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The underground economy as a percentage of GDP increased from 20 per cent to 51 per cent

By Syed M. Aslam
Jan 03 - 16, 2000

When the first paper money was issued by the Chinese in 1024 and the Swedes followed suit in 1661 it only has one colour— the colour of easy transaction minus the problems associated with barter. Today, black money has become a much used terminology to depict money made through unscrupulous means.

In a country like Pakistan which is reportedly have a huge informal economy, the black money is blamed for many social and monetary ills. It is linked to the massive drug trade, smuggling menace and rampant tax evasion to erode the basis of an already fragile monetary situation.

It was in this backdrop that the Chief Executive, General Pervez Musharraf offered ‘a one-time opportunity to whiten the black money by paying a 10 per cent tax till March 31, 2000.

The relevant question that arises is: Just how much black money is in circulation in Pakistan? While in a vastly undocumented economy like Pakistan the exact amount of black money could not be traced, no two persons seems to agree on a single figure, the Pakistan Institute of Development Economics put it at Rs 1115 billion or almost the GDP of the country. This indeed is a huge amount when one realises that the total revenue collected annually hardly surpass Rs 300 billion figure.

Call it what you may— black money, shadow, parallel or underground economy— the black economy is said to be growing at a much higher rate than the 3-6 per cent growth of the formal economy in last many years.

According to PIDE report a large number of economic activities in Pakistan fall outside the reporting system and are beyond the reach of the tax net. Some of these activities are illegal, such as smuggling, narcotics and corruption while others though legitimate remain unreported to the tax authorities.

Together this group constitutes the informal, black or underground economy which apart from causing large fiscal losses to the government also distorts the incentive structure and the growth of the economic system.

Talking to PAGE, secretary general of the Overseas Investors Chamber of Commerce and Industry (OICCI) said that it was not the first time a money whitening amnesty has been offered by the government. He said that successive governments had offered money whitening schemes before but the problem still much remains unsolved. In fact, the time-and-again amnesty have resulted in achieving exactly the opposite results as they have made the holders of black money to believe that they have much to gain and nothing to loose by neglecting the offer.

He said that the amount of black money has multiplied by 75-fold from Rs 15 billion to Rs Rs 1115 billion at present primarily due to an immense increase in narcotics trade, corruption, tax evasion and smuggling.

He said that the issuance of bearer instruments such as Foreign Exchange Bearer Certificates, NIT Bearer Certificates, Foreign Exchange Bearer Certificates, Foreign Currency Bearer Cerificates and the most of all Prize Bonds have offered a safe haven to invest the black money. How the money shifted out of the country could ever be brought back, he asked.

Appreciating the measures by the government to abolish the foreign currency bearer schemes— the government has stopped the reissuance of the FEBC— he said that unless a similar action is taken on the Rupee bearer schemes, particularly the Prize Bond, little is expected to discourage the development and flourishing of the black economy in the country.

The PIDE report said that as these bearer instruments are exempt from tax obligations and reporting requirements and while they have helped mobilise resources for the government, the possibility of wealth remaining outside the purview of easily detectable forms of wealth has been made easy by the existence of these instruments.

In addition, the report added, that despite a number of attempts to expand the documentation network to cover the legitimate unreported business activity, to date no breakthrough has been made in Pakistan to arrest the rate of growth of the underground economy.

Summarising the main conclusions about the existence of large underground economy and higher tax evasion in Pakistan during 1973 to 1996 the underground economy as a percentage of GDP increased from 20 per cent in 1973 to 51 per cent in 1996.

The paper also said that the cost of the mushrooimg underground economy must be immense: The loss of tax revenues and the demand on public services by underground activities should be an important contributing factor for the high fiscal deficit. The high and uncertain cost of doing business, when the element of discretion exercisable by the public officials is pervasive, should be an important constraint for the private sector-led development strategy, it added.