economy becomes a part of the current economy, it will increase the GDP growth by 10.5%. The informal economy brings adverse effects on the productivity of the country. It increases corruption, bribery, money laundering, social evils, a threat to registered products, etc. The government suffers hugely in terms of tax evasion, which directly affects public spending.

In this article, our focus will remain on the strategies through which we can change the status of the informal economy. In the next few paragraphs, we will discuss the points that help transform the Informal economy into the formal economy.

Firstly, government institutions are responsible for taking action against those businesses that are not registered in official records. The government should make surveillance teams in every district on the provincial and national levels to constitute a list of those, who not listed on formal documents. Many products in the market are manufactured by companies that are not registered in official records of the Security and Exchange Commission of Pakistan (SECP). Due to the un-documentation of such businesses, the government is enduring a lot in terms of tax.  Government institutions like FBR, NAB, FIA, SECP, etc should establish special teams to counter such organizations involved in the transactions of unregistered products.

Secondly, the Security and Exchange Commission of Pakistan (SECP), with the collaboration of NADRA and FBR, create a special database in which all the record of salaries should be stored. The government should make it mandatory for every company, business, shop, vendor, etc to submit the record of its employees along with their salary documents. Also, the government should make it obligatory for every employer to pay salaries through the banking network. This will help in the identification of those who are out of the formal economy circle.

Thirdly, business-to-business transactions should be made through the banking sector. The majority of the small business transactions are carried out in the form of cash, which does not become a part of the government record, and because of that, businessmen hide this money from the eyes of the government for tax evasion purposes. The government should encourage businesses to make transactions through banking channels because it will help the government to constitute a record or financial transactions.

Fourthly, it is estimated that around Rs 10 billion worth of products are being sold to customers each month which has no record. The government should impose an ID card policy on every sector, whether big or small. This will help in the identification of those who are buying more than they earn. Most of the tax evaders prefer to buy in cash, which provides them a shield against government institutions. The state should make it mandatory that every citizen must provide its National identification card (CNIC) in case the amount exceeds the limit set by the government.

Fifthly, the government should make it compulsory for all the businesses, shops, manufacturers, service providers, etc to acquire a work license. There are millions of small businesses that are working without any license or certificate from the government. The government should apply strict actions against unlicensed shops. Any business without a license should be closed immediately, and the owner must be punished accordingly. The same thing should apply to the service sector because the service sector comprises a big amount of GDP. The licensing will help the government in maintaining a record of all the business and service activities in the country.

Sixthly, the government cannot achieve any productive outcome without changing the perception of the public. Changing the behavior and attitude of the public is inevitable to the development of the country. The government should assure the people through its attitude and work that whatever money the government receives, in the form of taxes, will be spent on the welfare of the people. The state, with the help of Media, should launch campaigns to increase awareness in the public about the benefits of their registered businesses, and taxes. The government should enhance public spending on education, health, transport, etc to prove that the public will be benefited from the taxes.

Seventhly, the unwillingness of the previous political parties increased the informal economy. In the past, democratic governments didn’t pay much attention to this matter, and the consequences of their neglection are severe. The incumbent government is taking steps to bring the informal economy in the tax net. The government should attract small businesses through different schemes, like tax exemptions, etc to lure them towards documentation. PTI government launched various projects to provide benefits to small businesses.

Eighthly, the state must impose strict security measures on the border to stop the flow of smuggled goods in the economy. Billions of rupees worth of smuggled products get in our markets, which brings huge losses to our economy.

Lastly, the government must enhance the information technology sector of the country, which will help in the documentation of the economy. By improving the IT department in government institutions, record-keeping, and documentation will become simple. The identification of the culprits will become easy, who are involved in illicit activities.

To conclude the whole argument, it is pertinent to say that the conversion of the informal economy into formal is inevitable for the prosperity of Pakistan. Pakistan is already struggling with various financial deficits, and this conversion will be beneficial in overcoming many financial losses.

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