ISLAMABAD - The undocumented economy is one of the root causes of many financial problems being faced by Pakistan, WealthPK reported.

The fiscal and current account deficits, inflation, poverty and rising unemployment are related in one way or the other to the undocumented economy. The documentation of an economy helps policymakers and relevant authorities to identify loopholes and take remedial action.

M Ali Kemal, an economic policy adviser at the SDG Support Unit of the Ministry of Planning Development and Reforms, told WealthPK that undocumented or informal economy accounted for a significant share of the overall economy not only in developing countries but also in the developed world. “Over the past few decades, however, it has decreased in developed nations due to digitalisation process and registration of businesses,” he added.

He said that Pakistan faced many challenges both on internal and external fronts. “In a developing country like Pakistan, a large share of output comes from the informal sector. The proportion of this sector, as a share of gross domestic product, is rising at an alarming rate,” he said.

Ali Kemal said that higher tax rates and government policies, a high level of domestic unemployment and a heavy regulatory burden were the main reasons for the growth of the undocumented economy. However, he termed the lack of trust in the tax collection system in the country as one of the major reasons for not documenting the economy.

“Since these factors contribute to the economy getting larger, this reciprocates into higher tax rates set by the government on the formal economic sector, which has a negative impact on the potential of the formal sectors,” he said.

Ali Kemal said that dealing with a large bureaucracy, complying with complicated and long registration procedures and getting approval and licences from various government agencies and departments made it difficult for the economic agents to operate within a documented framework. They attempted to find an alternative, he added.

“The other dilemma in Pakistan is that government also hesitates to eradicate the labour-intensive informal sector due to the pressure of the rising unemployment because the formal economic activities are incapable to accommodate such a large number of jobless workers,” he said.

The expert said that expansion in the informal sector due to the economic crisis in the formal sector could only be controlled if the problems of the documented economy were rectified by effective monetary and fiscal strategies.

“The policymakers should formulate policies that are more effective and resolve the problems of economy in a better way,” he said.

Due to its geographic location in the continent, Pakistan enjoys close relations with its neighbour China. Friendly capital control, favourable official exchange rates and lubricating labour and capital mobility will help Pakistan to boost its economy and at the same time reduce the undocumented economy.

Pakistan should work closely with its neighbours to enhance its capacity and formulate legal channels to strengthen its economy and resolve its financial problems, according to WealthPK research.