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Pakistan's Informal Sector Drives Consumer-Led Economic Boom

Car sales increased 14 percent in February from a year earlier. Cement sales are rising with growing housing demand for increasing population. Lucky Cement, Pakistan’s biggest publicly traded construction materials company, is expected to post record earnings this year. Rising farm prices of bumper crops are pumping hundreds of billions of rupees each year into Pakistan's rural economy.

Contrary to government statistics of a stagnant economy, packed shopping malls and waiting lines at restaurants tell a different story-- the story of growing discretionary incomes of Pakistani consumers today.

So where is the disconnect between these two opposite views of Pakistan's economy? Naween Mangi of Businessweek answers it in her piece "The Secret Strength of Pakistan's Economy". She attributes it to the fast growing informal sector of the nation's economy that evades government's radar, illustrating it with the story of a tire repair shop owner Muhammad Nasir. Nasir steals water and electricity from utility companies, receives cash from his customers in return for his services and issues no receipts, pays cash for his cable TV connection, and pays off corrupt police and utility officials and local politicians instead of paying utility bills and taxes.

Here's an excerpt from Mangi's Businessweek story:

"The rhythms of life in the underground economy remain largely undisturbed. After work, Nasir and his friends sometimes hire a rickshaw to head to the beach or to a religious festival. The driver, part of the flourishing local transport business, doesn’t turn on the meter because he doesn’t have one. On his way home, Nasir stops to buy cooking oil, wheat flour, and sugar at a small grocery store that isn’t officially there. Out of about 1 million shops, up to 400,000 are grocery stores, and most of them are not registered and don’t pay taxes, according to Rafiq Jadoon, president of the City Alliance of Markets Association. In the evening, Nasir unwinds in front of the television. He watches an Indian movie transmitted by a local cable operator to whom he pays a monthly fee—in cash."

The estimates of the size of Pakistan's underground economy vary from 30% to 50% of the official GDP of just over Rs. 18 trillion (US$200 billion). Businessweek's Mangi claims that the government is losing as much as Rs. 800 billion (US$9 billion) in taxes from the informal sector...nearly enough to wipe out Pakistan's current fiscal deficit.

In my view, there are two major problems that arise from the underground economy described by Mangi. First, the massive tax evasion fosters Pakistan's dependence on foreign aid which comes with strings attached and infringes of national sovereignty. Second, the widespread theft of electricity is largely responsible for the huge circular debt and the ongoing power shortages that affect all aspects of life and scare away investors. The sooner the government and the people realize the severe downsides of the underground economy, the better it will be for Pakistan.

Related Links:

Haq's Musings

Rural Consumption Boom in Pakistan

Pakistan's Tax Evasion Fosters Aid Dependence

Poll Finds Pakistanis Happier Than Neighbors

Pakistan's Rural Economy Booming

Pakistan Car Sales Up 61%

Resilient Pakistan Defies Doomsayers

Land For Landless Women in Pakistan

Pakistan's Circular Debt and Load-shedding

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Tags: Consumers, Economy, Informal, Pakistan

Comment by Riaz Haq on November 16, 2012 at 11:38am

Here's an excerpt of a story in "">The News about the size of Pakistan's informal economy:

ISLAMABAD: Pakistan’s informal economy has expanded, reaching 91.4 percent of Gross Domestic Product (GDP). At a PIDE conference on Thursday, economist, M Ali Kemal said, “according to data for 2007-08, our formal GDP is half our actual GDP. However, it is still an under-estimated figure since investment data is not adjusted. The informal economy is 91.4 percent of the formal economy.”

He further said that the formal economy contributed Rs10,242 billion of the estimated Rs19,608 billion that the economy generates. Moreover, the informal economy stands at approximately Rs9,365 billion.

“Estimating the size of the underground economy is crucial for policy makers,” said Kemal. According to Economic Survey findings, total consumption for the entire population of the country is Rs17,261.6 billion and private consumption is Rs7,835.31 billion.

The sum of Rs9,426.29 billion is not reported in the formal economy.

During the session on poverty and household consumption, Dr Ashfaque H Khan, Dean NUST Business School (NBS) and Umer Khalid cited findings from a research paper on the consumption pattern of male and female-headed households in Pakistan.

According to their findings, marginal expenditure shares were highest for housing, durables, food and drink for households headed by men while they were highest for durables, followed by housing and food, and drinks for households headed by women. Higher marginal expenditures by households headed by females on education and durables were found in comparison with their male counterparts as these results were consistent in urban and rural areas of Pakistan.

Further, households headed by women were found to have higher budget shares for education, housing, fuels and lighting, clothing and footwear and lower average expenditure on food, drink, transport and communication compared to those headed by men.

The study also examined the consumption behavior of both types of households to determine consumption patterns and how they vary with change in economic status.

This analysis revealed that in the first three expenditure quintiles, the consumption expenditures of households headed by men were higher than those by women.

Moreover, in the last two quintiles, the consumption expenditures for households headed by women were slightly higher than those headed by women.

http://www.thenews.com.pk/Todays-News-3-143058-Size-of-informal-eco...

http://www.pide.org.pk/psde/25/pdf/AGM28/M%20Ali%20Kemal%20and%20Ah...

Comment by Riaz Haq on December 12, 2012 at 8:40am

Here's Reuters on 70% of Pak lawmakers not filing tax returns:

Almost 70 percent of Pakistani lawmakers did not file income taxes last year, an investigative journalism group said on Wednesday, highlighting deep flaws in a taxation system that has drawn repeated criticism from Western aid donors.

The Center for Investigative Reporting in Pakistan released a report based on leaked tax returns, marking the first time that the records of 446 lawmakers and ministers have been published and focusing scrutiny on individuals ahead of polls next year.

Pakistan's inability to raise revenue has constrained government spending, depriving schools and hospitals of funds and exacerbating a power crisis, causing widespread hardship in the nuclear-armed country of 180 million people.
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"This is what the people of Pakistan are upset about," said Jehangir Tareen, a trim, silver-haired businessman who paid the most tax in the National Assembly last year. He tried to set a precedent by making his returns public but no one followed suit.

"Taxes are the beginning and end of reform in Pakistan," said Tareen, who gave up his seat in parliament in frustration over his inability to push changes. "Right now the rich are colluding to live off the poor."

Umar Cheema, an award-winning journalist heading the Center for Investigative Reporting, said he hoped the report would make members of parliament more accountable to voters.

Cheema took legislators' identity card numbers from their public election nomination papers, then convinced employees at the Federal Board of Revenue to leak the tax returns related to the identity numbers. It took him a year to collect the data.

POOR ENFORCEMENT

The report highlights why Pakistan has failed to improve its tax collection rates: politicians benefit from a lax regime. No one has been convicted of income tax evasion in 25 years and few Pakistanis see a failure to pay tax as shameful.

Although lawmakers have about $25 a month deducted from their basic pay in tax, almost all have second incomes.

They built this system for their own benefit," said tax expert Ikramul Haq. Poor laws and loopholes meant lawmakers often have their income exempt from tax, he said.

Huge swathes of the economy, like agriculture, are virtually exempt. Specially designated products also benefit from "zero-ratings" and are not subject to any tax.

"We want to cut down on zero ratings and loopholes," said Ali Arshad Hakeem, the head of the Federal Board of Revenue. He has vowed to crack down on tax cheats.
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Most countries collect between 20 to 40 percent of their economic output in tax. In Pakistan, less than 10 percent is collected, Franks said.

Pakistan revenue authorities say 0.57 percent of adults pay income tax and the number is steadily declining.

"People know that the elites, the government, are corrupt but they don't understand how the corruption works," said report author Cheema.

"If our rulers are not paying for themselves, why should taxpayers in other countries pay for them?"

Part of the problem with going after tax evaders is the poor state of records at the Federal Board of Revenue. It's hard to distinguish ineptitude from corruption, officials said.

About three quarters of the time, people's declarations of what they paid did not match the actual payments, the officials said. An official said authorities never really tried to match up the records: "Oh dear God, no!" he laughed.

http://in.reuters.com/article/2012/12/12/pakistan-tax-idINDEE8BB08X...

Comment by Riaz Haq on December 13, 2012 at 9:51pm

Here's LA Times on Pakistan's tax collection effort:

The man hired to go after a nation of tax evaders jabs his finger at his laptop screen as he scrolls through a database of wealthy Pakistanis and dissects their spending habits.

He stops at the name of a rich man from Peshawar.

Everything's there, Ali Arshad Hakeem says: the man's photo, his home in a posh Peshawar neighborhood, his frequent trips to Abu Dhabi, his BMW and a bevy of bank accounts.

"We have the universe; now how do we use that universe?" asks Hakeem, Pakistan's new Federal Board of Revenue chairman. Hakeem answers his own question. "My approach is to give them an offer."

Hakeem has the Sisyphean task of overhauling Pakistan's broken income tax system, and he claims to have the remedy. He is asking parliament members — a majority of whom are believed to evade taxes themselves — to approve a national amnesty wiping the slate clean for millions of Pakistanis who have never paid a rupee in taxes, if they agree to a one-time payment of 40,000 rupees, about $420. Then, in 2013, they would have to file a return and pay whatever income tax they owe: for example, about$11,100 on a taxable income of $56,000

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Hakeem, 49, was appointed in July, after a four-year stint as head of the National Database and Registration Authority, the agency that issues the national identity cards. He says his prime target is Pakistan's moneyed upper crust: owners of sprawling two- and three-story marble-floored homes kept white-glove clean by teams of servants.

Among them are ministers and politicians, the very people responsible for enacting and executing laws aimed at fixing the system. A 2010 study by the Pakistan Institute of Legislative Development and Transparency, an independent think tank, reported the average worth of a Pakistani lawmaker to be about $850,000, while the richest lawmaker's assets topped $34 million.

According to a study released Wednesday by Pakistani investigative journalist Umar Cheema, two-thirds of Pakistan's federal lawmakers and more than 60% of the Cabinet did not file income tax returns in 2011. One senator, Mushahid Hussain Sayed, paid less than $1 in income taxes in 2011, Cheema says. The report also says President Asif Ali Zardari did not file an income tax return last year, though it adds that an aide said the president did file a return.

"The problem starts at the top," the report states. "Those who make revenue policies, run the government and collect taxes have not been able to set good examples for others."

To track down cheats, Hakeem and his team of young computer experts have combed a variety of national databases to form individual spending and income profiles. One of those experts and a top aide to Hakeem, Samad Khurram, says previous tax amnesties in Pakistan failed because the government had no idea who the tax evaders were.

"Now we know them, their children, their wives, where they travel, what cars they use," Khurram says. "We're saying, 'We know you, we're coming after you, and if you don't pay, we do this….' That's not an amnesty — that's a threat."....

http://touch.latimes.com/#section/-1/article/p2p-73686565/

Comment by Riaz Haq on May 5, 2013 at 5:15pm

Here's a Telegraph story of Pak tx collector fired by judges for "simply too successful in forcing people to pay more taxes":

In a country where almost no-one pays income tax, including more than two thirds of MPs, it only took seven months for Ali Arshad Hakeem to become a hated man.

As Pakistan's newly minted chief taxman, he built a database designed to monitor the spending habits of millions of people, and work out how much tax they owed.

At the click of a mouse, he could call up details of the elite's holiday habits, electricity bills and bank accounts, complete with photos addresses and vehicle details.

This quiet, technocratic revolution came to a juddering halt last month, when Mr Hakeem was suspended by judges over allegations that his appointment breached government rules that demand each job be filled from a shortlist of three.

In Pakistan's murky world of political appointments and patronage systems, few believe that was the real reason. Instead, his supporters say he was simply too successful in forcing people to pay more taxes. In other words, he was too good at doing his job.

A recent report by Pakistan's Centre for Investigative Reporting revealed that President Asif Ali Zardari and Rehman Malik, interior minister until mid-March when the government stepped down ahead of next week's elections, were among those politicians who paid nothing.

It made gloomy reading for anyone wondering whether there was any will inside Pakistan to reform. "The problem starts at the top," the report stated. "Those who make revenue policies, run the government and collect taxes, have not been able to set good examples for others."

Two of Mr Hakeem's key appointments have since transferred, moving them away from jobs where he said they would have helped bring more than £1.3 billion into government coffers.

"It's gone. And I'm not going to do it again," Mr Hakeem, 49, told The Sunday Telegraph - his relaxed demeanour and easy smile belying the bitterness he feels.

Much of his work has been undone in the short time since he was forced out, he said, and he had no appetite to take on the courts or challenge his suspension. His wife and children had already suffered enough stress.

"I hate it. I worked 20 hours a day. I've taken so much hatred for this, everyone is my enemy and out to get me - and then they sack me. Angry is not even the word," he said.

The decision to oust him will worry international donors who have kept pressure on Pakistan to shake up its anaemic tax system. They fear that without economic growth and an expanding revenue, the country's growing population could tip what is a fragile state into a failed state.

Pakistan is officially classed as a middle income country. It has the resources to build more than 100 nuclear warheads yet depends on handouts to keep its power stations, schools and hospitals running.

http://www.telegraph.co.uk/news/worldnews/asia/pakistan/10037380/Pa...

Comment by Riaz Haq on December 8, 2013 at 4:58pm

Here's Express Tribune report on rising consumption of branded packaged products in Pakistan:

.....
Stocks of major consumer goods and food companies listed on the Karachi Stock Exchange have appreciated 73.1% to date in 2013, outperforming the benchmark KSE-100 index, which has gained 50.8%.
The numbers were taken from a sample of MNCs listed on the Karachi bourse including Unilever Pakistan, Unilever Foods, Nestle Pakistan, Colgate-Palmolive and Gillette Pakistan. The current year’s market performance of these stocks, according to statistics compiled by Topline Securities, is 10.2 percentage points higher than 62.9% they gained last year.
The Express Tribune, in this report, tries to analyse what factors have been contributing to this growth and keeping these giants interested in a market confronted by deteriorating law and order and crippling power outages.
“Pakistan, with its nearly 200 million population, is simply a too large and attractive market to ignore,” Unilever Pakistan CEO Ehsan Malik said, explaining why the Anglo-Dutch food and consumer goods giant is interested in this market.

If being the world’s sixth largest consumer base is not enough, it is the country’s population growth rate that will create a high demand for food and consumer goods in the years to come.
Pakistan will soon become the fourth most populous country in the world, Nestle Pakistan’s Head of Corporate Affairs Waqar Ahmed said.
Pakistan’s population is growing at four million people a year and in four years, he says, the increase in food consumers will be larger than the population of Switzerland (15 million).
“The growth of consumption within the Pakistani market dictates that we spend more in order to be able to supply the consumers with the value they deserve. Hence for us, the investment climate within Pakistan is as good as it ever was.”
Nestle is a very good example of the country’s growth potential, Topline Securities Manager Research Zeeshan Afzal said. The Swiss giant almost doubled its sales from Rs41 billion in 2009 to Rs79 billion in 2012.
The data highlights the performance of listed MNCs but unlisted foods and consumer goods companies have also grown manifold.
Mondelez International – a subsidiary of Kraft Group based in Chicago – says Pakistan has been one of their top-five growth markets in the world.

The confectionary giant saw a significant growth in their snack brands in Pakistan, which is among the highest in the world. Their Cadbury Dairy Milk and Tang brands alone earn Rs1 billion a year in sales.
In food and consumer goods business, says Afzal, law and order is not that big a problem. The goods are produced by MNCs but the rest is done by distributors who are local people. What matters in this business, he says, is the growth and in Pakistan the growth is driven by volumes and not the price.
Beverages giant Coca-Cola, for example, didn’t need investment from its parent company, it rather invested in its new plants from profits generated by its local operations, the analyst said.
The energy shortage, he said, is also not an issue for most MNCs because of their high profitability.
Explaining the population demographics that have driven this growth, Afzal said more women are entering the workforce contributing to a rise in their family’s incomes.
Rising urbanisation, growing middle class and sophisticated consumption habits, he said, have all contributed to this growth. A big chunk of its population is young while it is one of the top countries adding 20-year-olds to the world.
These people get jobs and establish families, thus contribute to the growth of the consumer goods business.
The country’s food consumption is very high but there is still a lot of room for further growth, believe analysts as well as industry officials...

http://tribune.com.pk/story/642820/consumer-goods-multinationals-ba...

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