Sunday, November 18, 2012

Pakistan's GDP Grossly Underestimated, Stocks Highly Undervalued

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

52 comments:

Hopewins said...

Dr. Haq,

Good Article. I am not going to play devil's advocate on this one. I will just leave you in peace.

But I would just like to point out that if our nominal GDP is as follows:
1) Formal Economy: $210 billion
2) Informal Economy: $191 billion
--
3) TOTAL Economy: $401 billion

Then our PPP GDP would be as follows:
1) Formal Economy: $485 billion
2) Informal Economy: $443 billion
--
3) TOTAL Economy: $928 billion

http://www.tradingeconomics.com/pakistan/gdp-ppp-us-dollar-wb-data.html

This means that we need just 1-2 more years to become a(PPP)TRILLION$ economy! Wow!

I just thought these PPP data should be mentioned so that your other readers don't get confuse your nominal numbers with the PPP ones.

Thank you.

Riaz Haq said...

HWJ: "This means that we need just 1-2 more years to become a(PPP)TRILLION$ economy! Wow!"

It depends on what PPP factor is used.

At 2.33, Pakistan's PPP GDP is $934 billion.

But at 2.9 PPP factor as used by the Indian govt, it's already $1.163 trillion.

http://www.thehindubusinessline.com/opinion/columns/harish-damodaran/article1540678.ece

Hopewins said...

^^^Riaq Haq Spake Thus: "But at 2.9 PPP factor as used by the Indian govt.."

----

Dr. Haq,

I recall you mentioning this once before in one of your other articles.

Are you sure of this claim? Perhaps it was just an typo-error or misprint or temporary miscalculation by some government official in some report?

The only reason I ask is that the World Bank data does not show any such discrepancy.

A) Pakistan WB Data

2011 Nominal GDP: 211 Billion$
2011 PPP GDP: 488 Billion$
Implied Factor: 2.32

http://www.tradingeconomics.com/pakistan/gdp-us-dollar-wb-data.html
http://www.tradingeconomics.com/pakistan/gdp-ppp-us-dollar-wb-data.html

B) Bangladesh WB Data

2011 Nominal GDP: 111 Billion$
2011 PPP GDP: 269 Billion$
Implied Factor: 2.42

http://www.tradingeconomics.com/bangladesh/gdp-us-dollar-wb-data.html
http://www.tradingeconomics.com/bangladesh/gdp-ppp-us-dollar-wb-data.html

B) India WB Data

2011 Nominal GDP: 1.85 Trillion$
2011 PPP GDP: 4.53 Trillion$
Implied Factor: 2.45

http://www.tradingeconomics.com/india/gdp-us-dollar-wb-data.html
http://www.tradingeconomics.com/india/gdp-ppp-us-dollar-wb-data.html

So the "conversion factors" are all about the same at 2.3-2.4, as they should be for roughly equivalent economies.

So I am not sure what that sky-high "2.9" number you mention really means.

Please explain.

Thank you.

Riaz Haq said...

HWJ: "So I am not sure what that sky-high "2.9" number you mention really means. Please explain."

Read The Hindu story. Here's an excerpt:

"The Survey estimates India's PPP correction factor at 2.9, meaning the stuff available here for $100 will cost $290 in the US. That corresponds to an exchange rate of roughly Rs 15.5 to the dollar. But the interesting bit is about the linkage with GDP. Countries with per capita GDP of $1,000-1,400 in 2009 – which include India, Pakistan and Vietnam — have an average PPP adjustment factor of 2.3.

In comparison, those with per capita GDP (unadjusted for PPP) between $8,000-12,000 — the likes of Brazil, Mexico, Russia and Turkey – require a correction of only 1.6 or thereabouts."


http://www.thehindubusinessline.com/opinion/columns/harish-damodaran/article1540678.ece

Hopewins said...

^^^Read The Hindu story. Here's an excerpt:

-----

Here is the original government report that the newspaper is quoting:

http://indiabudget.nic.in/budget2011-2012/es2010-11/echap-02.pdf

You can find that "2.9" figure on Page 25 & Page 27.

It is obviously a mistake made by some bureaucrat in this particular report and is being used purely in a descriptive sense to explain ideas.

The World Bank, however, has not made this mistake. The WB data correctly show the conversion factors for Pakistan, Bangladesh & India at 2.33, 2.42 & 2.44 respectively in 2011. These numbers seem to be all within the same range, especially given that these numbers will fluctuate with the dollar-trade in these countries.

I mean if we were to really use 2.9 for India, their GDP PPP would be 5.35 Trillion$ instead of 4.53 trillion$ as the world bank is reporting it.

I think we should stick with consistent WB data whenever it is available.

VC said...

Worth reading Dr. Ashfaque Khan...

What is there in store for the economy in 2012-13? Before we answer this, it is essential that we summarise the state of the economy as it stands at the beginning of 2012-13. Lack of vision, direction, commitment, knowledge and understanding of Pakistan’s economy has destroyed the economy during the last four and a half years. By the end of the last fiscal year (2011-12), Pakistan’s economic growth slowed to an average of 3 percent per annum, equalling less than one-half of the average of 2002-07. Domestic investment hit a 60 years low and domestic saving experienced an unprecedented fall. Side by side, foreign private investment collapsed and inflation hovered in high double-digits with a corresponding deterioration in the business environment, unemployment and poverty figures and relations with the IFIs.

The root cause of our economic destruction has been the policy of ‘reckless borrowing and ruthless spending’ pursued by the government. The country has never witnessed such a level of fiscal profligacy with budget deficit touching 8.5 percent of the GDP in 2011-12. Resultantly, public debt has more than doubled in the last five years and consumed a bulk of tax revenue as interest payments. Non-availability of sufficient resources for social sector and infrastructure has resulted in the deterioration of education and health systems, crumbling of the infrastructure and worsening of the power crisis.

In short, by the end of 2011-12, Pakistan’s economy resembled a patient in intensive care unit fighting desperately for survival. To extend the analogy, the economic ‘doctors’ are least bothered about their ‘patient’. Should we expect any change in their attitude towards their patient (economy) at the tail end of their shift? Through the ‘ballot’ budget and ‘ballot’ monetary policy, the government has already revealed its preferences. Fiscal indiscipline is likely to attain new heights in 2012-13. Resources will be doled out to ‘win’ election in the name of ‘taraqiati programme’ (development budget).

No efforts will be made to mobilise additional resources by broadening the tax base and rationalising expenditure. No attempts will be made to address the issues of the NFC Award which has rendered the fiscal policy ineffective as a tool of the stabilisation policy. The ‘ballot’ budget 2012-13 failed to touch upon several key issues including agricultural income being drawn under the direct tax net, implementation of RGST, reforming of the petroleum sector taxation, bleeding PSEs, circular debt and strengthening of tax administration.


http://www.thenews.com.pk/Todays-News-9-128630-Economy-in-2012-13

Riaz Haq said...

VC: "Worth reading Dr. Ashfaque Khan...http://www.thenews.com.pk/Todays-News-9-128630-Economy-in-2012-13"

I share Dr. Ashfaque Khan's basic concerns about the government's handling of the economy. But it doesn't change the facts about the underlying strength of the economy as obvious from healthy private consumption and strong corporate profits.

Let me repeat what I said in the concluding paragraph of my post:

"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. "

Anonymous said...

You cannot run your Country on shall-will do this and that, no predictions and forecast can save any country unless they really take steps to curb corruption-over spending-bad governance and best economic plans implementable. To the Author it appear but to most Pakistanis in Pakistan and outside Pakistan it appears to be in deplorable state. Author says "it appears" and next he says "economy is in fact healthier" if you ask me author is confused and had penned it down poorly.

Riaz Haq said...

Anon: "Author says "it appears" and next he says "economy is in fact healthier" if you ask me author is confused and had penned it down poorly."

I think it's you who's confusing public fiances with the overall national economy. The two are very distinct.

While Pakistan's government is incurring debts and running deficits, the nation's private sector is quite healthy.

As Barron's reported, "the (Pakistani) firms 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."

Riaz Haq said...

There is one reader of my blog who continues to insist on an explanation that the consumption is coming entirely at the expense of investment. I think this is totally false.

The gap between the officially reported consumption GDP and actual consumption GDP is just too large to be explained by it.

To understand the reason for the gap between official GDP which is under-reported and the actual GDP which is much larger, please read a recent paper by Kemal and Qasim presented at PSDE (Pak Society of Dev Economists) conference in Islamabad.

The paper goes into the details of the discrepancies between the Economic Survey GDP data and the Social and Living Standards (PSLM) consumption survey which is carried out and reported separately several months after the end of each fiscal year.

The PSLM data shows there's a huge gap between reported incomes and actual consumption in a largely cash-based economy.

Another issue the paper discusses is the rampant mis-invoicing of imports and exports that contributes to understating the official GDP.

For example, 2011-12 PSLM has not yet been completed.

http://www.pide.org.pk/psde/25/pdf/AGM28/M%20Ali%20Kemal%20and%20Ahmed%20Waqar%20Qasim.pdf

Hopewins said...

Dr. Haq,

Since you are now repeatedly quoting that paper by kemal & Qasim (K-Q), I gave it a glance myself.

According to Table I (they don't seem to have page numbers!), it is largely private consumption that they claim is MASSIVELY under-reported in the formal statistics.

According to them, as seen in that table, there is no problem with the INVESTMENT data as Total Investment = Formal Investment.

Let us now look at the situation you claimed for 2011-12:
1) Formal Economy: $210 billion
2) Informal Economy: $191 billion
3) Total GDP: $401 billion

According to the authors, Formal Investment = Total Investment

Formal Investment as seen in WB Data is $25 Billion for 2011-12:
http://alturl.com/52v7h

Therefore, we can calculate our current Investment Rate =
Investment/Total GDP = 25/401 = 6.3%

Assuming a low ICOR of 3 for now (it will have to go up as the economy develops), this means that our future GDP growthrate average can be, at best, around 2.1%.

When we account for our 2% population growthrate, we can see that we are clearly heading for a DISASTROUS situation low per capita growth.

And all of this is because of our SUPER LOW INVESTMENT RATE of 6.3% of our total GDP (informal & formal).

What do you think? Have I made an error in my reasoning? Is there some fact that I have overlooked?

Please comment.

Thank you.

Riaz Haq said...

HWJ: "According to the authors, Formal Investment = Total Investment"

Not true. Here's the relevant excerpt from the paper:

Although data on investment is also seems to be under reported since it is calculated based on the old survey methodologies for certain sectors and predicted according to commodity flow mechanism for rest of the sectors and commodity flow could be under reported as well. Thus there are ample chances that investment data is also under estimated and increase the formal GDP if it is calculated correctly. However, in this paper we are taking investment and government expenditures same as in the formal economy.

Anyone interested in exploring officially unreported investments can easily find undocumented housing, commercial real estate and factories and other SME businesses in all parts of the country...particularly in places like Orangi in Karachi.

So your entire premise of "our SUPER LOW INVESTMENT RATE of 6.3% of our total GDP" is completely flawed.

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 Express Tribune story on Pakistan's informal sector:

KARACHI:

The informal sector in Pakistan has grown more rapidly than the formal economy over the last three decades and while estimates vary a great deal, the size of the informal sector is not less than one-third of the country’s gross domestic product (GDP).

These views were expressed on Monday at a discussion on “The informal enterprise in Pakistan: challenges for growth”, organised by the Centre for International Private Enterprise (CIPE) and the Karachi Chamber of Commerce and Industry.

Experts said the policy environment surrounding the informal sector is characterised essentially by three parameters – taxation, regulation and private property rights. Property rights and tax reforms are needed at the policy level to encourage informal businesses to enter into the formal sector, which is considered the most important challenge faced by the business community, they said.

“Research has consistently shown that entry barriers such as lengthy registration requirements, licensing and inspection requirement and complicated taxation policy are the key reasons for people remaining in the informal sector,” CIPE Washington Regional Director Andrew Wilson said.

BusinessMen Group Chairman Siraj Kassim Teli suggested that collective action is required and the private sector should unite at one platform and encourage the informal sector to follow standards which will help them gradually convert into formal businesses.


http://tribune.com.pk/story/285820/informal-sector-grows-faster-than-formal-economy/

Hopewins said...

Dr. Haq,

FRESH UPDATE: SBP has just published the Exports Data for 2011-2012:

http://www.sbp.org.pk/ecodata/Export_Receipts_by_Commodity.pdf

It looks like a mixed bag of results. Overall, Exports seem to have fallen by 2.3%, but that is not a huge drop. Here are the results sorted by Group:

GROUP NAME......2010-11..2011-12
PetroleumGroup..$1,706...$1,062
FoodGroup.......$4,129...$3,779
TextileGroup....$13,076..$13,028
OthersExports...$1,416...$1,504
OtherManuf......$4,242...$4,630
TotalExports....$24,568..$24,004

GROUP NAME......$Change..%Change
PetroleumGroup..-$644....-37.70%
FoodGroup.......-$350....-8.50%
TextileGroup....-$48.....-0.40%
OthersExports...$88.......6.20%
OtherManuf......$388......9.10%
TotalExports....-$564....-2.3%

It looks like Petro-products and Food-Products lost the most this year and general non-textile manufacturing (leather, rugs etc) gained the most, with textile remaining steady.

Item-wise Summary:

Winners: As you predicted, Guar exports are up by 232%, probably because of that Fracking thing. Raw cotton is up 50%, Ready-mades are up 30%, Chemicals up 15%, Leather & Sports goods are up 10%, and Cotton-Cloth grew by 5%.

Losers: Wheat exports collapsed by 90%, Refined petro-products down by 65%, Knitwear down 15% and Bed-wear & Cotton-Yarn are down 5%.

What is your analysis of these latest export trends?

Thank you.

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.
------------
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's a Reuters' story on benefits of Pak biometric ID cards:

Elderly men wait patiently, carefully combing their hennaed beards, while a guitar-playing student entertains the long queue of Pakistanis lined-up to be photographed, fingerprinted and questioned inside a crowded office in the capital Islamabad.
--
...bureaucrats say the successful ID registration has dramatically cut the number of ghost voters and is assisting in the distribution of cash payments for the poor and displaced.

"The database has brought a lot of transparency. We signed up so many people," said Tariq Malik, the 44-year-old chairman of the National Database and Registration Authority (NADRA).

During elections five years ago, less than half of Pakistani adults had a government-issued ID. Now 91 percent have the plastic green cards, said Malik, who previously worked as a county technology officer in Michigan in the United States.

It is hard to verify such a high rate of registration as Pakistan's census data is many years out of date.

Malik said registration spiked after the cards were required for poor Pakistanis to qualify for cash payments from the government.

However, some families, while grateful for the cash, say the flow of aid is sporadic.

"One year ago when I received a card, I got 2,000 rupees. They come after every two to three months and give a little bit of money. Now they come only after six to seven months and only give 3,000 rupees," said Hanifa Meer Beher, 6o, who lives in Karachi's coastal belt Kaka-pir village.

"This money is not enough and it has not made my life any better. I am a poor woman. Whenever I receive this money, I buy a little bit of flour, rice...I am grateful that I am getting something."

International donors like the World Bank, who are using the ID database for cash distributions, say they are happy with the system.

The bank helps fund a program where around 5.5 million poor families who have registered with NADRA get $10 a month.

"More countries are using cash transfers because poor families can choose what to buy and are more likely to get the money on time than aid given in other ways," said a World Bank spokesman.

Neighbouring India helps its poor via subsidized food or fuel, but much of its aid is stolen and ends up on the black market. Recent efforts to link benefits to identity cards there have been chaotic.

GHOST VOTERS, TAX CHEATS

Pakistan's new ID registrations helped eliminate 37 million ghost voters and add around 44 million real people to electoral roles, said Malik, adding voters can now use their ID number to check their registration by text message. A date has not yet been set for the next election, due in the first half 2013.

In future, the ID database may also help in the fight against tax evasion, fraud and crime, but only if the government uses the information, say sceptics like tax expert Ikramul Haq.

In a country where less than one percent of citizens pay income tax, NADRA has identified more than 2 million rich tax cheats, Malik said.

The federal board of revenue estimates tax evasion means as much as US$50 billion is missing from the treasury, money that could be used to upgrade crumbling schools and hospitals.

But so far, Pakistan's wealthy tax cheats remain untouched, yet authorities, mindful of pressure from the International Monetary Fund, are making noises about cracking down.

"We have so many enemies. The rich, who are not accustomed to pay taxes, pension cartels, politicians who want their voters to get benefits they are not entitled to," said Malik.

Registering Pakistan's 180 million population, spread from the Indian Ocean to the Himalayas, meant sending mobile registration vans and skiers laden with bulky equipment to far-flung villages and setting up booths at fairs....


http://www.reuters.com/article/2012/11/22/us-pakistan-identity-idUSBRE8AL0Y620121122

Anonymous said...

ohh cm'n if it is so then why pakistan is considered as a failed economy . Rising middle class in pakistan is a sheer joke. pakistan is a worse performing economy even worse than Bangladesh.

Riaz Haq said...

Anon: "ohh cm'n if it is so then why pakistan is considered as a failed economy . Rising middle class in pakistan is a sheer joke. pakistan is a worse performing economy even worse than Bangladesh."

What you heard and read in Indian media is WRONG!

Failed economies do not produce rising disposable incomes!

Talking about household disposable incomes in South Asia, there were 1.8 million Pakistani households (7.55% of all households) and 7.9 million Indian households (3.61% of all households) in 2009 with disposable incomes of $10,001 or more, according to Euromonitor.

This translates into 282% increase (vs 232% in India) from 1995-2009 in households with disposable incomes of $10,001 or more.

http://www.just-style.com/store/samples/2011_Euromonitor_WCIEP_Sample.pdf

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.

---
... 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.
------------
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 interesting Huffington Post piece by investment adviser Dan Solin:

Pakistan is often in the news and usually in unflattering terms. The relationship between the U.S. and Pakistan is troubled, characterized by deep mutual distrust and conflicting goals.

The economy of Pakistan is equally troubled. According to the Heritage Foundation, its economy has been plagued by "political instability and violence." Much needed economic reform has been stalled by bureaucratic delays and lack of political will. Property rights in Pakistan are "compromised." The rule of law is "fragile." Taxation is "poorly administered." Its public debt is over 50 percent of total domestic output. Foreign investment is declining. Its overall ranking on economic freedom is below the world and even regional averages, placing it in the category of "mostly unfree" economies. To put this in perspective, there is more economic freedom in Yemen, Senegal and Nigeria than in Pakistan. Its unemployment rate is a staggering 15 percent. Its inflation rate is 11.7 percent.

Does this country seem like a good place to invest to you?

Now for the shocker: Year-to-date returns for the stock market of Pakistan were 46.73 percent. That's not a typo. Year-to-date returns for the U.S. during the same period were 11.90 percent.

Here are some other interesting facts. The stock markets in Nigeria and Kenya
were 27.26 percent and 26.56 percent, respectively. What about the returns in fast-growing economies like Brazil and China? Brazil was an anemic 1.43 percent. China was a loss of 10.20 percent.

If you are a typical investor, you believe paying attention to the financial news is important to your investing success. You read the financial media. You watch CNBC and pay special attention to the fund managers who "explain" the stock markets to you and encourage you to follow their advice (often by investing with their firms). Maybe you follow the stock picks served up by Jim Cramer, who appears to have an encyclopedic knowledge of all things financial.

Let me ask you this question. Did any source of financial news advise you to invest in the stock markets of Pakistan, Nigeria or Kenya? Or Turkey, which topped the list with returns of 47.31 percent? How about your broker or financial adviser? They make it appear they have special insight into the financial markets. Did they advise you to invest in any of the countries reporting returns higher than the U.S.?

The average returns of the 77 countries is a positive return of 8.47 percent. In 2011, the average was a negative 14.15 percent and the list of top performers was markedly different, with Venezuela, Jamaica and Botswana turning in stellar results, along with Pakistan which came in second.

Trying to predict which country will perform best in 2013 is a crapshoot. So is trying to pick stocks that are mispriced, or betting on which asset class will outperform. Yet the securities industry continues to thrive by persuading you to pay its members fat fees for dispensing precisely this kind of "advice."

The next time your broker peers into his crystal ball and makes a recommendation, ask this question: Did you predict stellar returns in Pakistan, Nigeria or Kenya for 2012?


http://www.huffingtonpost.com/dan-solin/you-learn-investors-pakistan_b_2266913.html?utm_hp_ref=business

Riaz Haq said...

Here's a Daily Times story on a report about Pak stocks and bonds historic performance:

Magnus publishes first comprehensive study on Pakistani stocks and bonds

KARACHI: The first comprehensive study about returns of stocks and bonds in Pakistan has been recently published by Magnus Investment Advisors Limited. The research provides data for equities starting July 1965 and for bonds starting January 2001. The study shows that long term real Pakistani rupees return (after inflation adjustment) on local equities ranges between 4.82 percent to 5.69 percent. The treasury bills have provided negative returns. The real return on 5 year and 10 year PIBs is 2.19 percent and 3.43 percent respectively. The study also provides nominal and US dollar returns. Issues such as 'Equity Risk Premium' and relevance of 'Purchasing Power Parity' in the context of local securities market are also dealt with. The study also provides an asset allocation frame-work for local trustees. The most interesting part is the analysis of equity returns in Pakistan with other emerging markets and investment in Pakistani equities from the perspective of foreign investors. The study conclusively demonstrates that Pakistan stocks do not represent any unusual risk in the universe of emerging markets. Pakistani stocks should get one of the highest allocations among emerging markets from the perspective of US investors. The study is not only useful for local trustees of retirement funds and charitable institutions but it also fills a major gap for local business schools where so far graduates had little knowledge and understanding about risks and returns of local capital markets. The study is also a useful read for the Ministry of Finance, SECP and BoI officials who are called upon to promote investment in Pakistan from time to time. Magnus is a boutique investment advisory firm based in Karachi. It acts as an investment advisor to retirement funds sponsored by large companies (mostly MNCs) in Pakistan.


http://www.dailytimes.com.pk/default.asp?page=2012\12\14\story_14-12-2012_pg5_6

Riaz Haq said...

Here's a Bloomberg report on central bank rate cut in Pakistan:

Pakistan cut its benchmark interest rate to the lowest level in five years as policy makers seek to stimulate an economy battered by an energy crisis and insurgency that is likely to need more International Monetary Fund aid.

The State Bank of Pakistan reduced the discount rate by 50 basis points to 9.5 percent, Syed Wasimuddin, spokesman, told reporters in Karachi yesterday. The decision was predicted by 14 of 15 economists surveyed by Bloomberg News. One saw no change.

Pakistan’s economy will probably expand 3.5 percent in the 12 months through June, the IMF forecast Nov. 29, less than the 4.3 percent predicted by the government. Fighting with militants along the nation’s northwest border is sapping the budget and undermining confidence among businesses that are already struggling with record power outages that have shut factories and left thousands of people jobless.

“Pakistan is likely to go back to the IMF for another loan next year,” Hamad Aslam, head of research at Lakson Investments Ltd in Karachi who predicted yesterday’s decision, said before the announcement.

Pakistan is scheduled to repay about $7.5 billion to the Washington-based IMF between 2012 and 2015, with $1.2 billion due in June. A partially disbursed $11.3 billion loan program expired in September 2011.

The central bank’s reduction reflects inflation slowing to a 41-month low of 6.93 percent in November. Today’s cuts add to 2 percentage points of easing since August. The new rate will be effective from Dec. 17.

“Deceleration in inflation is faster than the projected path and credit extended to private businesses remains muted,” the State Bank said in its monetary policy statement yesterday. Average inflation for the year ending June will be below the 9.5 percent target, it said.

While the central bank has scope for a larger cut, it may opt for a conservative approach amid IMF repayments, Uzma Taslim, an analyst at Alfalah Securities Pvt. Ltd. in Karachi, said before the announcement.

The rupee traded at a record high against the dollar this week, after falling 9 percent earlier this year.

“Government finances are also under pressure,” Moody’s Investors Service said in November. “The budgeted deficit of 4.7 percent for the year ending June is likely to see slippage due to optimistic revenue and expenditure assumptions.”

Pakistan recorded the highest budget deficit in two decades in the fiscal year ended June.


www.bloomberg.com/news/2012-12-14/pakistan-cuts-key-rate-to-5-year-low-as-power-crisis-hits-growth.html

Hopewins said...

Here is an Dec 13,2012 article by Dr. Hilaly which agrees with your basic premise...

Quote: "But, it’s hardly a secret that what really cushions the economy is the black economy, which is almost as large as the documented one and remains beyond the purview of the government."

http://www.thenews.com.pk/Todays-News-9-148119-Pakistan-a-cheerful-place



Riaz Haq said...

Here are a couple of reports on Pak economy:

1. Dr. Ishrat Husain in The News:

“The economy is facing lot of difficulties due to bad governance,” he said at a seminar on ‘Pakistan’s Economic Outlook – 2013 & Beyond’ organised by the Institute of Chartered Accountants of Pakistan (ICAP) on Tuesday evening.



Dr Ishrat, who is also Dean and Director of Institute of Business Administration, disagreed with the doom and gloom painted about the economy by other speakers, saying the situation is not as worst as being projected. “There is plenty of room to improve the system by improving good governance in law and order, education and energy,” he added.



He said that it was an issue of governance that authorities were not taking action against tax evaders and criminals. “Due to lack of enforcement the criminals feel comfortable,” he said.



The economic situation is much better right now, he said and added that the country had witnessed a crisis like situation when oil ships were anchored on the ports and government had no money to pay them in the past.



He neither criticised the present government setup nor supported it, but said that the democratic system should be given opportunity for sustainable economic growth. “We did not allow democratic system to flourish,” he added.



Further, Dr Ishrat said that 50 percent population of Pakistan is living in an urbanised society, and most of them belong to middle class. Besides, a big strength of youth would set direction for better.



To a question about rupee depreciation against dollar that is creating difficulties in capital investment for manufacturing sector, which would result in decline in exports, he said rupee depreciation will help in increasing exports. He said that the nation was blinded by short-term measures and frequent changes of heads at SBP and finance ministry also resulted in economic instability.


http://www.thenews.com.pk/Todays-News-3-149270-Pakistans-economic-outlook-2013-&-beyond


2. Reuters on Pak current account deficit:

Pakistan’s current account deficit for the July-November period of the 2012/13 fiscal year was $365 million, compared with a deficit of $2.341 billion in the same period last year, the central bank said on Thursday.

In November, the current account deficit was $638 million.

The current account deficit for the 2011/12 fiscal year was $4.634 billion compared with $214 million in the 2010/11 fiscal year.

“This was positive mainly because of lower commodity prices and the gap between imports and exports was lower,” said Ahsan Mehanti, an analyst at Arif Habib Corp.

“At the same time, there was higher foreign investment in the country and higher remittances. There was a higher rupee to dollar value.”


http://dawn.com/2012/12/19/pakistan-july-nov-current-account-deficit-at-365-million/

Riaz Haq said...

Here's Fiber2fashion on Pakistan's rising textile exports:

Pakistan’s textile exports grew to US$ 5.4 billion during first five months of the current Pakistani fiscal year that began on July 1, 2012, showing a year-on-year rise of 7.81 percent, Pakistan Bureau of Statistics (PBS) data showed.

Pakistan exported textiles worth US$ 5.009 billion during same period of last fiscal.

Product-wise, the items that depicted positive year-on-year export growth during July- November this year, include cotton yarn which grew by 38 percent year-on-year, yarn increased by 62.73 percent, cotton cloth by 12.31 percent, towels by 10.98 percent, readymade garments by 14.26 percent, tents by 25.49 percent and other textile materials by 70 percent.

On the negative side were raw cotton, exports of which declined by 44.35 percent year-on-year, cotton carded by 86 percent, knitwear by 2.02 percent, bed wear by 9.61 percent, art silk and synthetic textiles by 18.1 percent and made-up articles by 2.14 percent.


http://www.fibre2fashion.com/news/textile-news/newsdetails.aspx?news_id=119255

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 Daily Times on the impact of nearly $700 million CSF funds from US to Pakistan:

Pakistan received the second tranche of $688 million Coalition Support Fund (CSF) from the US on Friday. This second CSF tranche is expected to provide relief to the ailing economy, supporting the country’s macroeconomic indicators positively in short-term.
Analysts said that Pakistan’ depleting foreign exchange reserves have been enhanced with inflows of much-awaited funds dedicated mainly for the expense of military operations in the war against terrorism. This was the second instalment received by the country after it got $1.12 billion in July.
The foreign reserves will be improved along with balance of payment and rupee position against dollar on temporary basis.
The current account balance failed to sustain its surplus position as it turned into a deficit of $365 million in November due to trade imbalance of trade and services that stood at $6.3 billion and $8.2 billion, respectively in the first five months of the current financial year. The rupee, which neared the Rs 100 mark against the dollar, will likely get some respite. The macroeconomic situation will be improved for a quarter with inflows of millions of dollars into the country’s reserves, analysts said.
In the short-term, the country will benefit from the millions of dollars inflows but its impact will not be sustainable for the long-term, they added.
The overall CSF pledged by US government is $2.5 billion in which remaining amount will be expected in future to be received by the country depending on diplomatic relationship with the US government. The persistent inflows are important for the country mainly for the payment of $7.9 billion it borrowed from the International Monetary Fund (IMF), otherwise, the economic situation will get severe and the country will again go to the IMF.


http://www.dailytimes.com.pk/default.asp?page=2012\12\29\story_29-12-2012_pg5_13

Riaz Haq said...

An Express Tribune article cites a World Bank report to conclude Pakistan has low rates of people who keep their money in a bank.

tribune.com.pk/story/486722/financial-inclusion-an-unheard-of-phenomenon-in-pakistan/

I believe the lower rates of banking in Pakistan is the key reason for the nation's huge undocumented economy and massive tax evasion.

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.

Riaz Haq said...

Here's bloomberg on fast food craze in Pakistan:

...Local and overseas business groups are queuing up to buy franchise rights in Pakistan for an array of popular food sold from Los Angeles to Kuala Lumpur, driven by rising demand from a booming middle class in South Asia’s second-biggest economy after India. Pakistanis increasingly flock to American food outlets even as ties between the two nations are strained by U.S. drone missile strikes in the northwest of the country.

Johnny Rockets Group Inc., another American fast-food group based in Aliso Viejo, California, that operates or franchises 68 hamburger restaurants in 16 countries, Second Cup Ltd., a coffee shop chain based in Missisauga, Canada, with over 360 cafes and Malaysia’s MammaRoti and PappaRoti are set to open their first stores in Pakistan this year.

----

Fatburger joins Hardee’s Food Systems Inc., headquartered in St. Louis, Atlanta-based cinnamon roll maker Cinnabon International Inc., The Noodle House of the United Arab Emirates, and five foreign frozen yoghurt chains that opened their first outlets in the world’s sixth-most populous nation since 2011. Consumer spending in Pakistan has increased at a 26 percent average pace the past three years, compared with 7.7 percent for Asia, according to data compiled by Euromonitor International, a consumer research firm.

...Pakistan’s middle class has doubled to 70 million people in the past decade as booms in agriculture and residential property, as well as jobs in telecom and media have helped people prosper, according to Sakib Sherani, chief executive officer at Macroeconomic Insights in Islamabad.

---
Franchising is also booming as businesses battling Pakistan’s record energy outages seek alternatives to factories that can’t run without adequate power, said Samiullah Mohabbat, chief executive officer of Fatburger Pakistan and the country representative for the World Franchise Association. Mohabbat received over 100 queries this year from entrepreneurs wanting to buy franchise rights for international food chains.
---

The number of foreign food franchises in Pakistan will “easily double” in the next two years as more coffee houses and casual dining outlets enter the country, Mohabbat said. About two dozen foreign food franchises operate in Pakistan since Louisville, Kentucky-based Yum! Brands Inc.’s Pizza Hut opened two decades ago, followed by the same company’s KFC in 1997 and Oak Brook, Illinois-based McDonald’s Corp., the world’s largest restaurant chain, the following year.

KFC plans to open 40 more stores in Pakistan over the next five years to expand its network of 64 outlets in 18 cities, said Rafiq Rangoonwala, chief executive officer of Cupola, the company with the franchise rights for KFC, the biggest fast-food chain by outlets in Pakistan.
--
Salt Lake City-based Mrs Field’s Original Cookies Inc., that opened an outlet in Lahore in 2011, plans to start 15 more this year, said Rashed Siddiqui, franchise owner.

---
Second Cup will open its first outlet in Islamabad within the next six months and Red Mango Inc., a Dallas-based frozen yoghurt retailer, will enter Pakistan this year, Mohabbat said.

Fullerton, California-based Tutti Frutti Frozen Yoghurt, that has 20 outlets in Pakistan since opening in late 2011, plans to start 100 more this year, said Naeem Niazi, director for international business development at Wellspring Industry Inc., owner of Tutti Frutti.

Pakistanis spend 90 billion rupees ($924 million) a year on eating out at the 20,000 restaurants nationwide because of a paucity of other entertainment facilities, said Nauman Mirza, founder and chief executive officer of Food Connection Pakistan, an online restaurant guide.


http://mobile.bloomberg.com/news/2013-01-07/pakistan-loving-fatburger-as-fast-food-boom-ignores-u-s-drones.html

Riaz Haq said...

Here's an ET piece by economist Shahid Javed Burki:

On my way from Pakistan to Washington, I had a chance meeting with a Pakistani economist of considerable repute. We met at Karachi airport’s departure lounge. I have known him for years and have highly valued his work on the Pakistani economy. He surprised me by suggesting that the country was in a much better shape than suggested by some of my writings and those of several others who thought like me. He was of the view that the situation did not warrant the kind of pessimism reflected in our assessments. “Macro numbers may look bad but the real economy is doing reasonably well — in fact very well”, he said. ...
-----------
He told me of a recent visit he and some other economists had taken to Faisalabad — arguably the hub of Punjab’s industrial economy — and came across extraordinary enthusiasm about the future of the country and its economy. “The industrialists and traders we met at the city’s Chamber of Commerce were looking forward to the opening of the economy with India. There was nothing but good in that for them and the country”. But it was not only the entrepreneurs operating in large urban centres of the country that look upon Pakistan’s economic future with hope. “The countryside was booming with consumer durables being sold at rates never seen before”, said my economist friend. “I have traveled up and down the country in recent months and seen with my own eyes what numbers don’t tell. The recent commodity boom in the international market place has done wonders for the Pakistani producers in the countryside and also for rural consumers. There is palpable prosperity in the country’s towns and villages”.
----------
For the last five years, Pakistan has had a representative form of government but the representatives people have sent to the various legislative assembles have served mostly vested interests. Would that change? The tens of thousands of people who followed the preacher-politician Tahirul Qadri to Islamabad did so in the hope of widening the system by including those who are prepared to work for others.


http://tribune.com.pk/story/499385/on-the-eve-of-the-third-real-election/

Riaz Haq said...

Here's a PakistanToday report on KSE-100 performance in Q1-2013:

KARACHI - Hopes for change in the political setup along with strong foreign inflows were the major drivers of the country’s equity market during the first quarter of calendar year 2013 (1Q2013).
The market observers believe that while the May 11 election are around the corner, the equity investors were cautiously looking at the fast-changing political developments in the country. “We anticipate market activity to hinge on political temperature of the country,” viewed Topline analyst Nauman Khan.
The heightened investors’ confidence was also attributed to significant reduction in the policy rate that had facilitated the funds flows towards equity market, said the analysts.
The benchmark KSE 100-share index posted a gain of 6 percent, 5 percent in dollar terms, during the quarter to close at 18,043 and overall market capitalization reached Rs4.4 trillion or $45.2 billion.
“Though the index made a new high of 18,185, on March 01, 2013, the market capitalization was still seven percent, 40 percent in dollar terms, down from its record high of Rs 4.8 trillion ($74.9 billion) achieved on April 18, 2008,” said Khan.
With index achieving our midyear target of 18,000, we re-iterate that index can make a new high by crossing 19,500 in calendar year 2013 as mentioned in our strategy note date December 12, 2012. Abrupt PKR deprecation due to weakness in external account remains the major risk to our assessment.
The positive momentum was accompanied by higher traded volumes. During 1Q2013, average daily traded volumes stood at Rs5.7 billion (US$58.4 million) which compares favorably with Rs4.5 billion (US$46.6 million) recorded in the previous quarter. The average traded volumes are the highest in last 12-quarters.
In terms of shares, average volume stood at 210.6 million which is up 25 percent from preceding quarter, while are highest since 1Q2008 (19-quarters high).
In addition to higher foreign buying, we believe increased participation by individual investors have also contributed to improved depth of the market. Individual participation on an average improved to 50 percent in 1Q2013 as against 48 percent in the preceding quarter.
The foreigners, that hold $3.3 billion worth of Pakistan shares that is 31 percent of free-float and 8 percent of market capital, remained net buyers in 1Q2013.
The offshore investors in the quarter bought shares worth $228 million and sold $158 million resulting in net buying of $70 million as of March 28.
The numbers compare favorably with $65 million net inflow registered in previous quarter.
Giving their future outlook, the analysts reiterated that the market participants were likely to cheer signs of change in the political setup. “Mid caps with high leverage and consumer related business can perform better than large caps in 2013,” said Khan.


http://www.pakistantoday.com.pk/2013/03/30/news/profit/equity-market-rallies-6-in-1q2013-as-election-nears/

Riaz Haq said...

Here's a Dawn Op Ed by Khurram Husain on Pakistan's hidden economy:

...More detailed metrics of economic activity also show great ‘tranquillity’ in the west (Balochistan & KP). Detailed figures on consumption of electricity by industrial and commercial categories of consumer, for instance, show very little change over the years.

------

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.

First some background. Every time you write a cheque and the other party deposits that cheque in their account, it goes through a process called “clearing”. Because banks don’t hold your money themselves — much of it is held by the State Bank — the task of actually taking the money out of the books of one bank and transferring it to the books of another every time a cheque is cleared, is performed by the State Bank at its clearing house.

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.

----
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.
-----------.


http://dawn.com/2013/02/28/the-hidden-economy/comment-page-1/

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...

Sharp fall in Indian currency against the US dollar and slower economic growth have caused India's GDP for Fiscal  Year 2012-13 to shrink in US $ terms to $1.84 trillion from $1.87 trillion a year earlier. The Indian rupee has plummeted from 47.80 in 2012 to 54.30 to a US dollar in 2013, according to Business Standard. Since this report was published in Business Standard newspaper, Indian rupee has declined further against the US dollar to Rs. 59.52 today. At this exchange rate, India's GDP is down to $1.68 trillion, about $200 billion less than it was in  Fiscal 2011-12.


Meanwhile,  Pakistan's economy continues to struggle with its annual GDP rising just 3.6% to $252 billion ($242 billion at Rs. 100 to a USD exchange rate)  in fiscal 2012-13, according to Economic Survey of Pakistan 2012-13 estimates based on 9 months data. The country is facing militancy and energy shortages impacting its economy.

Riaz Haq said...

Ratio of informal (shadow) to formal (documented) entrepreneurs:

Indonesia 131

India 127

Philippines 126

Pakistan 109

Egypt 103

In a study of 68 countries, Professor Erkko Autio and Dr Kun Fu from Imperial College Business School estimated that business activities conducted by informal entrepreneurs can make up more than 80 per cent of the total economic activity in developing countries. Types of businesses include unlicensed taxicab services, roadside food stalls and small landscaping operations.

In a study of 68 countries, Erkko Autio and Kun Fu of London's Imperial College Business School found that after Indonesia, India has the second highest rate of shadow entrepreneurs.

This is the first time that the number of entrepreneurs operating in the shadow economy has been estimated.

Shadow entrepreneurs are individuals who manage a business that sell legitimate goods and services but they do not register their businesses. They do not pay tax and operating in a shadow economy where business activities are performed outside the reach of government authorities.

Indonesia has 131 shadow businesses to every business that is legally registered compared to India's 127.

Philippines have 126, Pakistan has 109 and Egypt has 103 shadow businesses to every legally registered business.

Experts say the shadow economy results in loss of tax revenue, unfair competition to registered businesses and also poor productivity - factors which hinder economic development.

As these businesses are not registered it takes them beyond the reach of the law and makes shadow economy entrepreneurs vulnerable to corrupt government officials.

The researchers said, "If India improved the quality of its democratic institutions to match that of Malaysia for example, it could boost its rate of formal economy entrepreneurs by up to 50% while cutting the rate of entrepreneurs working in the shadow economy by up to a third. This means that the government could benefit from additional revenue such as taxes."

The UK exhibits the lowest rate of shadow entrepreneurship among the 68 countries surveyed, with a ratio of only one shadow economy entrepreneur to some 30 legally registered businesses.

Autio said, "Understanding shadow economy entrepreneurship is important for developing countries because it is a key factor affecting economic development. We found that government policies could play a big role in helping shadow economy entrepreneurs transition to the formal economy. This is important because shadow economy entrepreneurs are less likely to innovate, accumulate capital and invest in the economy, which hampers economic growth."

http://timesofindia.indiatimes.com/India/India-has-2nd-highest-no-of-shadow-entrepreneurs-in-the-world/articleshow/35653042.cms

http://www3.imperial.ac.uk/newsandeventspggrp/imperialcollege/newssummary/news_27-5-2014-9-53-29

http://link.springer.com/article/10.1007/s10490-014-9381-0

Riaz Haq said...

In "Capital in the Twenty-First Century", French economist Thomas Piketty argues that the GDP growth rates of India and China are exaggerated.

Picketty writes as follows:

"Note, too, that the very high official growth figures for developing countries (especially India and China) over the past few decades are based almost exclusively on production statistics. If one tries to measure income growth by using household survey data, it is often quite difficult to identify the reported rates of macroeconomic growth: Indian and Chinese incomes are certainly increasing rapidly, but not as rapidly as one would infer from official growth statistics. This paradox-sometimes referred to as the "black hole" of growth-is obviously problematic. It may be due to the overestimation of the growth of output (there are many bureaucratic incentives for doing so), or perhaps the underestimation of income growth (household have their own flaws)), or most likely both. In particular, the missing income may be explained by the possibility that a disproportionate share of the growth in output has gone to the most highly remunerated individuals, whose incomes are not always captured in the tax data."

"In the case of India, it is possible to estimate (using tax return data) that the increase in the upper centile's share of national income explains between one-quarter and one-third of the "black hole" of growth between 1990 and 2000. "

http://books.google.com/books?id=J222AgAAQBAJ&printsec=frontcover&dq=thomas+piketty&hl=en&sa=X&ei=R7g0VMO3PMfjoASlvIGYDg&sqi=2&ved=0CB0Q6AEwAA#v=snippet&q=Indian&f=false

Riaz Haq said...

Pakistan’s true economic output is not reflected in the official gross domestic product (GDP) and this is the reason why.
It fails to include important industries that have sprung up since the last census of the manufacturing base was conducted nine years ago.
The State Bank of Pakistan (SBP) highlighted this anomaly in its annual report on The State of the Economy 2013-14, mentioning economic contributors not incorporated in the Large Scale Manufacturing (LSM) and agricultural data.
Manufacturing has a 11% share in economic output, but experts have been going on for years, saying that tens of thousands of establishments from Karachi to Faisalabad are the real drivers of the economy but remain unreported.

The last Census of Manufacturing Industries (CMI) was carried out by the Pakistan Bureau of Statistics (PBS) in fiscal 2005-06 on the basis of response received from 6,417 factories — a number much smaller than the actual size of the industrial base.
Some very large businesses are not covered by the PBS at all.
Engro Polymer and Chemicals, which meets over one-third of the domestic demand for caustic soda, is a glaring example.
Caustic soda holds the largest chunk in the 11 categories of chemicals reported by PBS. Excluding Engro distorts actual output of the industry, the SBP said.
While the production of caustic soda posted a 8.4% year-on-year decline in 2013, Engro Chemicals reported a 5.6% increase in production this year. “The inclusion of this company could have offset the reported decline in caustic soda,” SBP said.

When it comes to automobiles, PBS relies on data provided by the members of Pakistan Automotive Manufacturers Association (Pama). This leaves out leading bus and truck manufacturers like Afzal Motors and Al-Haj Faw Motors that entered the market later.
Textile and food
Similarly, the weightage of cotton yarn and cotton cloth is one of the highest in CMI, together holding 17%. Yet PBS leaves out 90% of the manufacturers as it covers only mill-related activity, which is based on units registered with the Ministry of Textiles.
As a matter of fact, data of wearing apparels and dressing, publishing, printing products and recorded media, fabricated metal products, computers, medical precision and optical instruments, and other industries, is not included as part of LSM, stated the SBP.

“In the food sector as well, demand and production of a number of processed food items like packaged milk, yogurt, dairy items, pastas cereals, has grown in past few years. But the production of these items is not included in LSM data,” it noted.

This basically leaves out manufacturers like Unilever, Kolson, Nestle, Engro Foods and National Foods, it noted.
The story is the same with cosmetics and personal care goods produced by FMCGs like Unilever and P&G that are also not part of the LSM.
Plastic sector
Another sector, which has emerged as an important contributor to the economy, and ignored in CMI, is plastics. The Pakistan Plastic Manufacturing Association (PPMA) has around 6,000 upstream and downstream units, employing 0.6 million people.
----------
Plastic sector has a weight of 0.75% in CMI while data is collected from only 142 units. As per PBS’ own numbers, in 2013-14, Pakistan exported 253, 896 tons of plastics products valued at $350.7 million, which was a 7% decrease compared with plastics exports in the previous year.
SBP also pointed out that while exports are down, imports of raw materials witnessed 26.4% growth in this year, which indicates robust growth in manufacturing in this segment.
The last CMI recorded 3,590 factories in Punjab, 1,825 in Sindh, 673 in Khyber-Pakhtunkhwa (K-P) and 212 in Balochistan.
At basic prices, textile sector had the highest contribution to GDP of 27.41%, food products and beverages 15.82%, chemicals and chemical products 14.83%, and non-metallic mineral products 7.52%.


http://tribune.com.pk/story/823774/misrepresented-and-misunderstood/

Riaz Haq said...

http://www.sbp.org.pk/reports/annual/arFY14/Real.pdf


Another important issue pertains to the coverage of sectors and manufacturing units, which are
included in LSM by the Pakistan Bureau of Statistics (PBS). The existing LSM index is based on the
Census of Manufacturing Industries (CMI) that was conducted in FY06. 32
While constructing LSM
index, only those sectors were included which had significant value addition to GDP at the time of
census. Our assessment is that not only has manufacturing activity in a number of sectors been
enhanced, many new manufacturing units have started operating in the country in the recent past.
Hence, an expanded data coverage exercise of manufacturing units and new categories is required, to
present a more realistic picture of large scale manufacturing in the country. We believe the actual
growth in LSM is better than what is reported by PBS (Box 2.2).
Box 2.2: Coverage Issues Undermining LSM Growth
Large scale manufacturing data is compiled across countries, according to the International Standard Industrial Classification
( ) of the United Nations Statistics Division, which has defined 22 broad categories of manufacturing.33
In the case of
Pakistan, however, the coverage of LSM pertains to only 15 sectors identified by the ISIC. Data pertaining to manufactures
of wearing apparels & dressing; publishing, printing products & recorded media; fabricated metal products (except
machinery & equipment); office & accounting machinery and computers; medical precision & optical instruments; and
recycling of metal and non-metal waste scrap, is not included as part of Pakistan’s LSM.34
The current LSM index is based
on the Census of Manufacturing Industries (CMI) conducted in FY06.

32 PBS conducted the CMI in 2006 to collect information about industrial activity in the country. Providing this information
by production units, is obligatory under Section 9 & 10 of General Statistics Act 1975, and Section 5 & 6 of Industrial
Statistics Act,1942. PBS is currently engaged in conducting a fresh CMI.
33 http://unstats.un.org/unsd/cr/registry/regcst.asp?Cl=17
34 The manufacturing data as reported by India contains all categories identified in the ISIC. Source:
http://mospi.nic.in/Mospi_New/upload/iip_11_july2014.pdf
35 Similarly in the case of glass, production of one of the leading manufacturers is not captured by LSM index.

http://www.sbp.org.pk/reports/annual/arFY14/Real.pdf

Riaz Haq said...


LSM posted 3.9 percent growth in fiscal year 2014 (FY14) compared to 4 percent in FY13; however the SBP while disagreeing with figures believed actual growth in LSM was better than what was reported by Pakistan Bureau of Statistics (PBS). Reasoning for its contradiction of PBS’s figures, the SBP said the existing LSM index was based on Census of Manufacturing Industries (CMI) that was conducted in FY06 while constructing LSM index, only those sectors were included which had significant value addition to Gross Domestic Product (GDP) at the time of census.

Meanwhile, manufacturing activity in a number of sectors has been enhanced and many new manufacturing units have started operating in country in recent past. Hence, an expanded data coverage exercise of manufacturing units and new categories is required, to present a more realistic picture of LSM in the country, it added.

In annual report for FY14, the SBP said LSM data was not being compiled in Pakistan according to International Standard Industrial Classification (ISIC) of United Nations Statistics Division’s defined 22 broad categories of manufacturing.

As in Pakistan, the coverage of LSM pertains to only 15 sectors identified by the ISIC while data pertaining to manufactures of wearing apparels and dressing, publishing, printing products and recorded media, fabricated metal products (except machinery and equipment), office and accounting machinery and computers, medical precision and optical instruments and recycling of metal and non-metal waste scrap, is not included as part of Pakistan’s LSM.

Pointing out main concerns, the SBP said LSM data for cotton cloth and cotton yarn was collected by Ministry of Textile, which only covered mill sector activity. The non-mill sector, which entails over 90 percent of overall production of cotton cloth in country, is not included in the data set. While the growth in manufacturing textiles posted a slowdown in FY14, the export quantum of almost all textile categories (with the exception of cotton yarn) posted an increase in the year. In fact, the provision of generalised system of preferences plus status from the European Union (EU) suggests strong growth prospects of this sector.

Similarly in automobiles, the PBS reported production of units registered with Pakistan Auto Manufacturers Association only while some leading bus and truck manufacturers namely Afzal Motors and Al-Haj FAW Motors were not included by the PBS. The PBS reports data for 11 categories of chemicals, with caustic soda claiming the largest share. For caustic soda, production of Engro Chemicals, which caters to one-third of the entire domestic demand of caustic soda, is not included in LSM data. The demand and production of a number of processed food items has grown in the past few years (eg packaged milk and products, dairy items, yogurt, pastas, cereals, frozen and ready to cook items etc). The production of these items, however, is not included in LSM data which leaves out large and vibrant manufacturers like Unilever, Kolson, Nestle, Efoods and National Foods.

Similarly, non-food Fast Moving Consumers Goods (FMCGs) products like cosmetics, personal care products and toiletries, which are produced by prominent brands like Unilever, Medicam and Procter and Gamble are also not captured by LSM. The production of plastics is completely absent from LSM data set.

According to Pakistan Plastic Manufacturing Association there are around 6,000 upstream and downstream units operating in the country, employing 0.6 million people. This sector is producing a broad range of products ranging from household items, industrial containers, medical and surgical items, auto parts, stationery items, PVC pipes etc. Yet they are not covered in LSM.

http://www.dailytimes.com.pk/business/14-Dec-2014/sbp-shows-dissatisfaction-with-pbs-s-lsm-coverage

Riaz Haq said...

Jaitley Hails #India's Tax-Free, Job-Rich Informal Economy Estimated At 40% of Official GDP #Modi #BJP http://bloom.bg/1KWhCk4 via @business

India’s underground economy is booming, and Finance Minister Arun Jaitley wants to keep it that way.
The informal sector is estimated at $780 billion, or about 40 percent of India’s official gross domestic product. It employs more than 90 percent of India’s workforce, according to the government.
“I’m a great supporter of this informal sector," Jaitley said in an interview on Monday. “The informal sector generates more jobs than the organized industry."
The approach goes against the advice of many economists, including those at the International Monetary Fund, which recommends widening the tax net to alleviate India’s chronic shortfalls in fiscal revenue. Indian governments often need to slash infrastructure spending to meet deficit targets that are still among Asia’s highest.
India ranks among the world’s top employers in the informal sector, according to the International Labour Organisation. It puts to work about 400 million people -- more than the entire U.S. population.
In India, it’s nearly impossible to avoid. Retail stores offer discounts for customers if they pay cash, and landlords often take a portion of the monthly rent in stacks of 1,000-rupee notes. Back-alley hawalas transfer billions of dollars around the globe with no questions asked, and thousands of unregistered and underpaid chauffeurs and housemaids don’t file annual income declarations.
“The black economy is growing faster than the white economy and everybody is involved -- the entire country," said Arun Kumar, author of “The Black Economy in India," who came up with the $780 billion estimate by looking at wages, under-the-table transactions and cash-based real estate sales. “This isn’t just a problem among the wealthy -- almost everyone with disposable income participates in the black economy and it’s accepted."


Total corporate and personal income tax payers in India amount to about 40 million -- roughly 3 percent of the country’s 1.2 billion people. To expand that, a Finance Ministry-created panel suggested putting levies on farmers in the untaxed rural sector who make more than 5 million rupees ($76,000) per year -- an approach backed by the IMF.
“We think there’s scope to bring the fiscal deficit down in particular with the revenue side," said Thomas Richardson, the resident representative of the IMF in India. “It’s really a task of widening the tax net -- not raising rates, but bringing more people into the tax net."
“Neo-Middle Class"
Jaitley, for one, rejects that idea. Most farmers don’t make much money anyway, he said, and the rest could use the extra cash.
“We need to strengthen the neo-middle class and put more money in their pockets," Jaitley said. “So bringing tax violators into the tax net, yes, but bringing people with marginal incomes into the tax net -- I’m not so excited about it at all."
Instead, Jaitley wants to finance them. This year the government started a program to boost lending to small entrepreneurs like shopkeepers, fruits and vegetable vendors and artisans. Government-run banks have so far disbursed nearly $6 billion in increments of as much as about $15,000.
Part of the problem is India’s strict labor laws for companies with more than 100 employees. They incentivize businesses to stay small, leaving workers with few rights. The government so far has tweaked only a few minor labor laws, and it’s unclear when they will push for more changes.
While Jaitley this year is again struggling to raise revenue, he’s confident he’ll hit his deficit target of 3.9 percent of GDP without slashing funds for roads, bridges and ports. Shortfalls in direct taxes and state assets sales will be compensated by higher-than-expected indirect taxes -- including payments on services and exports.

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...

THE EXPRESS TRIBUNE > BUSINESS
Dissatisfied with size of Pakistan’s economy, Dar authorises World Bank study

https://tribune.com.pk/story/1397094/dissatisfied-size-pakistans-economy-dar-authorises-world-bank-study/

Pakistan has authorised the World Bank to undertake a study to come out of what an economist called the age of ‘statistical darkness’, after the country’s finance minister also started believing that the nation’s gross income is understated by as much as 25%.

“I have asked the World Bank to trigger a study and come out with the actual size of Pakistan’s Gross Domestic Product (GDP), which I believe is currently understated by 20% to 25%”, said Finance Minister Ishaq Dar on Saturday while addressing a gathering of chartered accountants from South Asian nations.

His statements came in the backdrop of a widely used figure for the size of the Pakistani economy, currently stated to be hovering around the $280-billion mark.
Dar said after noticing this undercounting of economic output, he decided to stick to 7% GDP growth rate target for 2019.

What is wrong with Pakistan’s economy?

He said that the input output coefficient of various industries has not been worked out for the last two decades. Dar said that the World Bank would require at least one year to complete the study.

He assigned the task to the World Bank last week during his visit to Washington. He is the second person and the first in the government who has now started believing that the country’s national output could be far more than what it is at the moment.

The idea was first floated by Shahid Javed Burki, former vice-president of the World Bank, during a meeting with Dar that took place two months ago.

Pakistani policymakers are taking decisions in statistical darkness and the World Bank can help to end this, wrote Shahid Javed Burki in an article published in The Express Tribune after his meeting with Dar.

He had written that China was also making a similar mistake and was underestimating its gross income by as much as 25%. He believed that Pakistan was under-counting its GDP by the same order of magnitude.

A 25% upward adjustment in the estimate of GDP will bring 2017 Pakistani income from $280 billion to $350 billion, improving its world ranking from 43rd to 31st. It is then likely to cross South Africa, Singapore, Malaysia and Egypt, according to Burki.

According to Burki, some of the methods that Pakistan was using and the surveys that collected required data were seriously outdated. Pakistan was also not correctly estimating the size of its modern services – in particular information, communications, entertainment, travel and advanced commerce. All these sectors contribute much more to the economy than suggested by official numbers, he wrote.

Tax target

Meanwhile, Dar on Saturday finally announced that this fiscal year’s tax target of Rs3.621 trillion has been revised downwards. “We are aiming for over Rs3.5 trillion tax collections for fiscal year 2016-17,” said Dar.

The Federal Board of Revenue (FBR) is now aiming to collect Rs3.521 trillion – a cut of Rs100 billion.

Pakistan’s economy quietly rises even as terror makes headlines

The government had to lower the target after it faced a shortfall of Rs168 billion during the first nine months (July-March) of the current year. The shortfall has further widened in April to Rs198 billion after the FBR also missed its April target by a margin of Rs30 billion. Against the monthly target of Rs290 billion, the FBR could pool Rs260 billion, according to provisional results. The monthly collection is expected to slightly go up to Rs263 billion.

The cumulative tax collection during the first ten months (July-April) increased to Rs2.55 trillion. The FBR needs to generate Rs996 billion in the remaining two months of the fiscal year, which seems like an uphill task.

Special Assistant to Prime Minister on Revenue Haroon Akhtar said that the FBR sustained Rs121 billion shortfall due to change in polices by the government after the announcement of the last budget.

Riaz Haq said...

5 Most Profitable Business Sectors in Pakistan:

https://www.researchsnipers.com/5-profitable-business-sectors-pakistan/

Pakistan business sector is growing fast, a country with 193.2 million estimated population in 2016 has shown strong growth in the past five years which is expected to grow further. A study published by Harvard indicates that Pakistan’s economic growth will surpass China’s in the next 20 years, growth statistics and current development in the country including China Pakistan Economic Corridor CPEC attracts more businesses to invest in Pakistan from across the globe. Recently, France, United Kingdom, Turkey and China has shown special interest to start bilateral trade with Pakistan and private sector companies from these countries are also leapfrogging to make considerable investments in Pakistan.



Despite, these are many sectors in Pakistan that are underdeveloped but these five sectors including; FMCG, Chemicals and Fertilizers, Automotive, Textile and Energy/Petroleum are the most growing and profitable in Pakistan.

The data acquired from Karachi Stock Exchange KSE from 2013 to 2017 indicates that top companies who performed well are from the above five sectors. The companies witnessed strong growth and profitability over the four years.

1 FMCG

FMCG is the most lucrative and huge business sector in Pakistan, companies that are consistently growing and becoming more profitable includes; Colgate Palmolive, Unilever, Nestle and Engro Foods. The market is huge and still in growing stage whereas industry has few multinational players covering the whole market.

2 Chemicals and Fertilizers

“Chemicals and fertilizers” is another big sector which caters even bigger market, companies like ICI Pakistan, Fauji Fertilizer, Engro Fertilizers and Chemicals, Abbot, Lucky Cement and some other are dominating the market with strong growth over time and profitability.

3 Automotive

The automotive industry in Pakistan forms oligopoly, global players like Toyota, Honda and Suzuki dominates the market. However, Pakistan has allowed other automakers to setup car assembly plants in Pakistan, increasing disposable income and the transport needs in the country make the market more attractive, potential and profitable.

4 Textile

Pakistan’s textile industry is popular in all over the world; however, due to lesser facilities and government support Pakistan is not able to streamline its textile growth but the textile industry accounts for 57% of the country overall exports. There are several companies in this sector including Premium Textile and Din Textile that are quite lucrative.

5 Energy/Petroleum

Where there are people there is a need for energy in all segments of life whether you are at home, traveling, working, playing and having leisure energy and petroleum products are inevitable, Pakistan’s energy and petroleum needs are growing rapidly, it is estimated that Pakistan’s energy needs will surpass 50,000 MW by 2025. Petroleum and energy sector in Pakistan is expected to grow further and become more profitable in the future.

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.

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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...

Deficient data
By Ishrat HusainDecember 24, 2021

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


The last economic census was held from April 2003 to December 2003 and published in 2005, agriculture census in 2010, and livestock census in 2006. These censuses are critical in estimating the intercensal growth rates and also updating the samples for surveys from which the sectoral estimates for agriculture, livestock, micro, small and medium enterprises are derived. The Mouza Census was conducted in 2020 but its findings are still awaited. How can we have any confidence in the reliability of the present estimates when the underlying universe has changed significantly during this period, adding new economic activities while others may have disappeared from the scene? In addition, there is no unified national data center where various databases can be integrated, and thus there is too much fragmentation and very little aggregation across the silos. .
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The ECC had taken decisions on imports and exports of wheat, and sugar based on the crop reporting system of the provincial governments and Household Income and Expenditure Survey data but both the production and consumption data kept on changing from one meeting to the other as reported in the media. If the PBS can do a fine job in rebasing, expanding coverage and providing urban and rural price indices separately of the price statistics and decision support system, it is puzzling as to why this cannot be done in the case of the National Accounts, Labour Survey, Pakistan Living Standards Measurement

The agenda on which the PBS should work in the near term is: one, announce the results of rebasing of National Accounts 2015-16 and extend the series to date keeping the old series in parallel for one year. Two, hold or complete a new economic census, agriculture census, livestock census. Three, release the results of the Census of Manufacturing Industries CMI 2015-16 immediately and the QIM reconfigured its findings. Four, publish Quarterly National Accounts and Gross Provincial Products accounts regularly. Five, redesign and carry out a labour survey data including nominal and real wages every year and its methodology, coverage and definitions brought in line with the regional countries. Six, the PSLM Survey data /HIES show a lot of gap in income and expenditure compared to National Accounts. Their design, sample size and coverage may be revisited.

Riaz Haq said...

Deficient data
By Ishrat HusainDecember 24, 2021

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


The last economic census was held from April 2003 to December 2003 and published in 2005, agriculture census in 2010, and livestock census in 2006. These censuses are critical in estimating the intercensal growth rates and also updating the samples for surveys from which the sectoral estimates for agriculture, livestock, micro, small and medium enterprises are derived. The Mouza Census was conducted in 2020 but its findings are still awaited. How can we have any confidence in the reliability of the present estimates when the underlying universe has changed significantly during this period, adding new economic activities while others may have disappeared from the scene? In addition, there is no unified national data center where various databases can be integrated, and thus there is too much fragmentation and very little aggregation across the silos. .
--------

The ECC had taken decisions on imports and exports of wheat, and sugar based on the crop reporting system of the provincial governments and Household Income and Expenditure Survey data but both the production and consumption data kept on changing from one meeting to the other as reported in the media. If the PBS can do a fine job in rebasing, expanding coverage and providing urban and rural price indices separately of the price statistics and decision support system, it is puzzling as to why this cannot be done in the case of the National Accounts, Labour Survey, Pakistan Living Standards Measurement

The agenda on which the PBS should work in the near term is: one, announce the results of rebasing of National Accounts 2015-16 and extend the series to date keeping the old series in parallel for one year. Two, hold or complete a new economic census, agriculture census, livestock census. Three, release the results of the Census of Manufacturing Industries CMI 2015-16 immediately and the QIM reconfigured its findings. Four, publish Quarterly National Accounts and Gross Provincial Products accounts regularly. Five, redesign and carry out a labour survey data including nominal and real wages every year and its methodology, coverage and definitions brought in line with the regional countries. Six, the PSLM Survey data /HIES show a lot of gap in income and expenditure compared to National Accounts. Their design, sample size and coverage may be revisited.

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.

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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...

Five Things to Know about the Informal Economy

https://www.imf.org/en/News/Articles/2021/07/28/na-072821-five-things-to-know-about-the-informal-economy


The informal economy is a global and pervasive phenomenon. Some 60 percent of the world’s population participates in the informal sector. Although mostly prevalent in emerging and developing economies, it is also an important part of advanced economies.

The informal economy consists of activities that have market value but are not formally registered.
The informal economy embraces professions as diverse as minibus drivers in Africa, the market stands in Latin America, and the hawkers found at traffic lights all over the world. In advanced economies, examples can range from gig and construction workers, through domestic workers, to registered firms that engage in informal activities.

The International Labor Organization estimates that about 2 billion workers, or over 60 percent of the world’s adult labor force, operate in the informal sector--at least part time.

The informal economy is a global phenomenon, but there is great variation within and across countries. On average, it represents 35 percent of GDP in low- and middle- income countries versus 15 percent in advanced economies.

Latin America and sub-Saharan Africa have the highest levels of informality, and Europe and East Asia are the regions with the lowest levels of informality.

The informal economy is difficult to measure.
This is because activities within it cannot be directly observed, and for the most part, participants in the informal economy do not want to be accounted for.

But it is important to try and measure the size of the informal economy because of its significance, and also because it employs some of the world’s most vulnerable people.

Informality can be measured in two different ways. The direct approach is based on surveys, voluntary replies, and other compliance methods to directly measure the number of informal workers and firms.

Indirect methods focus on certain characteristics, or proxies, that can be observed and are related to informal economic activity. Examples of proxies include electricity consumption, night-light satellite data, and cash in circulation. Using these methods, the share of the informal economy in total output can be measured.

The COVID-19 pandemic hit informal workers particularly hard, especially women.

This uneven impact of the pandemic is because the majority of informal workers are employed in contact-intensive sectors (such as domestic workers, market vendors, and taxi drivers) and in insecure jobs that do not offer paid leave or the ability to work from home.

Close to 95 million more people—many of them informal workers--are estimated to have fallen below the threshold of extreme poverty in 2020 compared with pre-pandemic projections.

Gender inequality is also increasing as millions of women who are informal workers, have been forced to stop working since the start of the pandemic. For example, women make up 80 percent of domestic workers globally, and 72 percent of them have lost their jobs as a result of the pandemic.

In sub-Saharan Africa, 41 percent of women-owned businesses closed, compared with 34 percent of those owned by men.

The informal economy is central to the economic development process.
Understanding the drivers and consequences of informality is central to sustainable and inclusive development, as informality is critically related to how fast countries grow, and to poverty and inequality, including gender inequality. Whereas some individuals and firms operate informally by choice, 85 percent of all informal workers are in precarious employment, not through choice but due to a lack of opportunities in the formal sector. This has important economic consequences.

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.