Pakistan Tries to Rein In its Powerful Black Market
As the contours of an intensifying economic crisis become clear, Pakistan’s central bank convened a crucial meeting on September 14. Contrary to widespread expectations that it would slam the emergency brakes on monetary policy, the institution chose to abstain from further intervention. This surprising decision comes even after the central bank significantly ramped up interest rates to 22% over the past year, aiming to stabilize an increasingly volatile financial landscape characterized by soaring inflation, a plummeting currency, and rapidly dwindling foreign exchange reserves.
Emerging from a sustained downward economic spiral that culminated in a $3 billion bailout from the International Monetary Fund in July, Pakistan’s interim government, under the leadership of Caretaker Prime Minister Anwaar-ul-Haq Kakar, has taken a “whole-of-government approach” to recalibrate the country’s ailing fortunes. Speaking to an assembly of industrialists on September 7, Kakar emphasized the imperative nature of fiscal reforms aimed at improving tax collection mechanisms and enhancing the climate for investment.
In a parallel move, the central bank and the Federal Investigation Agency have initiated a crackdown on the illegal dollar trade that has been exacerbating record currency depreciation and causing acute shortages in foreign exchange reserves—a crackdown that has already begun to yield positive results.
However, Pakistan’s economic woes are not merely a reflection of inadequate policies or unstable global economic conditions; they are profoundly exacerbated by a sprawling and complex illicit economy that deprives the government of critical excise tax revenue, thereby undermining its ability to fund vital public services and drive sustainable development initiatives. Clearly, any viable long-term economic strategy for Pakistan will necessitate a holistic approach designed to reinforce and expand the formal, legal economy.
Earlier this month, the Pakistani news outlet, The News International, highlighted an alarming report submitted by the country’s Intelligence Bureau (IB) to the federal government. The report details the multifaceted illicit economy and its detrimental impact, covering issues ranging from smuggling and tax evasion to illegal foreign exchange trading and the misuse of the Afghan Transit Trade Agreement (ATTA). According to the IB, these illicit activities have bored a hole in Pakistan’s already fragile economy—a hole that the Pakistan Bureau of Statistics warns has widened to as much as $3 billion annually.
In a sobering account of financial loss, the IB points out that just the petroleum and illicit tobacco sectors alone siphon off an estimated $5.5 billion from public coffers annually. The IB’s investigation has revealed the existence of nearly 1,000 unauthorized fuel stations involved in smuggling Iranian oil across the nation, as well as identifying over 60 operators in the tobacco smuggling underworld. Furthermore, the agency’s investigation has found that excise tax evasion attributed solely to illicit cigarette trading has skyrocketed to an astonishing $31 million. Additionally, sugar and fertilizer stand as two of the most widely hoarded and smuggled essential commodities in Pakistan, as criminal syndicates exploit vulnerabilities in the porous Afghan border, thereby endangering the nation’s food security.
The findings of the IB report align closely with the conclusions of the IMF’s country report on Pakistan released in July, which also noted an uptick in illicit tobacco trading. The IMF report points to “implementation gaps in track and trace” solutions as a significant contributing factor and underscores the urgency of addressing this issue as a crucial pillar of broader fiscal reforms required to actualize the benefits of recently implemented excise tax policies.
For added context, it’s important to note that Pakistan’s Federal Bureau of Revenue (FBR) issued a public tender in 2021 for the establishment of a track and trace system aimed at monitoring the illicit trade in sugar, tobacco, fertilizer, and cement. Conceived as a “nationwide, electronic monitoring system,” facilitated by the “affixation of billions of tax stamps/bar codes” on targeted commodities at their production stage, the FBR’s initiative was designed to bolster its tax collection capacities and, by extension, enhance the government’s ability to deliver public services effectively and stimulate national growth. Regrettably, this vision has not yet been realized.
The contract for the track and trace system was eventually awarded to AJCL—a consortium led by the U.S.-based authentication solutions company Authentix, along with South Africa’s Mitas Corporation—in March 2021. However, the project has been plagued with controversies right from the tendering process. Just a month before the award, Islamabad’s Public Procurement Regulatory Authority (PPRA) put a temporary halt on the $300 million deal between the FBR and AJCL due to allegations of favoritism, echoing similar concerns that had triggered investigations in Botswana and Ghana over alleged irregularities in tender and procurement processes involving track and trace systems granted to Authentix. Adding another layer of skepticism, industry observers noted the dubious selection of Authentix’s bid as “the most advantageous,” despite its quoted cost being more than 50% higher than the lowest submitted offer.
Two years into the project, the initial concerns appear to have been justified. Local Pakistani media recently highlighted disappointing findings from a high-level inquiry committee headed by former Prime Minister Shehbaz Sharif, revealing that the multi-million-dollar venture has comprehensively failed to achieve its objectives across all four targeted industries. The tobacco, cement, and sugar industries continue to face serious compliance issues, with every manufacturing entity utilizing the Authentix-Mitas system falling short of meeting the FBR’s compliance standards.
Alarmingly, a failure to adequately adapt to local environmental conditions in factories—ranging from dust and humidity to heat—has resulted in tax stamps either breaking or quite literally falling off sugar, fertilizer, and cement bags. Even the cement industry has claimed that the system is fundamentally not adapted to its specific needs, spotlighting AJCL’s flawed “one-size-fits-all” solution for sectors with vastly different operational requirements.
Moreover, cigarette manufacturers are relying on antiquated tax stamp machines that are wholly incompatible with modern, automated technology. Compounding this problem is the reality that only a small number of Pakistan’s tobacco companies have actually implemented the track and trace system. Astonishingly, just two regulated companies account for 98% of all tobacco tax revenues, while the remaining companies, which constitute 48% of the market share, contribute a negligible 2% in taxes.
Leading industry experts, such as Muhammad Awais Ashard, who serves as the Head of Research at Foundation Securities, have publicly decried the inadequate rollout, lackluster enforcement, and subpar technological sophistication of the FBR’s system—all factors that are critical to “achieving the desired results in curbing illegal activities” that pervade Pakistan’s economy. The ramifications of this failed project are manifold, exacting a heavy toll on the Pakistani taxpayer in the form of both the direct costs associated with the tender process and system implementation, as well as the lost opportunity to generate public funds at a time when they are most urgently needed.
As the government in Islamabad continues to progress its overarching agenda of comprehensive economic and fiscal reforms, strengthening its track and trace system will be a critical step in putting the nation’s fiscal house in order, thereby allowing Pakistan to break free from the seemingly endless cycle of IMF bailouts. More than just a financial necessity, an effective tracking system also serves as an essential foundation for creating an attractive investment climate, particularly for foreign investors from the Gulf nations, whom Pakistan is actively courting.
With the initial indications suggesting that the government’s latest economic measures are beginning to yield positive results, it becomes ever more imperative for Pakistan to double down on its reform efforts. Failure to effectively implement and enforce these measures could undermine the credibility of the government’s plans to reinvigorate Pakistan’s economy, while success would mark a pivotal turning point, signaling a departure from a past mired in economic vulnerability toward a future of newfound stability and prosperity.
Through a combination of targeted fiscal reforms, concerted law enforcement efforts, and the appropriate utilization of technology, Pakistan has the opportunity to reclaim its lost economic potential, thereby fulfilling the collective aspirations of its people.