Unchallenged grey market in Pakistan

The greatest challenge facing the country is its failing economy and one of the factors contributing towards it is the diminishing revenue generation channels on account of slowdown in industrial and business activities. The factors responsible for it are understandable - the foremost being the non-sustainable cost of doing business in Pakistan.

What is not understandable in these times, when revenue generation is the dire need of the nation, is a growing revenue loss on account of unfair business practices which are controllable but not controlled. The foremost is the rampant and unchallenged growth of the grey market in the country, which is squeezing the space for effectively boosting tax revenue.

Grey channel trade, also known as parallel importing, involves the unauthorized importation of branded or unbranded products through unofficial distribution channels on account of which the local manufacturers and multinationals are both denied a level playing field.

As a consequence of which the national exchequer is robbed of its due revenue streams, whereas, the consumer is provided with an unregulated product, whose origin, genuineness and quality standards remain shrouded in doubt.

Grey channel trade poses several challenges to Pakistan’s local manufacturing sector. The influx of unauthorized imports means that genuine local manufacturers struggle to compete with cheaper, parallel-imported goods flooding the market.

This hampers their growth potential, reducing their market share and profitability. Whereas, multinational corporations (MNCs) face their own set of challenges due to the menace of grey channel trade.

Additionally, grey channel trade undermines the protection of intellectual property rights and patents, discouraging innovation and technological advancements. This vicious cycle perpetuates a lack of foreign investment and stalls the growth of the manufacturing industry, which adheres to international quality standards, notably, in the pharmaceutical and food sectors.

According to a 2022 research report by the Lahore Chamber of Commerce & Industry (LCCI), Pakistan incurs a staggering annual loss of USD 2.63 billion due to smuggling with food items accounting for a significant portion.

The total value of smuggled food products stands at USD 9 billion, equivalent to approximately 3 percent of the country’s Gross Domestic Product (GDP).

The LCCI report concluded that: “The expansion of the tax base will remain elusive as long as the grey economy remains un-incorporated, unable to contribute to the formal economy. While the government is cash and dollar-strapped and some market segments face serious liquidity problems, there is a segment of the market flush with cash “.

Whereas, the Pakistan Business Council (PBC) has estimated government’s tax revenue loss of between Rs579bn and Rs964bn at the average exchange rate due to under-declaration of the value of imports from overseas countries.

Recognising the ills of this rampant illicit trade, the Commerce Ministry issued SRO 237(1)-2019 in 2019 to curb the trade. This regulatory order stipulates stringent requirements for imported food products, including a minimum 66 percent shelf life at the time of import, bilingual ingredient labeling in English and Urdu, and halal certification from accredited authorities.

These measures were designed not only to ensure the safety and quality of imported food but also to create a level playing field for local manufacturers who adhere to rigorous standards. The enforcement of this SRO lacks commitment and the practice of illicit trade continues.

Manufacturers are demanding resolute action from the government to enforce SRO 237. Their demand includes rallying support from relevant stakeholders such as the Federal Board of Revenue, Customs Directorate, provincial food authorities, and law enforcement agencies. They argue that the lack of strict enforcement has allowed grey channel trade to thrive, causing immense losses to the national exchequer.

The government will be required to ensure strict monitoring of imports at ports and border checkpoints through effective customs controls. This involves increasing the efficiency and transparency of customs procedures, deploying advanced technology for real-time tracking of imported goods, and imposing severe penalties on those involved in grey channel trade, including fines and confiscation of goods.

That tighter or strong Intellectual Property Rights (IPRs) are good for foreign direct investment (FDI) and indigenous innovation is a fact. There are laws and regulations in relation to enforcement of IPRs to protect local manufacturers and MNCs. Unfortunately, however, their enforcement is hamstrung by a woeful lack of commitment and sincerity.

This involves strengthening intellectual property enforcement mechanisms such as providing enhanced legal frameworks, promoting awareness campaigns, and establishing specialized IPR courts to expedite legal proceedings concerning trademark infringement and parallel imports.

While the responsibility of curbing grey channel trade primarily lies with the government and manufacturers, consumers also have a significant role to play. Consumer s’ resistance to unethical trade practices can contribute to eliminating the demand for parallel-imported goods.

Awareness campaigns can educate consumers about the potential risks associated with buying grey market products, including compromised quality, absence of warranties, and unfair trade practices.

Promoting consumer loyalty towards genuine products can be achieved through various mechanisms such as ‘Building Brand Awareness’ and educating consumers about the adverse impact of grey channel trade on local manufacturers, the economy, and employment opportunities. This can foster a sense of loyalty towards genuine products produced by local manufacturers or authorized channels of multinational corporations.

Local manufacturers and MNCs can invest in promoting their quality assurance mechanisms to differentiate their authentic products from parallel-imported goods. Communicating the value proposition of genuine products such as quality, warranties and after-sales services will help in developing trust and encouraging consumers to resist grey channel imports.

Manufacturers can work towards improving the efficiency and reliability of their distribution network. By ensuring an uninterrupted supply of genuine products through authorized channels, they can meet consumer demands and reduce the appeal of parallel imports.

One can conclude that no doubt the menace of grey channel trade in Pakistan poses significant challenges to the local manufacturing industry and multinational corporations operating within the country; however, the government’s initiatives to strengthen intellectual property rights and enhance customs control provide hope for a solution.

Additionally, consumer resistance to grey channel imports can play a vital role in curbing this unethical practice. By increasing awareness about the negative consequences and promoting consumer loyalty towards genuine products, Pakistan can mitigate the impact of grey channel trade and foster a fair and competitive market.

Copyright Business Recorder, 2023