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Business Recorder
21-05-2025
- Business
- Business Recorder
Pakistan's smuggling epidemic
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
Express Tribune
04-05-2025
- Business
- Express Tribune
Trillions lost to smuggling
Listen to article A new study has found that smuggling costs Pakistan's economy an astounding Rs3.4 trillion in losses, which is about 3.5% of GDP. The figure also represents about 26% of the government's tax revenue target for the ongoing fiscal year, meaning that the economy could, on paper, be put on track for success 'simply' by ending smuggling. Unfortunately, ending smuggling is anything but simple. Even wealthy countries with well-documented economic systems often struggle to keep smuggling at low, nuisance levels. Meanwhile, Pakistan and its massive informal economy — estimated to be about one-third of the economy - are ripe for smugglers, especially those taking advantage of Afghan Transit Trade, which alone is credited with causing over Rs1 billion in annual losses, according to a report by the Policy Research Institute of Market Economy. But smuggling is not just about government losses — the illegal trade can greatly impact the quality of prices available in the local market, while also discouraging the establishment and growth of local production. This leads to the loss of potential jobs and long-term growth potential which, in turn, compounds efforts to fund improvements in health, education and other social services and infrastructure. The proliferation of smuggled goods also opens the door for counterfeiting, which is of grave concern in areas such as medicine, where almost half of some categories of drugs are allegedly counterfeit. It is, therefore, unsurprising that Pakistan's subpar showing on the 2025 Illicit Trade Index — the worst in the region — also couples with a finding that we are generally among the worst economic performers among all developing economies. While improving enforcement is not a total solution, it is a start. The government should also look into improving the archaic customs and shipping port infrastructure. Better risk profiling and scanning of containers would go a long way in cracking down on smuggling, as it would help keep the goods from ever entering the local market. The harder part of discouraging smuggling is encouraging a societal attitude shift to reject smuggled goods altogether.
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Business Standard
03-05-2025
- Business
- Business Standard
Pakistan losing Rs 3.4 trn due to misuse of Afghan Transit Trade facility
From smuggled petroleum and counterfeit pharmaceuticals to non-tax-paid cigarettes and under-invoiced consumer goods, illicit trade has entrenched itself across key sectors in Pakistan Press Trust of India Islamabad Pakistan is losing Rs 3.4 trillion, including a nearly 30 per cent loss because of misuse of the Afghan Transit Trade facility due to illicit trade, according to a report. The losses estimated by the Policy Research Institute of Market Economy (PRIME) in its report titled "Combatting Illicit Trade in Pakistan" are equal to 26 per cent of this fiscal year's annual tax target, reported The Express Tribune newspaper. The report estimates an annual tax revenue loss of Rs 3.4 trillion on account of an estimated $123 billion informal economy, according to the report released on Thursday. It underlined that the illicit trade has emerged as a critical challenge for Pakistan's economy, undermining formal businesses, eroding government revenues, and jeopardising consumer safety. From smuggled petroleum and counterfeit pharmaceuticals to non-tax-paid cigarettes and under-invoiced consumer goods, illicit trade has entrenched itself across key sectors, it added. The country's intelligence and investigation agencies have recently pointed fingers towards the customs officials facilitating the smuggling and under-invoicing. The estimated revenue loss from Afghanistan Transit Trade is Rs 1 trillion, according to the report. After making stringent conditions to curb smuggling under the transit trade, Pakistan last month relaxed the conditions by allowing the import of Afghanistan-bound goods against insurance guarantees. PRIME said that the smuggling of oil was causing Rs 270 billion in losses. The report has estimated the volume of smuggled Iranian oil at 2.8 billion litres. The government charges Rs 16 per litre customs duty and a petroleum development levy of Rs 78 per litre, a reason for smugglers to shift towards the smuggled oil to make higher profits. While commenting on the size of the informal economy, the report stated that independent experts consider the size of the informal economy to be one-third of the formal economy. According to the Small and Medium Enterprise Development Authority, the informal economy has a market share of more than 40 per cent of the GDP. High customs duties, complex tariff regimes, inflation, and a growing informal economy incentivise businesses and consumers to move away from the formal sector, according to the report. Regulatory inconsistency and protectionist trade policies further add to the cost of doing legal business. Simultaneously, porous borders, outdated customs infrastructure, and limited inter-agency coordination allow the unchecked movement of illicit goods, it added. According to the 2025 Illicit Trade Index, Pakistan ranks 101 out of 158 countries, performing below global and regional averages due to systemic weaknesses in governance, enforcement, and economic policymaking, according to the report. The Illicit Trade Index, a publication of TRACIT, monitors the performance of countries in preventing illicit trade by considering six broad categories comprising 37 indicators. Pakistan's score on the index was 44.5, placing it below the global average of 49.9. This ranking reflects risks and vulnerabilities across multiple dimensions of trade governance, enforcement, and economic regulation, according to the report.
Express Tribune
01-05-2025
- Business
- Express Tribune
Smuggling causing Rs3.4tr/year loss
Listen to article A new independent report has estimated that illicit trade is causing annual revenue losses of a whopping Rs3.4 trillion, including nearly 30% loss because of misuse of the Afghan Transit Trade facility. The losses estimated by the Policy Research Institute of Market Economy (PRIME) in its report titled "Combatting Illicit Trade in Pakistan" are equal to 26% of this fiscal year's annual tax target. The gravity of this issue (illicit trade) is manifested by an estimated annual tax revenue loss of Rs3.4 trillion on account of an estimated $123 billion informal economy, according to the report released on Thursday. The report underlined that the illicit trade has emerged as a critical challenge for Pakistan's economy, undermining formal businesses, eroding government revenues, and jeopardising consumer safety. From smuggled petroleum and counterfeit pharmaceuticals to non-tax-paid cigarettes and under-invoiced consumer goods, illicit trade has entrenched itself across key sectors, it added. The findings are released at a time when there is a growing focus on the role of tax officials in facilitating smuggling and under-invoicing to evade taxes. The country's intelligence and investigation agencies have recently pointed fingers towards the customs officials facilitating the smuggling and under-invoicing. There has been credible evidence of even manipulating the goods declaration forms to facilitate tax evasion. PRIME said that the loss of revenues from the smuggling of tobacco is estimated to be more than Rs300 billion. The government increased the federal excise duty on tobacco products by up to 150% to generate additional revenues for budgetary support in February 2023. But PRIME said that since then, the market share of illicit cigarettes has increased manifold from 30% to 56%, causing a loss of more than Rs300 billion annually. The estimated revenue loss from Afghanistan Transit Trade is Rs1 trillion, according to the report. After making stringent conditions to curb smuggling under the transit trade, Pakistan last month relaxed the conditions by allowing import of Afghanistan-bound goods against insurance guarantees. PRIME said that the smuggling of oil was causing Rs270 billion losses. The report has estimated the volume of smuggled Iranian oil at 2.8 billion litres. The government charges Rs16 per litre customs duty and a petroleum development levy of Rs78 per litre, a reason for smugglers to shift towards the smuggled oil to make higher profits. The report said that the outdated border control infrastructure and limited automation in the customs processes make it difficult for the government to prevent smuggling of goods. Pakistan is also lacking in risk-based profiling systems and modern container scanning technologies, it added. While commenting on the size of the informal economy, the report stated that independent experts consider the size of the informal economy to be one-third of the formal economy. According to the Small and Medium Enterprise Development Authority, the informal economy has a market share of more than 40% of the GDP. High customs duties, complex tariff regimes, inflation, and a growing informal economy incentivise businesses and consumers to move away from the formal sector, according to the report. Regulatory inconsistency and protectionist trade policies further add to the cost of doing legal business. Simultaneously, porous borders, outdated customs infrastructure, and limited inter-agency coordination allow the unchecked movement of illicit goods, it added. Enforcement mechanisms, though partially effective at the borders, remain weak within domestic markets, especially at the retail and distribution levels. The report stated that the suboptimal performance of the Track and Trace System, adopted to monitor tax compliance, reflects weak implementation, with only a fraction of cigarette brands complying. A study by the Institute of Public Opinion and Research (IPOR) in 2024 found that only 19 out of 264 cigarette brands were compliant with Track and Trace System regulations, with 56% of the market comprising non-compliant and untaxed products. The report estimated the revenue loss due to counterfeit pharmaceutical goods at Rs65 billion. About 40% of medicines are counterfeit and substandard, it added. Over 60% of tires sold are smuggled and are causing revenue loss of Rs106 billion, said PRIME. Around 30 % of the market share of tea is taken by smuggling, causing a Rs10 billion loss. Minimum Retail Price of tea is Rs1,200 per kg, and an 18% sales tax is charged. Pakistan sinks on Illicit Trade Index According to the 2025 Illicit Trade Index, Pakistan ranks 101 out of 158 countries, performing below global and regional averages due to systemic weaknesses in governance, enforcement, and economic policymaking, according to the report. The Illicit Trade Index, a publication of TRACIT, monitors the performance of countries in preventing illicit trade by considering six broad categories comprising 37 indicators. Pakistan's score on the index was 44.5, placing it below the global average of 49.9. In contrast, the neighbouring countries have fared well with China at 40th rank, India at 52nd, Sri Lanka at 73rd, and Bangladesh at 95th, according to PRIME. Similarly, comparison with emerging economies also shows that Pakistan is lagging behind all of them. The report said that it is a cause of concern that Pakistan is among the few developing economies falling at the bottom of lower-middle income countries. This ranking reflects risks and vulnerabilities across multiple dimensions of trade governance, enforcement, and economic regulation.
