Last week, the interim government took an important decision as part of its ongoing drive to stem rampant smuggling via Afghan transit trade: Islamabad has tightened the transit regime, banning the import of several items through its territory under it.

The prohibited items — tyres, black tea, cosmetics, vacuum flasks, home appliances, fabrics, dry fruit, etc — are largely rerouted into the Pakistan markets, mostly directly from the ports.

A 10 per cent fee on some other imports like chocolates, footwear, machinery, blankets and garments and a new condition of bank guarantees equal to the duties and taxes on the imported goods have also been imposed to ensure that the goods transported under the Afghan Transit Trade Agreement (ATTA) reach their final destination. These guarantees can be encashed in case the imported goods do not reach Kabul.

But cross-border illegal trade isn’t the only threat to the economy and manufacturing industry. The under-invoicing of imports from the country’s airports and seaports under the guise of legal trade is another major area which is inflicting huge losses to manufacturing.

The Pakistan Business Council (PBC) last week quoted the International Trade Centre (ITC) to underline that there was a $7.5 billion disparity between the export value declared by four countries — China, Singapore, Germany and the UK — to Pakistan and the corresponding import values reported by the Pakistan Customs in 2022.

The total value of smuggle-prone food items is $9bn, equal to nearly 3pc of GDP

The PBC has estimated a tax revenue loss to the government of between Rs579bn and Rs964bn at the average exchange rate due to under-declaration of the value of imports from these countries.

Likewise, some money transfer firms believe that importing under-invoiced goods, especially high-end items like branded watches, designer purses, and expensive perfumes, from Dubai and other Gulf countries is even greater than from these four countries. The value of the under-invoiced imports from the Gulf nations cannot be estimated in exact terms because these countries don’t share trade data with ITC.

How smuggling and grey trade affect investments in the local manufacturing industry and the government revenues can also be gauged from its impact on the packaged food industry. A research report by the Lahore Chamber of Commerce & Industry (LCCI) shows that Pakistan is losing $2.63bn a year due to food smuggling and grey imports.

The total value of smuggle-prone food items is $9bn, equal to nearly 3pc of GDP. In 2019, the then trade minister Abdul Razzak Dawood took bold actions to contain illegal food trade through grey channels despite strong resistance from large importers and powerful retailers involved in food trafficking.

The trade ministry issued an order through SRO-237, requiring imported packaged food products to have 66pc shelf life at the time of import, ingredients mentioned in both English and Urdu and have halal certification from prescribed accredited authorities along with the logo and labelling in a specified format.

It also disallowed the use of stickers to mention these details to ensure that the imported products are quality standard compliant and brought in through legal channels.

Implementing the order immediately resulted in reduced grey imports of packaged food products and instated incentives for the manufacturers to produce and market their local substitutes, fully compliant with the local regulatory requirements and health safety standards.

Many small food manufacturers, including home businesses, found a business opportunity for them, and new, small local food brands hit the shelves of supermarkets and departmental stores, selling at a much cheaper rate than the smuggled products. Foreign food manufacturers also introduced their brands to test the market by legally importing their products from their facilities in other countries, compliant with the ministry’s order and requirements.

However, PBC chief executive officer Ehsan Malik says the incentives created by the 2019 order are almost rendered ineffective now because of the influx of smuggled and under-invoiced food products, which undercut the price of their local competitors as well as legally imported items, due to increase in illegal and grey trade in the last one year.

“The commerce ministry’s order was one of the excellent decisions made by the then government. But Pakistan’s porous borders, unhindered import channels and lax implementation of the food import conditions have again increased the inflow of non-compliant products into local markets, resulting in declining volumes and higher costs of compliance for domestic food companies, and is eventually causing massive tax loss to the government.”

A food company executive says the grey food trade — like any other smuggled product — is a scourge for the local manufacturers and multinationals, as well as legal imports since it imposes heavy compliance costs and unfair competition on legitimate businesses.

“Besides the significant negative impact on the government’s tax revenues, it also is responsible for loss of remittances because the foreign exchange for settlement of payments for illegal trade is either arranged in Dubai or flown out of the country, through the illegitimate hundi/hawala network. Under-invoicing or under-declaration of the value of the imports is not possible without payment of the difference in the actual and declared values through illegal hundi/hawala system.”

“The health safety concerns should be enough for a strong crackdown to protect the consumers besides plugging revenue losses to the government and save the documented industry from imminent closure,” former LCCI president Abdul Basit, who is into value-added packaged food business, argues.

He is of the view that the elimination and reduction of the grey food trade will reinstate market development incentives for both local and foreign firms facing existential challenges from the influx of non-compliant products.

Mr Basit insists that violation of food regulations, discrepancies in labelling, questionable halal certifications, lack of traceability and the risks associated with products transported through unsuitable, unhygienic supply chains pose a serious health hazard to consumers.

“There is also no way of making sure that the smuggled and under-invoiced products are not expired since these are bought in bulk in sale abroad.”

Mr Malik says a clampdown on grey channel trade, tighter border controls and enforcement of the ministry’s order is crucial for food safety concerns and stop revenue and massive foreign exchange leakages. “This becomes even more important in case of illegal food trade to restrict the influx of potentially unsafe food products.”

The businesses are all for the ongoing anti-smuggling drive, but they think it cannot be fully controlled only by strengthening controls along the borders with Afghanistan and Iran. Nor any single agency can handle it successfully on a sustained basis.

“All stakeholders — the Federal Board of Revenue, Customs, port authorities, provincial food authorities, the Pakistan Standards & Quality Control Authority, provincial law enforcement agencies, etc — must work hand in hand to get rid of this menace.

In the case of packaged food, and to enforce the imported food safety conditions, the role of the provincial food authorities and law enforcement agencies becomes even more crucial. There also is a need for better coordination between federal and provincial authorities, law enforcement agencies, and other relevant institutions to deter retailers from stocking and selling smuggled products.

“Federal and provincial agencies should evolve a mechanism for close coordination to curb parallel trade. A sustained successful drive against illegal trade not only requires stringent border/port controls but also stern measures to discourage sale of such items and products by the retailers. This is important because you cannot completely seal borders and ports,” Mr Basit concludes.

Published in Dawn, The Business and Finance Weekly, October 9th, 2023