ISLAMABAD – The undocumented economy is one of the main causes of many of the financial problems Pakistan is facing, WealthPK reported.
Fiscal and current account deficits, inflation, poverty and rising unemployment are all related in one way or another to the undocumented economy. Documenting an economy helps policymakers and relevant authorities identify loopholes and take remedial action.
M Ali Kemal, economic policy adviser to the SDG support unit of the Ministry of Planning, Development and Reform, told WealthPK that the undocumented or informal economy accounts for a significant share of the overall economy not only in developing countries but also in developed countries. “However, in the last few decades, it has been declining in developed countries due to the digitization process and the registration of companies,” he added.
He said that Pakistan faces many challenges on both the internal and external fronts. “In a developing country like Pakistan, a large part of production comes from the informal sector. This sector’s share of gross domestic product is increasing at an alarming rate,” he said.
Ali Kemal said that higher tax rates and government policies, high levels of domestic unemployment and a heavy regulatory burden are the main drivers behind the growth of the undocumented economy. However, he cited a lack of confidence in the country’s tax collection system as one of the main reasons for not documenting the economy.
“As these factors help the economy grow larger, this leads to higher tax rates set by the government for the formal sector of the economy, which negatively affects the potential of the formal sector,” he said.
Ali Kemal said that dealing with a large bureaucracy, following complicated and lengthy registration procedures, and obtaining permits and licenses from various government agencies and departments made it difficult for economic agents to operate within a documented framework. They were trying to find an alternative, he added.
“The other dilemma in Pakistan is that under the pressure of rising unemployment, the government is also reluctant to eradicate the labour-intensive informal sector because of the inability of formal economic activities to absorb such a large number of unemployed,” he said.
The expert said that the expansion of the informal sector due to the economic crisis in the formal sector can only be controlled if the problems of the documented economy are resolved through effective monetary and fiscal strategies.
“Policymakers should formulate more effective policies and solve the problems of the economy better,” he said.
Due to its geographic location on the continent, Pakistan enjoys close ties with its neighbor China. Friendly capital controls, favorable official exchange rates, and lubrication of labor and capital mobility will help Pakistan boost its economy while reducing the undocumented economy.
According to research by WealthPK, Pakistan should work closely with its neighbors to improve its capacity and formulate legal ways to strengthen its economy and solve its financial problems.