Illicit trade damaging country’s economy

Smugglers employ a range of routes and tactics to engage in the illicit trade of goods in and out of Pakistan. These methods encompass land routes through the rugged mountainous areas adjoining Iran and Afghanistan, as well as sea routes along the Arabian Sea.

Smugglers frequently utilize animals like camels and horses, and in some instances, even human couriers to transport illicit goods across the borders, illustrating the versatility and resourcefulness of these illicit activities.

The menace of smuggling has social, moral, and economic repercussions with a greater debilitating impact on the economy. It undermines the local industry of the country, leading to tax evasion besides promoting crimes. Smuggling is a universal phenomenon.

According to the World Economic Forum, smuggling creates an annual drain on the global economy to the tune of $2.2 trillion. As far as Pakistan is concerned, according to a study jointly carried out by economists of Harvard University and the Ministry of Commerce in 2020, smuggled goods have penetrated several sectors of Pakistan’s economy accounting for $3.3 billion.

The report revealed that a staggering 74% of cell phones sold in Pakistan were smuggled into the country. It is estimated that 53% of diesel, 43% of engine oil, 40% of tyres and 16% of auto parts sold in the country were smuggled items.

What’s even more concerning is that law enforcement and regulatory agencies in Pakistan can only seize a small fraction, around 5%, of the smuggled goods entering the country.

As discussed earlier, we have a long border that we share with Iran and Afghanistan and then miles of coastline. The smuggling of physical dollars and oil must be effectively controlled to prevent the outflow of foreign currencies.

According to the report, Pakistan loses around $150 million per month on account of dollar smuggling, culminating in an alarming annual figure of around $2 billion per year. Let’s now consider smuggling of currency.

Our former finance minister believed that dollars are being smuggled in huge quantities, causing its appreciation. It is correct that there were a couple of successful raids in which dollars were forfeited; however, it should not be generalized. But for a moment, let’s assume he was right.

A sudden rise in dollar smuggling, if it happened, also signaled that the policy created an arbitrage opportunity, which then increases the physical flight of dollars. Thus, once again, smugglers provided a signal to policymakers.

We now know clearly that the difference between open market and inter-bank rates was a signal of gap generated by the policy itself. In a country where incomes are not rising and prices are on an upward spiral, smuggled goods, are often less costly than legally imported or locally produced “taxed goods”, offer an alternative to low-income households as well as vendors. We see this in many upscale markets.

Similarly, ACE Money Transfer, the UK-based money transfer company, in its recent report suggested that smuggled Iranian oil now commands a significant share estimated at over 30 per cent of Pakistan’s diesel demand.

Around 10 million litres of diesel and two million litres of petrol are smuggled every day into Pakistan from Iran. The usage of smuggled diesel causes a monthly loss of Rs.10.2 billion. The result is that some local refineries are operating far below their capacity.

Officially, the government has placed a ban on importing Iranian fuel products since 2013. The report revealed that out of the significant gold market value of Rs2.2 trillion ($7.1 billion), only 1.32% or Rs29 billion ($94.5 million) is officially declared to tax authorities.

This stark underreporting results from an annual smuggling of approximately 80 tonnes of gold into the country out of the total annual consumption of 160 tonnes. With regularization, this market could contribute a minimum of $500 million annually to government revenues.

Smuggling is the bane of the Pakistani economy. It especially has a debilitating impact on the manufacturing industry, discouraging fresh investment, and resulting in large job and tax revenue losses. In countries like Pakistan, the settlement of payments for illicit cross-border trade through the illegitimate hawala/hundi network also impinges on much-needed remittance inflows and often leads to capital flight.

It is heartening to note that the authorities have woken up to the challenge, launched an anti-smuggling drive, and tightened the Afghan transit trade regime, besides banning the import of goods prone to being smuggled under it. But this campaign should not be confined to simply reinforcing border controls; it must be expanded to take action against those who stock and sell smuggled or illegally imported goods in their shops without fear of the law or who under-invoice their imports.

Additionally, there is also an issue where payments for imports to Pakistan are made from the UAE. UAE-based companies facilitate payments from the UAE to other countries, such as China, on behalf of Pakistani importers.

Here is the need for the Pakistani government and the State Bank of Pakistan (SBP) to collaborate with their UAE counterparts to control this practice. If these payments were made within Pakistan’s borders, they would contribute to the country’s foreign reserves.

Copyright Business Recorder, 2023