Illicit trade continues to plague Pakistan, putting economic recovery in doubt | Business

Illicit trade continues to plague Pakistan, putting economic recovery in doubt | Business

The Pakistan Business Council (PBC) recently raised red flags over the country’s ongoing problems with illicit trade, noting that the country has one of the highest rates of illegal trade in Asia, amounting to a whopping Rs 8 trillion–some 20% of the formal economy. The ongoing problem is worsening Pakistan’s already-dire economic circumstances, and hitting certain sectors particularly hard. The tobacco industry, unsurprisingly is one of them–tobacco giant Philip Morris’s Pakistan division, for example, posted truly dismal profit figures in late October, noting a remarkable drop in net income from Rs 2.15 billion rupees at this time last year to Rs659 million this year.

The tobacco titan blamed their sharp drop in profit on a steep decline in legal cigarette sales and what they identified as an apparently significant increase in the consumption of illicit smokes, and called for the full implementation and monitoring of the track and trace system which went into effect in July 2022 for Pakistan’s tobacco industry. While Philip Morris’s claims should be taken with a grain of salt— tobacco industry figures about illicit trade are frequently unreliable, and investigations have demonstrated that the tobacco major has itself been complicit in the underground trade of its products, including in Pakistan, where it apparently used an undeclared warehouse to produce black-market smokes— the introduction of a comprehensive and effective track and trace system is widely seen by independent experts as a key tool to tackle the shadow economy, in the tobacco sector and beyond. In Pakistan, however, the rollout of a track and trace system has been anything but smooth, stymying the country’s efforts to curb the illicit trade wiping out billions of rupees in profits for companies–and billions more in tax revenue.

Pakistan’s track and trace system was designed to specifically target a number of sectors–including tobacco, cement, sugar, and fertilizer–which are both major players in the Pakistani economy as well as plagued by significant illicit trade. Despite expenditure of millions of rupees, however, the chosen system has by all accounts been a colossal failure.

Even before the system was rolled out, the tender for its implementation–eventually awarded to AJCL—a consortium led by Authentix Inc. USA and Mitas Corporation of South Africa–was roiled by controversy, with allegations over alleged favoritism in the tender process. The implementation itself has been no less rocky: an inquiry committee set up by the Pakistani Prime Minister found in September that the system has failed to yield the desired results for all the four major sectors targeted.

From the start, the system was marred by the use of outdated technology and manual processes that were easily exploited by tax evaders. For instance, the sugar sector faced compatibility issues with the system due to factors like tax stamps not adhering properly to sacks–remarkably, the prime minister’s inquiry committee found that all 71 sugar mills were not compliant with the track and trace system, and that the machinery installed in these mills requires extensive and costly modifications to make the system work properly. Similarly, the cement sector was declared non-compliant due to the dusty factory environment, which affected the functionality of the track and trace system. The tobacco industry also fell short, with old machines (some dating back as early as 1960) unable to sustain the technology required; what’s more, the vast majority of Pakistani tobacco manufacturers are non-compliant with the system. More than 50 companies are registered with the Pakistan Tobacco Board—yet only a few have implemented the track and trace system, while a number of cigarette manufacturers continue to contribute themselves to the country’s illicit trade problem.

The track and trace system operated by Authentix appears to have been fatally flawed from the beginning–notably, the contractual framework which won the tender tried to follow a “one solution fits all sectors” approach, when in fact, the four sectors targeted have significantly different factory installations, different mechanisms, and different processes–and would have benefited far more from customized solutions for each sector.

The consequences of the botched implementation are clear to see: its inherent flaws mean that the long-awaited track and trace system is doing almost nothing to curb Pakistan’s ever-worsening illicit trade problem. As the Pakistan Business Council recently underscored, this failure to address the shadow trade is an enormous drag on the country’s already unstable economy.

As Pakistan awaits a fresh tranche of IMF funding to avoid a looming default, the failure of its track and trace system to effectively combat illicit trade represents a substantial threat to its economic recovery. The IMF, with its strict fiscal discipline, is likely to view the ineffective handling of such a significant portion of the economy as a highly concerning issue. The inability to curb illicit trade not only leads to a loss of revenue and hinders the development of legitimate businesses, but also undermines investor confidence, a key prerequisite for Pakistan’s hopes of economic stabilization and growth.

Moreover, the rampant illicit trade exacerbates the country’s already significant fiscal deficit. With the informal sector evading taxes, the government’s ability to generate revenue is severely hampered. This shortfall in revenue collection directly impacts Pakistan’s ability to meet the stringent fiscal targets set by international financial institutions, including the IMF. The resultant fiscal imbalance could lead to further austerity measures, adversely affecting public spending on essential services like healthcare and education, crucial for the country’s long-term development.

In this context, the effective implementation of a more functional and robust track and trace system is even more critical. Addressing the country’s rampant illicit trade problem is not just a matter of improving tax revenues; it’s about restoring faith in Pakistan’s economic governance, attracting investment, and ensuring a fair playing field for all businesses. The government must address the various issues plaguing the current system and consider sector-specific modifications to make the system more effective. Failure to do so could have long-lasting implications, potentially derailing Pakistan’s economic recovery and its ability to meet the conditions imposed by key international partners like the IMF.

(Disclaimer: The opinions expressed are the personal views of the author. The facts and opinions appearing in the article do not reflect the views of Devdiscourse and Devdiscourse does not claim any responsibility for the same.)