PBC calls for investigation after Pakistan’s exports to China ‘underreported by $594mn’

The Pakistan Business Council (PBC) urged the country’s financial authorities including the State Bank of Pakistan (SBP) and the Federal Board of Revenue (FBR) to conduct an investigation after it noted that “exports to China were underreported by $594 million in FY22”.

“The export values reported by Pakistan to all the main destinations apart from China were found to be within an acceptable tolerance limit taking account of timing or other possible reasons such as trans-shipment in Europe,” the PBC said in a letter, dated October 7, 2023, addressed to caretaker Finance Minister Dr Shamshad Akhtar.

The letter was also copied to the caretaker Minister of Commerce, the SBP governor, FBR chairman, and the Secretary, Special Investment Facilitation Council (SIFC).

“However, we noted that exports to China were under reported by $594 million, representing a large difference of 21%,” it added.

The PBC said there is a discrepancy on exports between what is reported by Pakistan to the International Trade Centre (ITC) portal, and what the importing countries record as import value.

“In the absence of plausible explanations, we suggest that a $594 million shortfall in forex inflow was on account of under-invoicing to build funds to pay for subsequent under-invoiced imports,” it added.

The PBC, country’s largest corporate sector advocacy platform, highlighted that the shortfall occurred in a year in which the country faced acute pressure on its foreign exchange reserves.

“We urge an investigation by both the SBP and the FBR. The FBR should also look into the possibility of loss of tax revenue. At a rate of 1%, the tax revenue loss at 2022 exchange rate of Rs205/US$ could have amounted to Rs1.2 billion.”

The PBC pointed out that ITC trade data does not always match especially with trans-shipment countries like Singapore, UAE or Netherlands. It was also suggested that the mismatch should not entirely be ascribed to under or over-invoicing.

“We accept that. However, unlike many other countries, due to high import tariffs, the incentive to evade is attractive and there is strong anecdotal evidence of under-invoicing. Hence, the larger discrepancies, such as with China, need to be investigated,” said the PBC.

The body also advocated for agreements to exchange information through Electronic Data Interchange with key trading partners.

For its analysis, the PBC said of the top destinations for Pakistan’s exports, USA accounts for the largest at 20%, followed by China (8%), UK (8%), Netherlands (6%), Germany (6%), Spain (4%) and Italy (4%), while the GCC countries do not report their trade data to the ITC, thus they could not be included.

“Our analysis therefore covered 56% of Pakistan’s exports in 2022 amounting to $17.1 billion at Free on Board (FOB) value, which we adjusted upwards by 10% to arrive at a Cost, Insurance, and Freight (CIF) value of $18.8 billion, which is the basis on which importing counties report imports to ITC,” said PBC.

The PBC called on the stakeholders to “institute changes that reduce the possibility of misdeclaration in trade and misclassification of imported goods to lower tariff lines”.

Pakistan has faced issues of under-invoicing and misreporting of trade data in the past with stakeholders on several occasions calling for a more transparent system of financial data.

The losses come as the country reels from an economic crisis, largely due to shortage of foreign exchange, which has pushed the exchange rate higher and resulted in inflationary pressures as well as driven up costs of doing business.