Economy bleeds $23b annually

On black market currency trade, oil and gold smuggling, import controls

LAHORE:

Illicit activities such as the black market and smuggling of United States Dollars (USD) in key sectors are draining Pakistan’s economy of a staggering $23 billion per year, according to a report by ACE Money Transfer, a UK-based company.

These clandestine operations, encompassing black market currency trade, oil smuggling, gold smuggling, and import controls, have detrimental effects on Pakistan’s economic stability. They distort exchange rates, leading to currency devaluation, which, in turn, can fuel inflation as imported goods become costlier. Moreover, such activities undermine the efficacy of monetary policies and erode confidence in the financial system.

“This not only leads to a loss of government revenue but also fuels a shadow economy, making it harder to track and regulate economic activities,” the report highlighted.

In recent years, Pakistan has experienced significant fluctuations in its exchange rates, intensifying its economic challenges. A robust crackdown on these illicit activities has somewhat stabilised the interbank rate at Rs282.62 per dollar. Experts underscore that a steadfast commitment to eradicating smuggling in key sectors is essential for Pakistan’s economic recovery.

“The most important part is governance, if governance is improved, it will lead to an overall improvement in financial and economic environment and bring stability to our financial markets and help economic and financial growth of the country,” said ACE group of companies, Chief Executive Officer Rashid Ashraf.

Speaking to the Express Tribune, Ashraf stressed the need for advanced surveillance techniques and technologies to secure Pakistan’s physical borders and crossing points.

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“We have a long border sharing with Iran and Afghanistan and then sea border with gulf countries. The smuggling of physical dollars and oil must be effectively controlled to prevent the outflow of foreign currencies,” Ashraf asserted.

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

Similarly, the report suggested that smuggled Iranian oil now commands a significant share estimated at over 30% of Pakistan’s diesel market. Around 10 million litres of diesel and two million litres of petrol are smuggled every day into Pakistan from Iran. This smuggled diesel eventually cost government over $1 billion annually.

Gold smuggling poses another challenge. The report revealed that, out of the significant gold market value of Rs2.2 trillion ($7.1 billion), only 1.32% or Rs29 billion ($94.5 million) is officially declared to tax authorities. This stark underreporting results from an annual smuggling of approximately 80 tonnes of gold into the country out of the total annual consumption of 160 tonnes. With regularisation, this market could contribute a minimum of $500 million annually to government revenues.

The report also highlighted the unintended consequences of import bans, despite their well-intentioned implementation. These bans have given rise to a shadow economy, with smuggling, misreporting, and product substitution becoming common methods to bypass import restrictions. This has disrupted economic activity on a large scale and has the potential to increase unemployment figures significantly, with projections exceeding 2 million people by the end of 2023.

Ashraf also drew attention to another critical issue where payments for imports to Pakistan are made from the UAE. UAE-based companies facilitate payments from the UAE to other countries, such as China, on behalf of Pakistani companies and importers. He highlighted the need for the Pakistani government and the State Bank of Pakistan (SBP) to collaborate with their UAE counterparts to control this practice. Ashraf explained that if these payments were made within Pakistan’s borders, they would contribute to the country’s foreign reserves.

“Any imports should only be financed from within the borders of Pakistan,” he suggested.

Published in The Express Tribune, October 7^th, 2023.

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