The Scale of Pakistan’s illicit economy just keeps expanding

Over the last few years, Pakistan’s illicit economy – which consists of everything from drugs and foreign currency to consumer goods such as soap, has thrived.  Illicit trade costs Pakistan over PKR. 2 trillion (about $7 billion) annually.

Major sectors contributing to this loss include real estate, pharmaceuticals, tobacco, tyres, lubricants and tea. This illicit economy relies on collusion among Pakistan’s law enforcement institutions, political elites, and criminal and militant networks.

Counterfeiting and piracy are widespread in Pakistan, including in the areas of pharmaceuticals, printed work, digital content, and software. According to the Organisation for Economic Co-operation and Development (OECD), Pakistan ranks among the top 25 provenance economies in terms of their propensity to export counterfeit products. For instance, during the period 2014-2018, the top dozen commodities smuggled into Pakistan generated as much as USD 3.3 billion a year.

Pakistan has also been noted as one of the leading sources of counterfeit medicines distributed globally. At the same time, Pakistan has not provided criminal enforcement authorities ex officio authority to take action against counterfeit goods. In this respect, law enforcement and regulatory bodies in the country can seize about 5% of the goods smuggled into Pakistan.

A report compiled by a team of Harvard economists and senior commerce ministry officials revealed that the top dozen commodities smuggled into the country generate as much as $3.3bn a year. “A staggering 74pc of cell phones sold in Pakistan were smuggled into the country. When it came to vehicles, 53pc of diesel, 43pc of engine oil, 40pc of tyres, and 16pc of auto parts sold in the country were smuggled,” the report reveals, adding that 20pc of cigarettes in Pakistan were smuggled, as was 23pc of tea. Surprisingly, law enforcement and regulatory bodies in the country can only seize 5pc of the goods smuggled into Pakistan.^[1]

A more recent study conducted by the global leader in market research, IPSOS, reveals that the annual volume of tax evasion in five sectors is around PKR.310 billion, including PKR.35bn from the illicit trade in tea; PKR.80bn from tobacco; PKR.90bn from tyres and lubricants; PKR.45bn from medicines; and PKR.60bn annually from the real estate sector.^[2]

It has also been noted that Pakistan’s use of unlicensed software exposes the government and enterprises to higher risks of security vulnerabilities.

Counterfeit goods exported from Pakistan often use sea routes. The Pakistan Customs and the Pakistan Navy have foiled some smuggling attempts near Karachi. Some isolated incidents have been reported of luxury goods purchased by tourists and subsequently exported involving products manufactured in China shipped to vendors in Pakistan.

The illicit trade in excise goods, especially tobacco, is a cause of concern at the domestic front. The illicit tobacco industry is growing, especially in Mardan and other KP areas that use the brand names of known companies and sell cigarettes within the country. Pakistan is a source, transit, and destination country for the illicit trade of tobacco. Organised crime groups often facilitate the trade. A 2021 study found that one in six packs of cigarettes consumed in Pakistan are from the black market.

An Oxford study estimated that lost excise revenues from illicit tobacco trade represented 37.7% of total potential Excise Tax receipts. A more recent study conducted by IPSOS estimated that PKR 80bn in excise taxes were evaded due to the illicit trade of tobacco products in the country.

Pakistan has a large market of locally produced cigarettes that are not taxed due to underreporting of production by transnational companies and tax evasion by local companies. Despite the implementation of a track-and-trace system in the tobacco industry, the sale of smuggled tobacco products continues to be common in the country. It is also important to note here that, despite the studies above, assessing this market is particularly challenging due to the lack of official data.

Muhammad Zeeshan, Chief Financial Officer and Executive Director of Philip Morris (Pakistan) Limited, he expressed concerns about the escalating illegal cigarette market and its implications for government revenue. “If the illegal cigarette market continues to rise as it did after the excise duty hike, the government will not be able to generate the anticipated revenue,” he said. Zeeshan highlighted that the government had increased the Federal Excise Duty (FED) by 200% in the current fiscal year. Consequently, Philip Morris (Pakistan), one of the two documented tobacco companies, experienced a staggering almost 70% decline in sales.^[3]

The illegal cigarette market, which currently captures more than 40% of the total market share and is projected to escalate to 50%, making Pakistan one of the largest illicit cigarette markets in the world.Prime Minister Shehbaz Sharif also acknowledges that illicit tobacco causes losses of over PKR. One hundred billion annually to the national exchequer.

Pakistan also has a market for illegal car trading. Japan is the main source of used car imports to Pakistan under the misuse of gift schemes or baggage rules. This often involves forged and fake documents with fake seals and stamps from the Japanese Embassy and forged signatures of the Trade and Investment Counsellor.

 Arrangements to smuggle vehicles are often agreed upon over social media platforms like Facebook, Instagram, and WhatsApp. Corrupt state officials, particularly excise and taxation officers, also facilitate the country’s illegal car market. Tax evasion and collusion of excise officials is endemic. In a 2020 investigation, 18 officers in the Punjab Excise, Taxation, and Narcotics Control Department were arrested for a scam involving registering as many as 4,397 used, smuggled, and stolen vehicles between 2015 and 2018 with fake auction vouchers.

Even the tyre industry suffers substantial losses due to illegal trade. For example, the local tyre industry estimates that over 50 percent of tyres sold in the market are smuggled. Illicit trade including smuggling and under-invoicing poses serious problems for legal industries and businesses.The annual consumption of tyres in Pakistan is 14 million and around 15-18 percent  of demand is met by domestic production, while more than 50 percent of the demand is met through smuggled tyres. Only 35 percent of tyres are imported legally into the country.

Gold smuggling poses another challenge.Out of the significant gold market value of Rs 2.2 trillion (USD 7.1 billion), only 1.32 per cent or Rs 29 billion (USD 94.5 million) is officially declared to tax authorities. This stark underreporting results from an annual smuggling of approximately 80 tonnes of gold into the country out of the total annual consumption of 160 tonnes

Pakistan keeps reiterating that without raising tax rates, it will continue to rely on International Monetary Fund (IMF) loans. And yet it has taken no effort to implement a comprehensive strategy to combat illicit trade, in order to control the vicious cycle of illicit trade. Even as the IMF has approved a $7 billion loan for Pakistan, to be disbursed over 37 months,  there is massive withdrawal of foreign exchange from the country in the form of imports or smuggling. Pakistan loses almost US $150 million per month from dollar smuggling and over US$ 1 billion annually from oil smuggling. However, the government machinery turns a blind eye to smuggling because of the huge profits earned by involved parties.

Sources:

^[1]  Pakistan’s shadow economy accounts for 40pc of GDP, says study – Business – DAWN.COMhttps://www.dawn.com/news/1693195^[2] Ibid

^[3] Philip Morris CFO raises concerns over soaring illegal cigarette market (nation.com.pk) https://www.nation.com.pk/27-May-2023/philip-morris-cfo-raises-concerns-over-soaring-illegal-cigarette-market

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