Ayesha Saba

Pakistan's sustainable economic growth is tied to reforming its informal economy and boosting exports as experts highlight these challenges hinder efficiency, reduce government revenues and restrict global competitiveness.

Speaking to WealthPK, Aliya Imran, economic policy analyst and gender specialist at UNDP, highlighted that the informal sector constitutes over 35% of Pakistan’s GDP and employs a significant portion of the workforce. “While this sector provides livelihoods to millions, its unregulated nature results in low productivity, tax evasion and labour rights violations.” She noted: “The informal economy operates outside the formal legal framework, which means the government misses out on substantial tax revenues.”

Aliya suggested formalising this sector by offering incentives such as simplified tax structures and access to credit. “These measures could encourage small businesses to register with the government, leading to a broader tax base and improved economic stability.” “Reforming the informal sector is closely linked to boosting exports, as many small and medium enterprises that dominate this space have untapped export potential,” she said.

She emphasised the importance of integrating these businesses into the global market. “SMEs are often unable to meet international quality and certification standards, which limits their ability to participate in global supply chains,” she noted. “Providing training, technological support and access to affordable financing can equip these businesses to meet export requirements, thereby enhancing their competitiveness.” Aliya also underlined the urgent need for export diversification.

“Pakistan’s reliance on low-value textile products has left its economy vulnerable to external shocks and price fluctuations.” The UNDP economic policy analyst suggested shifting focus towards high-value sectors such as IT services, engineering goods and agro-based products. “Countries that have successfully diversified their exports have shown greater resilience and sustained growth,” she explained. Meanwhile, Umar Khayam, Assistant Chief, Commerce Section, Ministry of Planning, Production and Special Initiatives, said: “The informal economy thrives on evading taxes and bypassing regulatory compliance.”

He underscored that while informal businesses offer flexibility and adaptability, their contributions to national revenue are negligible. “This creates a dual challenge for the government: limited resources for development and a skewed competitive environment that puts tax-compliant businesses at a disadvantage.” According to Khayam, formalising the informal sector could unlock billions in tax revenues, providing a much-needed boost to Pakistan’s strained fiscal system. “One of the major impediments to formalisation is the complexity of the country’s tax structure.

SMEs, which dominate the informal economy, often lack the capacity to navigate the intricate web of tax regulations,” he pointed out. The planning ministry official advocated for simplifying tax processes and introducing a single-window system for registration and compliance. “Reducing bureaucratic hurdles and ensuring transparency in the system would encourage more businesses to enter the formal sector,” he suggested.

Credit: INP-WealthPk