Pakistan's 2012 Economy Estimated at $401 Billion

Even with the run-up (in KSE-100), Andrew Brudenell, manager of the HSBC Frontier Markets fund (HSFAX) in London, says Pakistan is one of the cheapest markets he follows, at about seven times earnings. He notes that earnings growth has kept pace with the market. The firms, he adds, are typically cash-rich, boast strong return on equity levels in the 20% range, and pay good dividends. In Pakistan, the informal, cash-based economy for goods and services is larger than the formal economy.  Barron's, November 17, 2012

Growing gap between dismal official economic statistics and consumption boom coupled with strong corporate profits in Pakistan is a challenge for many analysts around the world. Most believe that Pakistan's GDP is, in fact, much larger and growing faster than the government data indicates.

Informal Economy Estimates:

 M. Ali Kemal and Ahmed Waqar Qasim, economists at Pakistan Institute of Development Economics (PIDE), have published their research on estimates of the size of Pakistan's informal or underground economy.

Kemal and Qasim explore several published different approaches for sizing Pakistan's underground economy and settle on a combination of  PSLM (Pakistan Social and Living Standards Measurement) consumption data  and mis-invoicing of exports and imports to conclude that the country's "informal economy was 91% of the formal economy in 2007-08". Here are the figures offered by the authors for 2007-8:

1) Formal Economy: Rs. 10,242 billion= $170 billion (using Rs.60 to a US dollar)
2) Informal Economy: Rs. 9,365 billion = $156 billion
3) Total Economy (Sum of 1 & 2): Rs. 19,608 billion = $326 billion

Assuming that the ratio of formal and informal economy remained the same in 2011-12, here are the figures for Pakistan's total economy as of the end of last fiscal year which ended in June, 2012 :

1) Formal Economy: $210 billion
2) Informal Economy: $191 billion
3) Total Economy: $401 billion
Hypermart Lahore

Naween Mangi of Businessweek in her piece titled "The Secret Strength of Pakistan's Economy" described how Pakistan's informal cash-based economy evades government's radar, illustrating it with the story of a tire repair shop owner Muhammad Nasir. Nasir steals water and electricity from utility companies, receives cash from his customers in return for his services and issues no receipts, pays cash for his cable TV connection, and pays off corrupt police and utility officials and local politicians instead of paying utility bills and taxes.

Karachi Stock Market:
Comparing Karachi and Mumbai Share Indexes


A string of strong earnings announcements by Karachi Stock Exchange listed companies and the Central Bank's 1.5% rate cut have helped the KSE-100 index exceed 16,000 level, a gain of 42.1% (33.2% in US dollar terms) year to date. In spite of this run-up in KSE-100, Andrew Brudenell, manager of the HSBC Frontier Markets fund (HSFAX) in London, remains bullish on Pakistani equities, according to Barron's. Pakistan is one of the cheapest markets he follows, at about seven times earnings. He notes that earnings growth has kept pace with the market. The firms, he adds, are typically cash-rich, boast strong return on equity levels in the 20% range, and pay good dividends.

Conclusion: 

While Pakistan's public finances remain shaky, it appears that the country's economy is in fact healthier than what the official figures show. It also seems that the national debt is much less of a problem given the debt-to-GDP ratio of just 30% when informal economy is fully comprehended. Even a small but serious effort to collect more taxes can make a big dent in budget deficits. My hope is that increasing share of the informal economy will become documented with the rising use of technology. Bringing a small slice of it in the tax net will make a significant positive difference for public finances in the coming years.

Related Links:

Haq's Musings

Investment Analysts Bullish on Pakistan

Precise Estimates of Pakistan's Informal Economy

Pak Consumer Boom  Fuels Underground Economy

Rural Consumption Boom in Pakistan

Pakistan's Tax Evasion Fosters Aid Dependence

Poll Finds Pakistanis Happier Than Neighbors

Pakistan's Rural Economy Booming

Pakistan Car Sales Up 61%

Resilient Pakistan Defies Doomsayers

Land For Landless Women in Pakistan

Pakistan's Circular Debt and Load-shedding

Hypermart Pakistan

Comments

Riaz Haq said…
Here's an excerpt of a Dawn story on informal business sector in Karachi:

Unlike the Sind Industrial Trading Estate and other big industrial and commercial zones in Karachi, Orangi, Shershah and other katchi abadis on the outskirts of the city can be taken as self-created special economic zones for the poor. Unfortunately the government has failed to provide necessary infrastructure for development of formal sector and as such a major chunk of economic activity is the preserve of informal sector.

The OPP’s micro credit programme has given fillip to micro businesses not only in Karachi, but also has expanded in other cities of Sindh. The youth initiated Technical Training Research Centre (TTRC) provides housing support service to the community and trains youth to become architects specialising in low cost housing. In a way the OPP promotes Katchi Abadis as franchise all over the country as youth of Karachi from low and middle income class learn construction and other trades skills from TTRC and then move to other settlement to set up their businesses. These katchi abadis and slums are not only working class settlements, but also have growing population of doctors, engineers, architects and business administration graduates who, in large numbers, are mainstreamed in economic process every year.

Although the government is responsible for providing main sewerage lines and treatment plants yet the Orangi Pilot Project works as a link for developing partnership between poor residents of the area and the government for accomplishing the task.

This, apart from facilitating the work of government for developing and regulating these settlements, has given impetus to construction and also construction material supply business in these areas, providing employment and self-employment to thousands of people.

Almost all katchi abadis in Karachi have business clusters in their folds, particularly of garments and leather goods manufacturing establishments. Garment factories have proliferated throughout katchi abadis which make women and children outfits including exportable fashion and designer dresses. A lot of embroidery works and small printing factories are coming up in these areas which handle the work of large scale textile industries producing fashion fabrics on sub- contracting basis.

Another important economic feature of these settlements is that all recycling operations of discarded plastic and news prints is done here. Thousands of people are employed in this business. In a way these squatter ‘bastis’ are helping clear the waste and improve the environment.

Along with the OPP quite a number of NGOs and CBOs operating in katchi abadis have initiated micro enterprise credit programmes to enable the poor to set up home- based family businesses. The OPP alone has so far expanded its micro credit programme to more than 12 cities and 50 villages of Sindh.

The Sindh government’s recent initiative to regularise katchi abadis will promote a sense of security among its dwellers.


http://dawn.com/2012/04/30/thriving-informal-business/
Riaz Haq said…
Here's an ET report on the start of index futures trading in Karachi:

KARACHI: AKD Securities CEO Farid Alam struck the gong on Friday at the Karachi Stock Exchange (KSE) to mark the commencement of market making in Stock Index Futures Contract (SIFC).

As an index-based contract with its price resting on a pre-determined contract multiplier, the SIFC aims to provide investors with an opportunity to “mimic returns on the KSE-30 Index,” according to Alam, whose company will act as the market maker for the SIFC.

Therefore, the SIFC is designed to provide a hedge for individual investors and institutions to take counter-balancing positions while offering basket exposure to index stocks.

“Global fund managers are becoming increasingly aware of the potential that Pakistan’s capital markets offer, which makes the SIFC more valuable,” Alam said.

Stock index futures – designed to link the stock market with the futures market – were first introduced in 1980 on the New York Stock Exchange (NYSE).

They are a typical example of a derivative – a financial instrument widely blamed for causing the 2008 global financial crisis, which can be defined as a security whose price depends on, or derived from, one or more underlying assets.

The Securities and Exchange Commission of Pakistan (SECP) allows mutual funds to use derivatives for hedging against their risks. Therefore, an index-based mutual fund duplicates the holdings of the underlying index. This means that if the underlying index increases by 5%, for example, the SIFC on that index will also rise by 5% for that mutual fund.

Speaking on the occasion, KSE Managing Director Nadeem Naqvi said stock index futures were introduced on the Bombay Stock Exchange in June 2000.

He added that their activity remained weak until 21 market makers started working in May 2002, as daily trading volumes increased seven times in one year.

Market crash?

Naqvi said many people feared a stock market crash – like the one experienced in 2008 – in view of the KSE’s over-the-top performance in the recent past. Saying that such a crash was highly unlikely, Naqvi noted that market capitalisation was roughly 45% of the country’s gross domestic product (GDP) when the stock market crashed in 2008.

“It’s true that the KSE-100 Index is at a historic high these days, but if you see market capitalisation as a percentage of the GDP, it’s nowhere near the level of 2008,” he said.

Pakistan’s GDP in 2011 was $211 billion. According to the KSE, market capitalisation as of November 13, 2012, was $42.3 billion, which makes it roughly 20% of the 2011 GDP. “I believe the market has a lot of potential to expand and the SIFC is going to help it grow,” Naqvi said.


http://tribune.com.pk/story/466899/market-making-starts-in-stock-index-futures-contract/
Riaz Haq said…
Here's a PakistanToday story on $258 million current account surplus for July-Oct 2012 period:

KARACHI - Pakistan’s dollar-hungry current account balance continued to remain in the green zone during July-October FY13 by registering a surplus of $ 258 million.
This surplus amounted to $ 432 million during first quarter of FY13, July-Sep, owing to what the official and unofficial quarters agree, receipts of war reimbursements from the United States in early August this year.
On August 1, 2012, the Islamabad’s non-Nato allies in Washington had released to the cash-strapped Pakistan some $1.118 billion under the long-denied Coalition Support Fund (CSF) after a months-long strain in bilateral ties relaxed through an on-and-off process of negotiations between the two countries on civilian, military and intelligence level.
The inflows, the SBP chief spokesman Syed Wasimuddin had confirmed, had put the country’s current account balance into a surplus since July. The central bank Monday reported that during the corresponding period of last year, July-Oct FY12, the country’s current account balance had marked a deficit of $ 1.655 billion.
In percentage terms, the surplus constitutes 0.3 percent of the country’s gross domestic product (GDP) accounting for $ 82.232 billion. This is against a deficit of 2.1 percent last year.
Senior analysts like Khurram Schehzad had also seconded the central bank’s view saying the positive was attributable mainly to the dollar inflows on account of CSF and Kerry Lugar from the US. The receipts under KLA have been meager with Washington reported to have transferred only Rs 20.356 billion during FY12 against a projected receipt of Rs 34.164 billion. Under the KLA, Pakistan has the US’s word for receiving a civilian aid of $ 7.5 billion till 2014, $ 1.5 billion per annum.
However, the funds transfer under CSF augured well for the funds-starved Pakistan which, in FY12, had braved a current account deficit of over $ 4 billion, pushing the economic managers closer once again to a fresh IMF bailout package. During the period under review, the country’s trade balance remained subdued and registered a deficit of $ 5 billion against last year’s $ 5.398 billion. A break up of trade deficit shows that during the review months the country exported goods worth $ 8.210 billion compared to $ 8.105 billion in July-Oct of FY12. Compared with last year’s $13.503 billion, the imports totaled at $ 13.210 billion.
Overseas Pakistanis also performed well by remitting $ 4.964 billion during the review period as against $ 4.315 billion last year. The State Bank says that the country on average receives over a billion dollars every month from Pakistanis working abroad. The disbursements from the foreign financers, another noteworthy indicator on the current account balance list, stayed however in the red zone by remaining confined to long-term project loans standing at $ 382 million. Last year, disbursements under the same head were recorded at $ 519 million.
However, despite these positives the analysts believe that the economic managers have still a lot to worry about owing to the current poor dollar inflows into the country specially the foreign investment.


http://www.pakistantoday.com.pk/2012/11/20/news/profit/green-light-for-current-account-balance/
Riaz Haq said…
Here's an ET story on Unilever targeting Pakistan market as a priority:

It is a global food and consumer goods giant that serves over 2 billion consumers every day in more than 180 countries around the world, but Unilever’s global management team is convinced that the key to their future success lies in 16 emerging markets, of which Pakistan is one.

Paul Polman, the CEO of Unilever, and Harish Manwani, the chief operating officer, visited Pakistan on Tuesday in what appears to be part of their global push to gear the company’s growth strategy towards emerging markets. “We want to be in every market with more than 100 million consumers,” said Manwani. “And we want to be in every market where the purchasing power of the consumer is growing. Pakistan meets both of those criteria, the first one by quite a lot.”

About 56% of Unilever’s revenues come from emerging markets, a number that Manwani says could rise to as high as 75% over the next few years. In Pakistan, the company operates two subsidiaries, Unilever Pakistan and Unilever Pakistan Foods, both of which are publicly listed on the Karachi Stock Exchange. For the year 2011, the company’s Pakistani subsidiaries earned combined gross revenue of over Rs73 billion, or about 1.3% of the global total for Unilever.

Growth in Pakistan is significantly higher. While Unilever’s global revenues grew by around 5%, revenues in Pakistan grew by a much stronger 9.9%, even when taking into account the rupee’s depreciation against the euro, the company’s global reporting currency. In Pakistani rupees, gross revenues of both companies grew by nearly 17%.

But it is not just the current growth figures that appear to be attracting Unilever’s attention to Pakistan, but rather what is clearly a rapid expansion of the Pakistani middle class, which is causing purchasing power – and thus the propensity to buy branded products – to rise among a wide and diverse array of Pakistani consumers. Unilever is increasingly finding that it is selling its products to everyone from the bank CEO who works on Karachi’s II Chundrigar Road to the small shop owner in rural Sanghar to the grain merchant in a small town outside Sialkot.
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Malik said that the company is actively trying to reach consumers in small towns and rural areas, well beyond the larger cities in the country. The company reaches 50,000 retailers in rural areas, said Malik, a number that keeps on expanding rapidly.

That focus on rural consumers appears to be part of the global strategy: Paul Polman said that Unilever’s connection to farmers and rural communities is part of its efforts to integrate its business strategy with social responsibility. “Over 40% of the world’s population is in agriculture. We want to integrate over 500,000 of them into our global supply chain. They tend to be more reliable suppliers and help us reduce our volatility. In turn, we provide them with a better livelihood,” said Polman.

Unilever’s global CEO was effusive in his praise of the team in Pakistan. “The water conservation techniques pioneered in Pakistan will now be replicated in Unilever factories around the world,” he said. “Pakistan has always provided us with talent, and is in fact exporting talent. Over 55 Pakistanis are now working in senior positions in Unilever all over the world.”...


http://tribune.com.pk/story/469350/food-consumer-goods-unilever-targets-pakistan-among-top-priority-markets/
Riaz Haq said…
Here are some excerpts of an interesting Op Ed in The Nation newspaper by former finance minister Shaukat Tarin:

Despite all the gloomy news and events that has started to define Pakistan, our national resilience remains intact. However, the question that is one every one’s mind is for how long?

Let’s start with the positives (yes there are always some!) of Present Day Pakistan;

• CP Inflation while high is showing signs of becoming range bound;

• Foreign Remittances continue to rise (the PRI scheme launched under my stewardship has borne fruit with remittances expected to cross the $l2b annual mark this year);

• We have finally started to debate/define our role in the devastating ‘War on Terror” and the end game of Afghan conflict has started to be played out.

• Pakistan’s banking system remains insulated from the Western banking meltdown.

• Booming Agrarian economy, despite devastating floods; with corporate sector moving into dairy, live-stock and value added processing.

• While most of the rest of the world is ageing our population is getting younger

• Democracy is still holding on!

However, we are far from the country we all aspire. The negative list (so to speak) is long, makes a somber reading, but largely includes:

• Lack of governance and transparency (lack of meritocracy).

• Unrelenting and crippling energy shortages.

• Lack of Scale/infrastructure to support GDP growth.

• Security and Law and order situation (Perception twice as worse as reality with the reality bad enough especially in Karachi and Quetta)

• Weak Social Sector reforms/indicators.

• Increasing friction amongst state institutions.

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... the economic and social sector performance of Pakistan has also been severely impacted by the following:

1) Inability of the successive governments to balance their budgets by increasing tax to GDP ratio, reducing non-development expenses and losses of the Public sector enterprises.

2) Negligible expenditures on education and health sectors to develop our most important asset i.e. human resource.

3) Creating a competitive environment of high economic growth by focusing on the productive sectors of our economy such as agriculture and manufacturing, and

4) Focusing on infrastructure and energy sectors to facilitate the economic growth.

Whereas, we have seen efforts in the past to address these weaknesses they have been at best weak and far between.

The present economic scenario is again infected by the same weaknesses i.e. large fiscal deficits, low expenditure on education and health, chronic electricity and energy shortages, lack of focus on the productive sectors resulting in high inflation, high unemployment and low economic growth. We all want a Pakistan which is economically prosperous, institutionally resilient and strategically oriented. In essence, we want to make Pakistan an economic welfare state. In my view, a key pre-requisite for an Economic Welfare State is to ensure that a country experiences equitable and sustainable growth for a prolonged period of time. Look at the examples of India and China where uninterrupted economic growth has changes the whole value proposition of these countries.
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To reduce our fiscal deficit we will have to increase our taxes. As I have said it many a times, all incomes will have to pay taxes and there cannot be any sacred cows. Agriculturists will have to pay their taxes and so should the retailers, real-estate developers stock-market and all professionals. Our tax to GDP is woefully inadequate at 9pc, where Sri Lanka is 17pc, India 19pc, China 21pc and Turkey 33pc. Before I left the government, there was a tax plan in place, which needs to be implemented. It will require a strong political will.....


http://www.nation.com.pk/pakistan-news-newspaper-daily-english-online/business/25-Nov-2012/economic-challenges-for-pakistan-going-into-2013
Riaz Haq said…
Here's an Express Tribune list of Pakistani companies with over a billion in revenue:

The Billion Dollar Club

1. Pakistan State Oil Company

Revenues: $11.57 billion

Joined club: Before 1986

2. Pak-Arab Refinery

Revenues: $3.00 billion

Joined club: 2000

3. Sui Northern Gas Pipelines

Revenues: $2.52 billion

Joined club: 2004

4. Shell Pakistan

Revenues: $2.38 billion

Joined club: 2000


5. Oil & Gas Development Company

Revenues: $2.23 billion

Joined club: 2005

6. National Refinery

Revenues: $1.97 billion

Joined club: 2005

7. Hub Power Company

Revenues: $1.97 billion

Joined club: 2009



8. Karachi Electric Supply Company

Revenues: $1.84 billion

Joined club: 2008


9. Attock Refinery

Revenues: $1.74 billion

Joined club: 2008


10. Attock Petroleum

Revenues: $1.72 billion

Joined club: 2010


11. Lahore Electric Supply Company

Revenues: $1.49 billion

Joined club: 2006

12. Pakistan Refinery

Revenues: $1.44 billion

Joined club: 2011


13. Sui Southern Gas Company

Revenues: $1.38 billion

Joined club: 2005

14. Pakistan International Airlines

Revenues: $1.36 billion

Joined club: 2005

15. Engro Corporation

Revenues: $1.29 billion

Joined club: 2011


16. Pakistan Telecommunications Company

Revenues: $1.25 billion

Joined club: 2000

17. Kot Addu Power Company

Revenues: $1.14 billion

Joined club: 2012

18. Mobilink

Revenues: $1.11 billion

Joined club: 2006

19. Pakistan Petroleum

Revenues: $1.09 billion

Joined club: 2012

.


http://tribune.com.pk/story/483287/corporate-revenues-the-growth-of-the-billion-dollar-club-in-pakistan/
Riaz Haq said…
Here's an excerpt of an Op Ed in The News on issues with informal economy:

Concerns regarding informal economy generally arise on the following grounds: First, informal economy creates biases and economic distortions. Second, it does not contribute to the state kitty as the firms and businesses operating in the informal sector are not registered with the tax authorities. Third, a huge informal economy is indicative of low trust between the government and business agents, and lack of confidence in economic and business regulations, procedures and policies.



Fourth, informality retards a country’s subsequent economic development, because informal entrepreneurs cannot use their wealth as collateral for loans to finance investments. Fifth, informality has social costs as well. Almost all countries have social security plans, labour welfare laws and safety regulations for the welfare, security and protection of labourers working in factories and other workplaces. But such laws will be applicable to formal businesses as informal businesses hide their business activity from regulators.



But the key question is: what causes the ballooning of the informal economy? Various elements are responsible for a large informal economy. High formalisation costs, high taxation, huge regulatory burden and corruption, and poor enforcement are considered prime reasons of Pakistan’s informal economy. The costs of formalisation are both monetary and non-monetary. These costs may be prohibitively high.



According to the World Bank’s Doing Business Report 2013, a Pakistani entrepreneur must complete 10 procedures to start a business. These take at least 21 days. The cost involved in meeting the procedural requirements is 9.9 percent of per-capita income.



Simple back-of-the-envelope calculations show fulfilment of these requirements consumes your income of 36 days. Is the cost very high? To arrive at a conclusion let us analyse this in the light of some regional and developed countries. In the case of India, the total number of procedures involved is 12, the time involved is 27 days and the income earned by an average Indian in 182 days is spent in the fulfilment of procedural requirements.



For Sri Lanka, the total procedures are five and seven days are required, on average, while a Sri Lankan will earn the income required as start-up costs in 70 days. In the case of Bangladesh, seven procedures are involved and the time taken is 19 days, and an average citizen of Bangladesh would earn the money required to formalise the business in 92 days.



In the US the procedures involved are six and it takes six days to register your business. A US citizen can earn in five days the money required in the registration of his business. In the UK the number of procedures involved are 19, the days required to start a business are 13, and it takes the earnings of two-and-a-half days to cover procedural costs and formalities. For countries like Sweden, Finland and Switzerland, the start-up costs are much lower in terms of per-capita income.



Where do we stand in terms of start-up costs? Compared with the regional countries we do not lag behind as far as ease of starting business is concerned. Rather, Pakistan fares better. We lag behind the developed countries not in terms of number of procedures but in the time and costs involved in meeting the procedural requirements. Certainly, we need do to further improve our processes and reduce start-up costs, but the present start-up costs are not a big constraint for formalisation of a business. So formalisation costs we can be ruled out as a key reason for informality in Pakistan.....


http://www.thenews.com.pk/Todays-News-9-156136-Our-informal-economy
Riaz Haq said…
Here's a Dawn Op Ed by Economist Sakib Sherani on Pak informal economy:

NEW estimates indicate that Pakistan’s informal economy is larger than previously approximated, and is expanding at a rapid pace. On the other hand, the formal sector appears to be on the retreat.

Indications to this effect have been around for several years. These indicators have included, among others, a rising share of informal jobs in total employment, a static share of output and employment of the formal manufacturing sector, a growing level of cash transactions in the economy, and an increase in estimates of the “tax gap”.

In addition, firm-level behaviour has also provided clues to the underlying trend in the economy. There are fewer listings on the stock exchanges, and some prominent de-listings, while a fairly significant number of previously formal small and medium enterprises have chosen to become Association of Persons over the past few years, according to some tax experts. Finally, according to some reports, the number of firms on the tax register (for income as well as sales tax) has declined in the past five years.

In fact, anecdotal evidence suggests that in the past few years, there have been instances of even large manufacturing units that have either completely or partially “shifted” production to the underground economy. Evidence to this effect has come from the Federal Board of Revenue (FBR) in the case of at least one significant sector of the economy — cigarettes — where a sharp dip in federal excise duty collection in 2009-10 was attributed to this phenomenon.

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Having set up and run my own small business in the formal sector for the past two years has given me some unparalleled insights. While Jamil Nasir in his article in January (in another newspaper) believes the tax structure is not a big contributor, and the regulatory burden is a bigger factor, my own experience suggests that it is both, the tax and regulatory burden, that are either preventing informal businesses from formalising, or are driving already documented firms into the informal economy.

Here’s how. For starters, a formally registered firm filing an income tax return has a 20 per cent disadvantage compared to an enterprise that is operating in the undocumented sector (the tax arbitrage for informal firms). But this is not the end of it. The direct costs of maintaining books, having the firm’s accounts externally audited by a professional auditor, hiring tax consultants and an accountant etc. are not insignificant.

More annoying from my perspective is the opportunity cost of devoting roughly 10-15 per cent of my management time to tax and SECP-related issues, not least of which are chasing up on tax deduction certificates and acting as a withholding tax agent for the government.

In addition, the number of corporate and tax-related filings that the company has to make each month, every quarter, and then on an annual basis is absurd. To incentivise informal sector players to formalise, both the Federal Board of Revenue (FBR) and the Securities and Exchange Commission of Pakistan (SECP) will have to reduce the number of filings, while the transactional relationship with FBR will need to be converted to “arm’s length” via the use of automation.

Finally, the government should consider a system of tax credits and rebates on investment and hiring by small registered businesses, and an initial lower income tax rate for newly corporatised firms as a powerful incentive.
At the other end of the spectrum, the tax and regulatory burden on large, formal firms also needs to be reduced by a comprehensive broad-basing of the tax regime.


http://dawn.com/2013/02/22/the-informal-economy/
Riaz Haq said…
Here's a Dawn Op Ed on hidden economy west of Indus:

GOING by the numbers alone, it would appear that no significant economic activity takes place west of the Indus. Look at the provincial GDP numbers, the revenue figures and you see no movement, no activity on any significant scale.

More detailed metrics of economic activity also show great ‘tranquillity’ in the west. Detailed figures on consumption of electricity by industrial and commercial categories of consumer, for instance, show very little change over the years.
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But take a closer look and you’ll find something odd. The State Bank has a data series on its website that shows something enormous, of truly gigantic proportions, stirring beneath the tranquillity suggested by the formal macroeconomic data.

Here is what the data reveals: the amount of money passing through the clearing houses of Quetta and Peshawar is so large that it rivals the amounts in clearing houses of cities like Faisalabad, Multan and Rawalpindi.

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The State Bank operates 16 clearing houses in cities all over the country. Every month it releases data on how many cheques were presented for clearing in each of these, and what the total amount cleared by cheques was.

If you take this data, which stretches back to 1999, and plot it for each city in Pakistan, you notice something very interesting. Remove the cities of Karachi and Lahore from the sample for the time being, because these are global cities in a sense with long-distance connections. Compare only the regional cities and here is what you’ll find.

Following 9/11, half the cities in the total sample will show a sharply rising trend in the amount of money going through their clearing houses. For the other half, the line is flat.

The cities that show a rising trend are led by Peshawar, with Faisalabad, Multan, Rawalpindi and Quetta in close succession. For Peshawar, the amount of money being cleared via cheque in the year 2011 crosses Rs1.3 trillion! For Quetta, in the same year, the amount is just under Rs900 billion, meaning between them these two regional cities are seeing almost Rs2tr going through their clearing houses in one year alone.

This figure compares with Faisalabad at Rs1.3tr, Rawalpindi at Rs1.4tr, and Multan at Rs826bn. Cities that show a flat trend over the entire reporting period include Sukkur, Hyderabad, Sialkot and D.I. Khan.

What the data shows is a steep intensification of transactions being cleared by cheque in some cities, and no change in others, meaning the pace of economic activity accelerated unevenly over the decade, sweeping some along its path and leaving others behind.

But what are Peshawar and Quetta doing on this list? With Faisalabad and Multan, it’s easy to understand. These are regional hubs, productive centres, large seats of agrarian operations.

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In fact, after Karachi and Lahore, it is Multan, Faisalabad and Rawalpindi that account for the bulk of transactions in branchless banking, which shows the intensification of activity in the clearing houses of these cities is accompanied by an overall deepening of the financial sector.

But in Peshawar and Quetta, there is no other accompanying trend, not in branchless banking, TT transfers, bulk consumption of electricity. There is only one lone spike, showing an increase in clearing house transactions that keeps pace with the agricultural and industrial heartland of the country.

The obvious question is: what is driving this spike in Quetta and Peshawar? Where is the economic activity that is sending such spectacular sums of money through the clearing houses of these two cities? And why does this money leave no trace on any other economic indicator of the city or the province?

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Here’s another explanation: these cities are engulfed by a very large hidden economy, from where a massive river of transactions briefly appears on the official record, then disappears from view again....


http://dawn.com/2013/02/28/the-hidden-economy/
Riaz Haq said…
Here's an Express Tribune report on rebasing Pak GDP from fiscal 2000 to 2006 adding another Rs. 557 billion to GDP:

A new rebasing exercise has been carried out by the Pakistan Bureau of Statistics (PBS), aimed at shifting the base (reference) year for calculation of economic statistics from fiscal 2000 to fiscal 2006. The share of services and agriculture in the overall size of the economy has resultantly increased, while the industrial sector has significantly shed its value. The exercise has resulted in gross value addition of 7.8% or Rs557 billion to the total size of the economy.

Headed by Dr Shahid Amjad, adviser to the prime minister on finance, the PBS Governing Council approved the change on Monday.

“The overall size of the economy from 2006 onwards will now be calculated afresh and presented to the National Accounts Committee (NAC) for approval,” Chief Statistician of Pakistan Asif Bajwa told The Express Tribune. The NAC meeting will also give approval to this year’s official growth rate. It is scheduled to meet on May 3.

As a result of the shift, the total size of the economy in fiscal 2006 will now be considered as Rs7.72 trillion, higher by Rs557 billion than the size of the economy in fiscal 2000.

The current size of the economy, estimated as Rs23.6 trillion in 2012-13, has been calculated keeping the base year as fiscal 2000. Experts say its size will increase after new calculations, which will not only add additional value to this year’s growth rate, but also lower the budget deficit in percentage terms.

Taking the new base year as 2005-06, the size of the agricultural sector now stands at 23% of total Gross Domestic Product (GDP), as against the earlier 20.3%. Due to the rebasing, Rs318 billion has been added to the value of the agriculture sector, taking its total size to Rs1.78 trillion.

The contribution of the services sector to total GDP, meanwhile, has increased to 56% against its earlier share of 52.8%. The value of the services sector in absolute terms has been reassessed as Rs4.4 trillion – higher by Rs547 billion.

At the same time, the industrial sector has shed its value by Rs308 billion, while its share in GDP has shrunk to 20.9%, against an earlier share of 26.8%. Its total value has reduced to Rs1.62 trillion due to major contractions in the sizes of the sub-sectors of large and small scale manufacturing.

Rebasing exercises usually increase the size of the economy due to the addition of new goods and services into the calculation. The government had carried out 223 studies for the last time the economy was rebased, which had been debated extensively in technical committees overseeing the matter.

Bajwa said the technical committee constituted for the recent exercise reviewed every subsector of the economy item-by-item, and had the exercise vetted by experts. Thus, he said, there are no chances of error. The PBS Governing Council was also informed that double counting, omissions and errors have also been rectified as a result of the rebasing.

The rebasing has been done in the light of improvements in international statistical systems, say officials. The availability of new data sources through censuses, surveys and studies, updated prices and industry bases have all been utilised in the exercise.

A similar exercise aimed at rebasing the economy was conducted last year, which immediately ran afoul of analysts as it resultantly reduced the overall size of the economy by Rs2.5 trillion of its value. The exercise had sent waves in the corridors of economic power, as it necessitated a revision of all major economic indicators over the preceding five years..


http://tribune.com.pk/story/542169/calculation-of-economic-statistics-pakistan-bureau-of-statistics-okays-change-in-base-year/
Riaz Haq said…
Here's a Dawn story on rebasing Pak economy resulting in 7.8% increase in GDP for 2012-13:

ISLAMABAD, April 29: After a delay of one year, the Governing Council of Pakistan Bureau of Statistics (PBS) on Monday approved the rebasing for calculation of national accounts.

Dr Shahid Amjad, adviser to the prime minister on finance and also chairman of the council, changed the base year for calculation of national accounts from 1999-2000 to 2005-06 to depict the actual performance of the economy and variables.

As per rebasing, the size of the GDP now expands to Rs7,716bn from Rs7,159bn in the previous base year, reflecting an increase of 7.8 per cent (Rs557 billion).

The size of the GDP is the outcome of changes in procedures, methodology for calculating various indicators, expansion of coverage to more sectors and corrections in the existing sectors. Double counting, omissions and errors have also been rectified.

The re-basing is now believed to make the system more advanced and on a par with the international system. Some missing areas like stone crushing industry, stock exchanges, brokers, cable operators, internet providers etc., are now part of the economy.

A senior official of the PBS told Dawn that the budget proposals for 2013-14 would be based on the new figures, which will be finalised by end of this week. “We are now working on calculating new growth figures on the basis of new base year”, the official added.

Last year, the base year was revised ahead of the budget, but the then finance minister Dr Abdul Hafeez Shaikh had reversed the process to show good feel figures.

Since July 2012, the rebasing was on the agenda of the PBS governing council but no meeting was convened.

The growth in the size of overall economy was mainly driven by an increase of 14.47 per cent (Rs547bn) in the share of services sector to GDP.

In the services sector, the share of wholesale and retail increased by 20.68pc (Rs261bn); transport, storage and communication 5.61pc (Rs51bn); housing services (owner of dwelling) by 172.97pc (Rs320bn); general government services 5.1pc (Rs21bn).

However, the share of two services finance and insurance; other private services dipped by 22.2pc (Rs81bn) and 3.82pc (Rs25bn), respectively.

With the introduction of Financial Intermediation Services Indirectly Measured (FISIM) in the banking and insurance sector, the contribution of the sector had been measured based on the services provided.

The share of overall agriculture sector in GDP increased by 21.82pc (Rs318bn). The share of crops increased by 21.01pc (Rs133bn), livestock 21.5pc (Rs165bn), forestry 21.4pc (Rs6bn), fishing 43.4pc (Rs13bn).

In the crops, the share of major crops dropped by 3.23pc (Rs15bn). However, major increase of over 52pc (Rs89bn) was witnessed in the share of minor crops. As part of the new base year, the share of cotton ginning/others were also calculated as part of crops.Earlier, cotton measurement was part of the manufacturing sector.

Ironically, the share of industrial sector in the size of overall economy dipped by 16pc (Rs308bn), reflecting a trend of de-industrialisation.

Of these the share of manufacturing dipped by 22.31pc (Rs306bn) in the industrial sector. However, mining and quarrying witnessed an increase of 15.9pc (Rs35bn).In the manufacturing sector, the share of LSM dipped by 9.97pc (Rs100bn); small scale manufacturing 63.82pc (Rs157bn) and slaughtering 40.16pc (Rs49bn), respectively.

On the other hand, the share of electricity generation and distribution and gas distribution share in the overall economy size dropped by 39pc (Rs43bn). However, the construction share increased by 3.22 pc (Rs6bn)..


http://dawn.com/2013/04/30/rebasing-approved-economy-size-expands-7-8pc/
Riaz Haq said…
Shadow Economies All over the World
New Estimates for 162 Countries from 1999 to 2007
Friedrich Schneider
Andreas Buehn
Claudio E. Montenegro


Pakistan's shadow economy estimated at 36%

Activities associated with shadow economies are facts of life around the world. Most societies
attempt to control these activities through various measures such as punishment, prosecution,
economic growth or education. To more effectively and efficiently allocate resources, it is
crucial for a country to gather information about the extent of the shadow economy, its
magnitude, who is engaged in underground activities, and the frequency of these activities.
Unfortunately, it is very difficult to get accurate information about shadow economy
activities, including the goods and labor involved, because individuals engaged in these
activities do not wish to be identified. Hence, doing research in this area can be considered a
scientific passion for “knowing the unknown.”
Although substantial literature5
exists on single aspects of the hidden or shadow economy and
comprehensive surveys have been written by Schneider and Enste (2000), and Feld and
Schneider (2009), the subject is still quite controversial as there are disagreements about the
definition of shadow economy activities, estimation procedures utilized, and the use of their
estimates in economic and policy analysis.6
Nevertheless, there are some indications that the
shadow economy has grown around the world, but little is known about the development and
the size of the shadow economies in developing Eastern European and Central Asian (mostly
former transition) countries, and high income OECD countries over the period 1999 to
2006/2007. The period was chosen as it has the most comprehensive data availability. This
study is an attempt to fill this gap by using the same estimation technique and almost the same
data sample used in Schneider and Buehn (2009) and Schneider and Enste (2000).
Therefore, the goal of this paper is twofold: (i) to undertake the challenging task of estimating
the shadow economy for 162 countries in various stages of development and located in
several regions throughout the world7
and (ii) to provide some insights about the main causes
of the shadow economy. To our knowledge, such an attempt has not been undertaken so far;
hence, we provide a unique database of the size and trends of the shadow economy in 162
countries over the period 1999 to 2006/2007. This is an improvement compared to previous
work – we used the MIMIC (Multiple Indicators Multiple Causes) estimation method for all
countries, thus creating a unique data set that allows us to compare shadow economy data.


http://www.gfintegrity.org/storage/gfip/documents/reports/world_bank_shadow_economies_all_over_the_world.pdf
Riaz Haq said…
A base year is a benchmark with reference to which national account figures such as GDP, gross domestic saving and gross capital formation are calculated.

According to the new base year, Bangladesh was an economy of Tk 34,840 billion in current prices in FY21, up 15.7 per cent from Tk 30,111 billion as per the previous base year.

https://www.thedailystar.net/business/economy/news/gdp-size-growth-down-new-base-year-takes-effect-2211826



"The size of our economy is huge, and the new base year will reflect it," he said, adding that a real scenario would allow the government to make more informed policy decisions.

Zahid Hussain, a former chief economist of the World Bank's Dhaka office, also welcomed the new base year.

He said timely revisions to data on GDP and its components determine the accuracy of national account estimates and their comparability across countries.

With the finalisation of the new series, Bangladesh will be ahead of all other Saarc countries in terms of the recency of the national account's base year.

Only the Maldives (2014) and India (2011-12) come close, while Pakistan (2005-06) and Sri Lanka (2010) are well behind.

"Improved data sources increase the coverage of economic activities as new weights for growing industries reflect their contributions to the economy more accurately," said Hussain.

The last revision was done in 2013.

The size of the agriculture, industry and services sectors has expanded as per the new base year.

The new base year uses data on about 144 crops while computing the contribution of the agriculture sector to the GDP, which was 124 crops in the previous base year.

The gross value addition by the agriculture sector rose to Tk 4,061 billion in current prices in the last fiscal year, up from Tk 3,846 billion in the old estimate, the BBS document showed.

The industrial sector saw the addition of the data on the outputs of Ashuganj Power Station Company, North-West Power Generation Company, Rural Power Company, cold storage for food preservation, Rajshahi Wasa, and the ship-breaking industry.
Riaz Haq said…
GDP rebasing: no more delays!
BR Research Updated 27 Aug 2021

https://www.brecorder.com/news/40115951

There is little doubt that the size of Pakistan’s economy is understated. Many economic indictors such as per capita income and debt levels depict bleaker picture than the situation on the ground reflects. When size of the economy is understated, it makes debt to GDP ratio appear unsustainable, in turn weakening government’s bargaining power with lenders such as IMF.

One strong indicator about economic activities in any economy is national electricity consumption. Most readers would be surprise to find out that per capita grid electricity sales are 25-30 percent higher in Pakistan than in Bangladesh. Many commentators point out that GDP per capita has become higher in Bangladesh over the last decade. But it is pertinent to note that while electricity consumption is based on actual data, GDP of any economy is based on many assumptions and estimates and is based on the level of documentation in any economy. Ergo, it would appear that the level of documentation in Bangladesh is significantly higher in Bangladesh than in Pakistan.

Yet, infrastructure and construction actives are significantly greater in Pakistan than in Bangladesh. Domestic annual cement sales in Pakistan are at 48 million tons against 33 million tons in Bangladesh; in per capita terms, the spending is 10 percent higher in Pakistan. Existing road infrastructure is also of better quality and much more extensive in Pakistan (although latter may also be an indicator of greater geographic area). Similarly, number of passenger vehicles in Pakistan – including much more pertinent, vehicle per 1000 persons – is also higher.

The purpose, of course, is not to undermine the economic performance of Bangladesh, and the significant gains made by that country in past two decades. However, it is equally important to engage in undercutting ourselves. Anecdotal evidence suggests that the widely held perceptions of smaller size of economy – exacerbated by lower growth rate in recent years – also contributes to brain drain; as skilled workers seek opportunities elsewhere due to bleak outlook.

Pakistan conducted its last GDP rebasing exercise in 2005-06. GDP rebasing becomes due every ten years, yet it has been much delayed since. Since the PTI government took office, work has been undertaken on the same for the last two years. Yet, the problem is that the post of chief statistician has been vacant for over three years. There are many sectors which have experienced mushroom growth since the last rebasing exercise was completed, and they are not fully recorded in GDP. For example, the value addition segment of textile industry is not recorded in official GDP. Similarly, packaging across many industries is not included. Economic activities is simply much greater than what the official estimation represents.

Then the undocumented cash economy is also growing fast. The velocity of money (computed as nominal GDP divided by broad money – M2) is down from the average of 2.6 during FY10-14 to 2.1 percent during FY17-21. The velocity in any country doesn’t change so abruptly. The catch lies in clamping down on cash economy. The currency in circulation kept on growing since 2015, and falling velocity implies that cash is not coming back into the system. It is turning into a mini-economy unto its own.

The excess average annual CIC (difference between the average CIC/M2 ratio in FY18-21 at 28% to FY10-15 ratio at 22%), of Rs1.2 trillion could have generated undocumented GDP of Rs3.1 trillion at the historic velocity of 2.6. In comparison to Bangladesh (CIC/M2 at 13%), Pakistan’s cash economy is double the size.

Planning ministry must bring life to the Bureaus of Statistics (PBS) and speed up GDP rebasing. Once its done, apples can be compared to apples, which can also help restore Pakistan’s negotiating position with global lenders.
Riaz Haq said…
THE size of Pakistan’s informal economy is estimated to be as much as 56 per cent of the country’s GDP (as of 2019). This means that it’s worth around $180 billion a year, and that is a massive amount by any yardstick. by LalaRukh Ejaz IBA Karachi Professor

https://www.dawn.com/news/1610606

The country’s large black economy is inextricably linked to the levels and quality of governance exercised by the state. In the course of fieldwork for my doctoral research for the University of Southampton, I found that many Pakistani women who were setting out starting their own businesses did so in the informal sector. The reasons they gave usually related to their experience of dealing with the bureaucracy and government machinery in Pakistan which they found to be dominated by red tape and tedious and complicated procedures.

This is precisely what drives many people who want to engage in economic activity towards the undocumented economy. The headache of having to deal with a large bureaucracy, of complying with complicated and long registration procedures, of getting approvals and licences from various government agencies and departments make it difficult for most people to operate within a documented framework.

A large black economy is an indication of misgovernance and indicates a failure of the government to ensure that all businesses and entrepreneurial ventures are included in the formal sector. This failure in turn leads to reduced tax revenue collection since all entities outside of the formal economy do not pay any tax to the government.


Pakistan’s black economy is linked to governance.

Given that the size of the black and informal economy is estimated at over half of the country’s GDP, bringing it under the documented net would bring hundreds of billions in tax revenue. Those funds would then be spent on social sector development projects and help the FBR meet its annual revenue collection targets.

The solution is to increase the size of the formal economy and this can be done by making transparent and efficient those institutions tasked with registering and regulating businesses. Instead of harassing businesses and entrepreneurs, agencies like the FBR should act as facilitators and make it easier for new ventures to be registered and come under the documentation net. This would in turn be good for the FBR because achieving the tax collection target would be easier than if they were in the black economy.

Government requirements for new businesses are linked to the general level of governance. A state whose primary aim is to improve the lives of its citizens will prioritise good governance over all other things and will formulate and implement policies that enable this. In fact, such a state will also be able to realise that having such priorities ends up helping it as well, not least because a happy populace is a more economically productive populace.

Unfortunately, in a country like Pakistan, so far, this has not been the case. A multitude of licences and permissions are required from a wide variety of federal, provincial and local government departments to operate a business or a store. Having to comply with all of these requires not only a lot of time on the part of the entrepreneur but also funds for greasing the cogs of the bureaucratic machinery that regulates businesses and commercial enterprises in Pakistan.

The result of this is that a significantly growing number of entrepreneurs, and especially those that happen to be female, are increasingly veering towards the informal sector. This is both good and bad — good because it enables economic activity to take place, and jobs to be created, away from the unwanted glare of government inspectors and officialdom, and bad because the incomes generated from such activity don’t end up getting counted in the national GDP and nor are taxes paid on it.

Riaz Haq said…
THE size of Pakistan’s informal economy is estimated to be as much as 56 per cent of the country’s GDP (as of 2019). This means that it’s worth around $180 billion a year, and that is a massive amount by any yardstick. by Dr. Lalarukh Ejaz, Assistant Professor, IBA Karachi

https://www.dawn.com/news/1610606

The country’s large black economy is inextricably linked to the levels and quality of governance exercised by the state. In the course of fieldwork for my doctoral research for the University of Southampton, I found that many Pakistani women who were setting out starting their own businesses did so in the informal sector. The reasons they gave usually related to their experience of dealing with the bureaucracy and government machinery in Pakistan which they found to be dominated by red tape and tedious and complicated procedures.

This is precisely what drives many people who want to engage in economic activity towards the undocumented economy. The headache of having to deal with a large bureaucracy, of complying with complicated and long registration procedures, of getting approvals and licences from various government agencies and departments make it difficult for most people to operate within a documented framework.

A large black economy is an indication of misgovernance and indicates a failure of the government to ensure that all businesses and entrepreneurial ventures are included in the formal sector. This failure in turn leads to reduced tax revenue collection since all entities outside of the formal economy do not pay any tax to the government.

Given that the size of the black and informal economy is estimated at over half of the country’s GDP, bringing it under the documented net would bring hundreds of billions in tax revenue. Those funds would then be spent on social sector development projects and help the FBR meet its annual revenue collection targets.

The solution is to increase the size of the formal economy and this can be done by making transparent and efficient those institutions tasked with registering and regulating businesses. Instead of harassing businesses and entrepreneurs, agencies like the FBR should act as facilitators and make it easier for new ventures to be registered and come under the documentation net. This would in turn be good for the FBR because achieving the tax collection target would be easier than if they were in the black economy.

Government requirements for new businesses are linked to the general level of governance. A state whose primary aim is to improve the lives of its citizens will prioritise good governance over all other things and will formulate and implement policies that enable this. In fact, such a state will also be able to realise that having such priorities ends up helping it as well, not least because a happy populace is a more economically productive populace.

Unfortunately, in a country like Pakistan, so far, this has not been the case. A multitude of licences and permissions are required from a wide variety of federal, provincial and local government departments to operate a business or a store. Having to comply with all of these requires not only a lot of time on the part of the entrepreneur but also funds for greasing the cogs of the bureaucratic machinery that regulates businesses and commercial enterprises in Pakistan.

The result of this is that a significantly growing number of entrepreneurs, and especially those that happen to be female, are increasingly veering towards the informal sector. This is both good and bad — good because it enables economic activity to take place, and jobs to be created, away from the unwanted glare of government inspectors and officialdom, and bad because the incomes generated from such activity don’t end up getting counted in the national GDP and nor are taxes paid on it.

Riaz Haq said…
Deficient data
By Ishrat HusainDecember 24, 2021

https://www.thenews.com.pk/print/919381-deficient-data

In most countries, the national accounts are revised at intervals of five years or so. GDP at current and constant factor prices in Pakistan is still derived from the 2005-06 base, for which some of the surveys were carried out several years before the base year. The 2015-16 rebasing exercise has been completed for quite some time and is in danger of becoming redundant because of new capacity, new activities and new sectors that have emerged since these surveys were undertaken. Rebasing and extrapolation to the current year would show a substantial increase in the size of the economy, and per capita income providing a more realistic picture. Of course, the result of the rebasing is likely to lead to uproar by certain quarters as it would show decline in debt, fiscal and current account deficits/ GDP ratios and a lowering of tax, imports and exports ratios etc relative to GDP. The present ratios are misleading and do not guide policymakers in taking the right remedial actions.

----------------

Let me give one specific example of the unreliability and inaccuracy of the present data. The Quantum Index of Large Scale Manufacturing (QIM) with 2005-06 as base year gives a weight to textiles of 20.9 percent (Yarn 13.7 and cloth 7.2). If we examine the exports of textiles, the value added textiles (non-yarn and non-cloth) form almost 80 percent of the total textile exports. All the large exporting houses producing value added goods are not reflected in this weightage for LSM. So the critics rightly point out as to how exports are growing when the yarn and cloth output are declining.

The QIM is constructed in an ad-hoc manner by combining the data from the Oil Companies Advisory Committee (11 items), the Ministry of Industries and Production (36 items), and the Provincial Bureaus (65 items) reporting changes on a monthly basis in the components of the index. Not only is the methodology questionable, the coverage is also incomplete and inaccurate. The provincial bureaus – except Punjab – do not have the capacity to collect the primary information and therefore rely on the industry sources (which usually understate production to evade taxes) or secondary data.

Any correlations with the usage of inputs or electricity or gas consumption are not attempted to verify the authenticity and whatever raw data is reported goes into the index unvarnished. Decisions on export or imports of sugar were made on the basis of the production data provided by the sugar millers which subsequently was found to be erroneous. The same is the case with cement, fertilisers, automobiles etc output data that is included without validation or independent verification.

The last Census of Manufacturing Industries (CMI) which was used in the National Accounts and QMI was that of 2005-06. CMI 2015-16 was completed a few years ago and my information about Punjab shows there is quantum jump in the index compared to what we are using at present. The PBS and the Planning Commission should have made the switch but it hasn’t been done so far. This would affect our national accounts and the industry sector but also the services sector whose value added is dependent on the quantum of commodity producing sectors.
Riaz Haq said…
Informal Savings in Pakistan


https://www.dawn.com/news/1725956


According to research by Oraan, around 41pc Pakistanis saved via committees (or Rosca), whereas Karandaaz puts that figure at 34pc. Assuming the informal economy accounts for roughly 30pc, as suggested by research from the Pakistan Institute of Developing Economics, it translates into annual committees of Rs4 trillion at base prices, using conservative inputs.

While this back-of-the-envelope calculation is far from scientific, it helps contextualise how big the informal savings market really is. Everyone from a widow looking to save up for her children’s education to young adults trying to save up for their marriage, committees are what they turn to.

This phenomenon is not exclusive to Pakistan. According to a note by Middle East Venture Partners (one of the investors in Bykea), “the global market is largely untapped and ripe for disruption with 2.4 billion people using money circles through traditional channels.”

They recently participated in the Egyptian digital committees’ startup MoneyFellows’ $31m Series B.

Apart from the traditional financial institutions’ general apathy towards the customer, committees appeal to an average Pakistani for several reasons: they are a community-based instrument with some level of flexibility and there is no interest involved.

Most importantly, it helps them manage cash flow better due to habitual change. For women, the product enjoys particular popularity since the former financial services are largely inaccessible.

However, since committees are primarily cash-based with virtually no money trail involved, it poses massive risks, as we saw recently when a girl, Sidra Humaid, who ran a network of committees through social media, defaulted on Rs420m of payments.

----

Even beyond this, committees have flaws by design, only amplified by Pakistan’s macros. For instance, the person receiving the first lump sum amount will always be at an advantage since their instalments in the subsequent months would be worth less due to both inflation and rupee depreciation. The recipient of the last payment would see the amount’s purchasing power eroded substantially by the time they get it.

Moreover, due to the community-based nature of the product, the risk of network defaulting is higher as people of usually similar risk profiles would be pooling in their money.

For example, if employees from an organisation have running office committees, delayed salaries or layoffs within the organisation would lead to a bad equilibrium, creating losses for the rest of the group, often resulting in default.

However, there are ways to address some of those challenges. First of all, to (partially) protect your lump sum from depreciation or devaluation, you can enter a committee with a duration of up to 10 months. Given Pakistan’s macros of late, you’d still lose money in real terms but to be fair, that’d most likely be the case in any other instrument as well, including the risk-free government papers.

In fact, contrary to popular perception, there are certain ways to further alleviate the inflation problem. Digital committees have an option of gamifying the experience by rewarding good payment behaviour through loyalty programs and/or brand partnerships to provide discounts on utilities-based services and products.

Secondly, digital committees help create a trail of money which, coupled with a centralised authority (the platform itself), brings in accountability and recourse in the event of a default. The receipt and/or ledger helps with basic accounting in committees creating transparency for people within the group.

The third benefit of digital committees is the security factor. The participant has to go through a know-your-customer and credit check process to make sure there is no fraudulent behaviour that could negatively impact the group, along with the participant’s ability and willingness to pay to create an overall environment for responsible finance.

Riaz Haq said…
How Informal Sector Affects the Formal Economy in Pakistan? A Lesson for Developing Countries

https://journals.sagepub.com/doi/full/10.1177/2277978719898975

There have been multiple estimates for the informal sector of Pakistan (Ahmed & Ahmed, 1995; Ahmed & Hussain, 2008; Arby et al., 2010; Aslam, 1998; Gulzar, Junaid, & Haider, 2010; Iqbal, Qureshi, & Mahmood, 1998; Kemal, 2003; Kemal, 2007; Kemal & Qasim, 2012; Kiani, Ahmed, & Zaman, 2015; Mughal, Schneider, & Hayat, 2018; Shabsigh, 1995; Yasmin & Rauf, 2003), yet most of the studies are limited to measuring the informal sector only. However, Shabsigh (1995) explored the relationship between fiscal deficit and informal sector, while Yasmin and Rauf (2003) and Kemal (2007) attempted to explore the nexus between informal and formal sectors. The estimates of the first author were based on simple ordinary least squares (OLS) without accounting for cointegration among variables. On the other hand, Kemal (2007) used vector autoregression (VAR), and his results showed unidirectional causality from informal sector to nominal GDP. Further, they used Johansen Cointegration test and Error correction model to conclude that shadow economy has a positive effect on the formal sector in short- as well as long run. We, however, argue that the effect of the informal sector on official economy may be of asymmetric in nature in the long and short run, emanating from two contrasting propositions:
1.
First, the informal sector, being more dynamic and extensive, is considered a safe haven for informal employment and production activities stemming from its capacity to avoid the bureaucracy and legalities. This may be supporting the economic activity in the long run when the income and savings from the informal sector are spent on consumption goods being produced by the formal economy. Furthermore, countries with relatively high incidence of poverty and weak social welfare institutions may use the informal sector as a substitute for social security.
2.
On the contrary, informality is a burden on exchequer, particularly when it comes to revenue collection in the short run; hence, it restrains the formal economic activity by raising the cost of being formal; that is, taxpayers have to bear the cost of tax evaders. Lower tax collection implies less expenditure on public utilities and lower productivity and economic growth.
The above contrasting propositions also seek strength from Khan, Khwaja, and Olken (2015) who used an experimental study on performance-based incentives to tax officials in Pakistan. Although they showed that the tax revenue increased, however, bribe requests also increased by 30 per cent, which depicts a clear burden on economic growth in the short run. Therefore, we hypothesize that the informal sector may affect the formal economy positively in the long run and negatively in the short run.

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