The Economics of Smuggling

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Dr Hasnain Javed

The unfortunate political discourse has taken the spotlight away from many real issues facing Pakistan. I tweeted a few days ago, “Economics demands stability.” Without the presence of micro and macroeconomic stabilizers, a country cannot achieve economic growth. Yes, political stability is crucial to economic growth, but have we given any thought to the leakages in our economic cycle, especially “smuggling?”
Smuggling may not be too big of a problem, but it reflects core issues with society in its social, moral and economic construct. Many economists and social analysts agree that smuggling destabilizes an economy by overtaking a functioning economy, promoting crime, damaging domestic industry and resulting in financial losses to the country in the shape of tax evasion and revenue loss. According to the World Economic Forum, “economic leakages from illicit trade create an annual drain on the global economy of $2.2 trillion – nearly three per cent of the world’s economy.” To put it in clearer context, if this was a country, its economy would be greater than Brazil, Italy and Canada or as large as Mexico and Indonesia combined.
Now, returning our focus to the plague of smuggling in Pakistan reflects a horrendous financial image. In recent reports by the Research and Development Department of the Lahore Chamber of Commerce and Industry, the financial leakage from smuggling is causing Pakistan an annual loss of over US$2.6 billion. The accumulated value of ten items accounts for more than US$ 9 billion which is equivalent to around three per cent of Pakistan’s GDP. A breakup of these smuggled items reveals that in FY2022 Mobile phones worth US$, 1100 million, diesel US$874 m, plastic US$222 m, auto parts US$184 m, vehicles US$175 m, tyres US$118m, steel sheets US$112, tea US$77m, Cigarettes US$27m, television US$9m, garments US$2.5m contribute to this mountainous amount.
On the other side of the spectrum are the continuous reports on diesel smuggling into Pakistan from Iran. Official estimates from Pakistan Petroleum Diesel Association (PPDA) believe that the usage of Iranian fuel has increased by a staggering 35 per cent, causing a decrease of 40 per cent in sales. The Ministry of Energy reporting on OGRA’s numbers on the usage of smuggled fuel estimates that the monthly loss is around Rs.10.2 billion. The larger impact of the fuel smuggling has forced Attock Refinery Limited to operate at a twenty per cent capacity. Like the fuel menace, is steel smuggling that estimating to cause losses of around 25 billion rupees per annum. The smuggling of urea, sugar, fertilizer and wheat flour has deeply affected Pakistan’s domestic market as well.
In a nutshell, the smuggling crisis only highlights the informal economy in Pakistan, which, according to some experts, is worth a staggering US$150 billion, which is more than 50 per cent of the size of the original economy. While associations and officials continue to appeal for harsher measures and stringent rules; the leadership cannot continue to ignore the challenge and the financial losses Pakistan’s economy is suffering from.
The first and foremost step is to improve border security with the use of technology, better security protocols and the elimination of corrupt elements that continue to compromise against the country’s national interests. Secondly, Pakistan needs to formally engage the governments of Afghanistan and Iran in a discussion to curb the menace of smuggling which is equally detrimental to their economies we well. Even though dialogues have taken place in the past there has not been an effective outcome or resolution to the problem. The Afghan transit route is one the biggest source of smuggling goods, narcotics, and arms into Pakistan. With the imminent threat from TTP on the rise, our deteriorating financial health, and domestic instability, Pakistan must on an urgent basis resort to diplomacy with its neighbouring countries if we are to mend our economy. Thirdly, sniff out the corrupt actors amidst the customs and border management to ensure that our national security and economy are not compromised due to the lust of a few. Also, the government on an urgent basis needs to improve resources and capability and inject more manpower into the customs and border control departments. Even though the Customs Department has formally and repeatedly made requests, it has not been made a law enforcement body. This makes it much harder for them to stop smugglers right at the border which could be more effective. Lastly, the creation of an international joint anti-smuggling organization with Afghanistan and Iran could reap greater benefits in the future. This could not only help the nations stop financial bleeding but would lead to concrete efforts towards a formal economy, improved diplomatic and bilateral cooperation and strengthen the domestic industries across borders.
These could be some of the steps that the officials can take to immediately stop the financial impact of smuggling in Pakistan. However, without serious commitments and a sound understanding of the economics of smuggling, it will be all in vain.