By Kazim Alam, The Express Tribune
KARACHI: A passing comparison of the key indicators of financial inclusion in Pakistan with those in other regional countries is enough to suggest that the sixth most populous country of the world has a burgeoning shadow economy, undocumented commercial activity that may be legal but hidden deliberately from tax officials.
According to the International Monetary Fund (IMF), the number of deposit accounts with commercial banks per 1,000 adults in Pakistan is 282.6. The comparable figure for India is 953. No wonder then that a large number of cash-based transactions led to the dismally low tax-to-gross domestic product (GDP) ratio of 9.3% in 2011, lowest in the region, according to the World Bank.
Based on data from Asian Development Bank and Federal Board of Revenue, and Tax Justice Revenue, Bloomberg Businessweek estimates that the size of Pakistan’s shadow economy is 36% – or roughly $76 billion – of its 2011 GDP.
“Contrary to what international financial institutions suggest in their studies, I believe the extent of financial inclusion in Pakistan is quite high, at least in urban areas,” said Shabbar Zaidi, who serves as partner at AF Ferguson and Company, a leading auditing firm associated with PricewaterhouseCoopers, a global name in consulting services.
“There are between 20 and 30 million bank accounts in Pakistan, but the number of income tax-paying people is about two million only. That means we have a problem of fiscal inclusion, not financial inclusion, as a significant number of Pakistani households already maintain at least one bank account,” Zaidi added.
According to the World Bank’s Financial Inclusion Database 2012, only 10.3% Pakistanis aged 15 years or more have an account at a formal financial institution compared to the global average of 50.5%. The comparable figure for all South Asian economies – Afghanistan, Bangladesh, India, Nepal and Sri Lanka – is 33%.
As for Pakistan’s female population aged 15 years or more, only 3% of them maintain an account at a formal financial institution as opposed to all South Asian economies where the figure stands at a much higher 25%.
Zaidi says the easiest way to curtail the size of the undocumented economy is by turning national identity card numbers into national tax numbers. Moreover, the government should make it mandatory for everyone to file annual tax returns without any exemption, he adds.
“Before anything else, we need to bring those 20 to 30 million bank account holders into the tax net, which will significantly enhance the level of documentation in the economy,” he said.
Analysts believe that the composition of Pakistan’s GDP is such that the documentation of wealth is easy to avoid, especially in sectors that remain largely untaxed. For example, the agriculture sector employs 45% of Pakistan’s total workforce with a 23% share in the GDP, and yet its contribution to tax revenues is roughly 1%. Same is the case with retail, transportation and services sectors that includes lawyers and doctors who, according to Zaidi, grossly understate their wealth and contribute to the shadow economy.
Published in The Express Tribune, May 20, 2013.