Pakistan's smuggling epidemic

Business Recorder

21-05-2025

EDITORIAL: For decades, illicit trade and smuggling of goods across multiple sectors have imposed a crippling drain on Pakistan's economy, depriving the national exchequer of vital revenue while nurturing a parasitic shadow economy that has strangled legitimate businesses and stifled growth. The alarming scale of this scourge was underscored last week in a report by the Policy Research Institute of Market Economy and the Transnational Alliance to Combat Illicit Trade (TRACIT), which revealed that Pakistan loses Rs750 billion in tax revenue each year due to rampant smuggling and illegal manufacturing, particularly in sectors like tobacco, petroleum, and pharmaceuticals. Meanwhile, the country's vast informal economy, valued at USD 123 billion, is responsible for an even more severe annual tax loss of Rs3.4 trillion, 30 percent of which stems from the gross abuse of the Afghan Transit Trade facility.
Moreover, TRACIT's Illicit Trade Index 2025 ranks Pakistan a dismal 101st out of 158 countries, significantly lagging behind regional peers like India (52) and Sri Lanka (73). The report has further emphasised the country's glaring vulnerabilities in taxation, weak regulatory enforcement and porous supply chains. Pakistan's highly inequitable tax regime, in particular, has played a critical role in fostering this crisis, overburdening legitimate businesses while enabling illicit sectors to flourish without meaningful scrutiny. The tobacco industry exemplifies this distortion perfectly: excessively high tax rates have squeezed formal manufacturers, which contribute 98 percent of the sector's tax revenue, while the illicit sector now controls 56 percent of the market. Far from boosting revenue, higher taxes have led to a nosedive in tax collection, driving consumers towards cheaper, illicit alternatives smuggled effortlessly across Pakistan's porous borders.
This brings us to another aspect of this crisis: the sheer volume of counterfeit and contraband products flooding markets, exposing both shocking incompetence and outright corruption by official circles in border management, as well as further down the supply chain, indicating that smuggling networks are operating with near impunity. As far back as December 2023, this newspaper had reported the federal government uncovering a network of mobile phone smugglers and dealers, allegedly supported by multiple departments, including the FBR, FIA, police, FC and PIA. Since then, there has been little meaningful progress in addressing corruption within these agencies, as smuggling persists unchecked across various sectors.
The TRACIT report prescribes a multipronged reform agenda that the authorities would do well to urgently adopt, including rationalising of the tax regime to eliminate incentives for smuggling and counterfeit trade, and upgrading of enforcement mechanisms. Despite some improvements in border control measures, domestic market oversight remains weak, necessitating more rigorous market inspections in a bid to crack down on illicit trading activities. The FBR's much-touted Track and Trace system is also in need of more robust implementation. Meant to combat tax evasion by digitally monitoring goods with unique QR-coded stamps, tracking them from factory to sale, the system has faltered due to the widespread use of counterfeit stamps and poor compliance, undermining its effectiveness. Technological upgrades of the system, more exacting audits and stiffer penalties for non-compliance are the needs of the hour.
Furthermore, the persistent lack of coordination between Customs, the FBR and security agencies needs urgent redress through the formation of dedicated task forces, streamlined intelligence-sharing and joint operations. Additionally, integrating cutting-edge border management tools, such as high-resolution surveillance drones and automated cargo scanning technology at key transit points and highways, can significantly strengthen the ability of law enforcement to detect smuggling networks.
For these measures to have the desired impact, however, Pakistan must first confront the entrenched corruption within its law enforcement apparatus and key departments. Purging institutionalised nexuses between smuggling networks and official circles has become critical. Until this rot is excised, no solution will work.
Copyright Business Recorder, 2025