Pakistan's Actual GDP Estimated at $401 Billion in 2012

[Riaz Haq]

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

[Riaz Haq]

The size of the informal economy in Pakistan is much larger.

https://www.southasiainvestor.com/2021/12/has-bangladesh-really-lef...


Pakistan's service sector which contributes more than 50% of the country's GDP is mostly cash-based and least documented. Compared to Bangladesh and India, there is a lot more currency in circulation as a percentage of overall money supply in Pakistan. According to the State Bank of Pakistan (SBP), the currency in circulation has increased to Rs. 7.4 trillion by the end of the financial year 2020-21, up from Rs 6.7 trillion in the last financial year, a double-digit growth of 10.4% year-on-year. Currency in circulation (CIC), as percent of M2 money supply and currency-to-deposit ratio, has been increasing over the last few years. The CIC/M2 ratio is now close to 30%, according to the State Bank of Pakistan. The average CIC/M2 ratio in FY18-21 was measured at 28%, up from 22% in FY10-15. This 1.2 trillion rupee increase could have generated undocumented GDP of Rs 3.1 trillion at the historic velocity of 2.6, according to a report in The Business Recorder. In comparison to Bangladesh (CIC/M2 at 13%), Pakistan’s cash economy is double the size. Even a casual observer can see that the living standards in Pakistan are higher than those in Bangladesh and India.

[Riaz Haq]

Five Things to Know about the Informal Economy

https://www.imf.org/en/News/Articles/2021/07/28/na-072821-five-thin...


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]

Pakistan Economic Survey 2021-22

Chapter 5: Money and Credit


https://www.finance.gov.pk/survey/chapter_22/PES05-MONEY&CREDIT...


Currency in Circulation (CiC)
During the period 01stJuly-29th April, FY2022 CiC witnessed an expansion of Rs 991.7
billion (growth of 14.4 percent) as compared to expansion of Rs 673.0 billion (growth of
11.0 percent) during same period last year. Currency-to-M2 ratio reached 30.7 as on
29thApril, 2022 against 30.2 percent during same period last year. Significant growth in
CiC has been observed particularly in the month of April, 2022 on account of cash
demand during Ramzan and Eid Festive.

[Riaz Haq]

Although Pakistani startups posted a 36% decline in third quarter (July-September) of calendar year 2022 compared to the previous quarter, the financial technology (fintech) showed rising graph during the same period.

https://www.nation.com.pk/10-Nov-2022/unbanked-population-helping-p...

According to the data of Invest2Innovate (i2i), a startups consultancy firm, six out of the 14 deals that took place in Q3 2022 were fintech startups, compared to two deals of e-commerce startups. Fintech startups raised $38 million which is 58% of total funding ($65 million) in Q3 2022, compared to e-commerce startups that raised 19% of total funding. The i2i data shows that in Q3 2022, fintech raised 37.1% higher than what it raised in Q2 2022 ($27.7 million). Similarly, in Q2 2022, the total investment of fintech was 63% higher compared to what it raised in Q1 2022 ($17 million).

Sumbal Qureshi, a fintech consultant, told WealthPK that political situation has an impact on the economic situation of the country due to which a lot of foreign fintech companies have held back their initiatives. This situation is also a challenge for local fintech firms. The unusual growth is just because the existing fintechs and more established companies are trying to survive at the moment. They are trying to overcome the situation by continuing to invest in the fintech sector.

Imran Jattala, a well-known IT expert, told WealthPK that 5% of the world’s unbanked population lives in Pakistan. About 18,000 people are crossing the age of 18 every day in Pakistan, and unbanked population and those under 18 use fintech for their financial affairs. So fintech and digital banking is going to thrive despite a decrease in startup funding.

According to data of Pakistan Telecommunication Authority (PTA), over the years, branchless/mobile banking has shown tremendous growth based on the telco-banks-fintech nexus, contributing significantly to financial inclusion. The m-banking network has expanded to over 534,460 m-banking agents and 74.6 million m-wallet accounts. This network enabled more than 2.2 billion annual transactions worth over Rs8 trillion in 2021. Despite these developments, cash still dominates economic activities and there is scant use of electronic payments, especially by micro and small retailers. Cash is the predominant payment method in Pakistan as it is considered ‘safe’ by the majority of retailers and suppliers. Many wages and salaries are also paid through cash.

The importance and usage of electronic banking and alternative delivery channels has increased during the post-Covid-19 period. Realising this, the State Bank of Pakistan further incentivised the use of digital financial channels by instructing banks to waive all inter-bank and intra-bank charges on digital transactions. This resulted in a substantial annual increase of 206% in inter-bank transfers and 122% in intra-bank transfers through internet banking. For mobile banking, the impact was even higher, with a three-fold increase in mobile banking inter-bank transfers from Rs765 billion in FY 2020 to Rs2.346 trillion in FY 2021.

[Riaz Haq]

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.