‘Black Economy Generating Undeclared Assets Home and Abroad’
(BE2C2 Report) — The country’s apex court has tasked a special committee to suggest ways to trace and retrieve assets from abroad in view of a suo motu notice on ill-gotten money of Pakistani citizens in foreign banks.
Last year, the then Finance Minister Ishaq Dar had a figure of US$200 billion as an estimated sum that Pakistani citizens hold in Swiss bank accounts. An estimated 4 to times this figure is speculated to be held as assets by Pakistanis abroad– both legally and through inappropriate means. In either case, the situation is symptomatic of a larger problem at play, and primarily fueled by country’s informal economy aka black economy also called parallel economy. The drivers of such economy are affirmative public policy, lacuna in laws, corruption, social-cultural attitudes driven by individuals and families insecurity and dire need for self acquiring safety nets in the absence of state and government performance.
A research conducted in 2012 by the Sustainable Development Policy Institute (SDPI) and United Nations Office on Drug and Crime (UNODC) coordinated by Dr Abid Suleri of the SDPI estimated the size of Pakistan’s illegal economy at anywhere between 20-30 per cent of the formal economy. This report dealt mainly with the darker side of the informal economy, like human smuggling, drug trade, arms trade and other hardcore crimes.
Another report on the subject was generated by the Pakistan Institute of Development Economics (PIDE), based on calculations by M Ali Kemal and Ahmed Waqar Qasim. This report was released in 2012 and suggested that the size of the informal economy in Pakistan in 2008 ranged between 74 per cent to 91 per cent of the formal economy.
Black economy or informal economy includes incomes generated from bribery, corruption, drug trafficking, human smuggling, arms trade, smuggling of non-contraband items. Lastly, tax evasion and subsequent flight of capital through informal channels– all these add up to a whopping number dubbed ‘black hole of Pakistan’s economy’.
Considering that the total size of Pakistan’s GDP was about $304 billion in 2017, this indicates that the informal economy is easily $274 billion. This also implies that the total size of Pakistan’s economy is almost $578 billion.
According to some financial experts including renowned stock brokers and money managers, the black economy of the country seems to have grown and continue to grow at a faster pace over the last several years.
Dawn’s editorial throws further light on the matter:
IT is not surprising that the suo motu hearing begun by the Supreme Court into Pakistanis’ undeclared assets in foreign jurisdictions has led to a cul-de-sac. Ultimately, inquiries into this matter always end up with the same question: how do we trace these funds? In this case, the court created a 12-member committee to help it address the question; unfortunately, the answer is one which may not make judicial action easy. The reason is simple. Tracing flows of undocumented wealth into foreign assets is not possible so long as there remains a large undocumented sector of the economy at home. Undocumented assets in foreign jurisdictions are tied in with undocumented assets within the country, because the black economy at home is the nesting ground from where the incomes that flow into these assets originate. And tackling the black economy within the country is a policy task; it is not one that can be pursued through instructions or even a stricter application of the laws.
“…the task requires large-scale documentation of the economy, not just a vigilant eye or even a one-time amnesty scheme…”
It is unlikely that the committee would be able to recommend much that is useful on the issue of shutting down the channels through which undocumented incomes travel. The main reason is that these channels are integral to the conduct of normal trade as well as the normal cross-border flow of capital. Heightening surveillance or attaching larger penalties to the misuse of these channels will negatively impact investment and trade. So long as practices like benami accounts and assets at home, as well as opaque property markets and multiple tax-evasion techniques persist, using the instruments of law and foreign treaties to create a meaningful dent in the accumulation of foreign assets abroad is unlikely to yield the desired results.
And therein lies the rub. By targeting the accumulation of undeclared foreign assets, the judiciary could find itself outside the remit of the law and firmly in the domain of policy. At the end of the day, this is a task that requires large-scale documentation of the economy, not just a vigilant eye or even a one-time amnesty scheme. It has to be achieved through creating the right policy incentives to bring the vast mass of business people into the tax net so that their transactions become visible to the state. And before that can happen, the compact between the state and capital needs to be reformed to lessen the fear and mistrust that most businesses have of the state and its petty officialdom that is tasked with implementing such policies. The court has done right to order such a study of the myriad pathways through which illicit and ill-gotten gains are being taken out. But the job of putting restraints on this racket will have to await a proper policy response.
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