THE informal economy, also known as shadow or undocumented economy, refers to economic activities that are not regis-

tered with the government, and are, therefore, not subject to taxation, labour laws or other regulations. This informal economy is a great threat to Pakistan’s prosperity, taxation system and economic expansion.

The government has no mechanism to keep a check on how much an individual not part of the salaried class earns. Big and small businesses avoid using proper digital payment systems. They deal in cash which is not counted in the formal economy.

The shadow economy includes academic institutions, large grocery stores, industries and small street venders, vegetables shops, restaurants, etc.

Moreover, more than 40 per cent of the people in Pakistan are believed to be engaged in the agricultural sector. This massive chunk also remains part of the undocumented economy.

When the government has no way of estimating how much people earn, all it can do is to impose more taxes on the salaried class, and opt for higher indirect taxation. Pakistan has a very fragile tax collection system, with people earning beyond imagination and then investing it in foreign countries.

We can convert this informal economy into formal economy through digital pay- ment options, like online banking and fintech applications that can facilitate every citizen as well as the government.

Besides, it is the government’s core responsibility to strengthen its institutions and restructure its business laws and tax collection system. We can counter and minimise the size of the informal economy by taking effective measures.

Rahim Ullah Wazir
Bannu

Published in Dawn, October 23th, 2024