Every time a street vendor counts his day’s cash after a long day, every unregistered tailor busy stitching in a city bazaar, every builder who quietly pockets part of a contract off the books-these are the threads of what can only be described as Pakistan’s invisible giant. It is an economy that evades measurement, dodges taxation, props up livelihoods, and simultaneously starves the state. No wonder this giant is invisible: the tools to measure it are crude, the political will to confront it is weak, and the policy prescriptions are half-hearted. Yet its footprint is enormous. Conservative estimates place Pakistan’s informal economy at 30 to 40 per cent of GDP. Using the MIMIC estimation method, it was around 34.6 per cent in 2020, while newer estimates place it closer to 33 per cent. Some trade and SME estimates even go beyond 40 per cent. If this giant were partially documented and taxed, Pakistan’s fiscal space could be transformed. But to understand how to confront it, one must first understand its roots, its spread, and why successive governments have allowed it to grow unchecked.
The origins of Pakistan’s informal economy are as old as the state itself. After Partition, the country inherited a largely agrarian structure with weak urban planning, fragmented markets, and a deep reliance on cash transactions. The early decades of state-building were consumed by political instability and security concerns, leaving little bandwidth to build robust tax and documentation systems. Agriculture remained largely outside the tax net, informal trade networks flourished, and over time, informal systems became the default rather than the exception.
Why has the state failed to confront it? Because informality is not simply an economic phenomenon-it is a political bargain.
By the 1980s and 1990s, this informality took on new dimensions. Urbanisation accelerated, but without parallel institutional development. The Afghan war economy and remittance inflows further expanded parallel markets. Entire sectors-transport, real estate, small manufacturing, wholesale trade-became dominated by cash-based, undocumented transactions. Political patronage networks, especially those tied to the trader class and landholders, resisted attempts to broaden the tax base. Instead of modernising the fiscal state, Pakistan settled into a pattern of indirect taxation, import duties, and negotiated exemptions for politically powerful groups.
Today, Pakistan’s informal economy is a layered and complex system that touches nearly every sector. In agriculture, vast tracts of land remain outside any effective documentation. Agricultural income is constitutionally a provincial matter, but provinces have shown little appetite to tax it. Informal tenancy arrangements, cash crop trading through middlemen, and undocumented supply chains ensure that the state collects next to nothing from one of the country’s largest sectors.
In retail and wholesale trade-the beating heart of informality-things are even starker. This sector accounts for roughly 18 per cent of GDP but contributes a negligible portion to tax revenues. Small traders rarely register for sales tax, and even many large ones under-report. Attempts by the Federal Board of Revenue to document traders through simple schemes have repeatedly failed. The 2022 documentation drive was rolled back after street protests and political pressure from powerful trader lobbies. The trader class is deeply embedded in the political economy, with influence in parliament, bureaucracy, and street politics.
Real estate is another story of deliberate under-declaration. For decades, property values have been assessed through DC rates far below market rates, allowing investors to park undocumented wealth. Even after FBR valuation tables were introduced, enforcement remained weak. Construction contracts are frequently executed in cash, and land transfers often involve partial off-the-record payments. The result is a sector that absorbs enormous amounts of capital without proportionate tax contribution, distorting investment patterns and fueling speculative bubbles.
The transport and construction sectors are similarly entrenched in informality. Trucking, freight, and passenger transport operate through cash networks, often avoiding formal registration. Small contractors in construction under-invoice, use informal labour, and avoid withholding requirements. The service sector has exploded with the rise of the gig economy-riders, freelancers, home-based workers-most of which remain outside any formal reporting or taxation framework.
The fiscal impact of this invisible giant is staggering. Pakistan’s tax-to-GDP ratio remains stuck between 9 and 10 per cent-among the lowest in the region. The FBR itself estimates the tax gap at between 7 and 9 trillion rupees annually. A large portion of this gap comes from informal activity that either escapes the net entirely or is drastically underreported. This narrow tax base forces the state to rely on indirect taxes, which are regressive and distortive, burdening the formal economy and consumers rather than those operating informally.
Measurement is itself contested. Different methods yield different estimates. The currency demand approach looks at excess cash in circulation relative to GDP, assuming that high cash use signals informal transactions. The MIMIC (Multiple Indicators Multiple Causes) model uses statistical relationships between observable variables (like electricity use, tax revenue, cash in circulation) to estimate the shadow economy. Dynamic general equilibrium (DGE) models try to simulate formal-informal interactions. Survey-based methods capture micro-level data but often under-sample the most hidden activities. Pakistan has used all of these methods at various times, and while numbers vary, the broad message is clear: the informal economy is massive, persistent, and politically protected.
Why has the state failed to confront it? Because informality is not simply an economic phenomenon-it is a political bargain. Traders, landowners, small manufacturers, real estate developers, and transporters are all significant political constituencies. Governments dependent on coalition politics or urban merchant classes have little incentive to push documentation drives that may trigger backlash. Bureaucratic capacity is weak, enforcement is inconsistent, and tax policy is often riddled with exemptions. The result is a status quo where informality is tolerated, even incentivised, while formal businesses carry the compliance burden.
The consequences go beyond revenue. An economy split between a small formal sector and a vast informal one creates unfair competition. Formal firms face compliance costs, labour regulations, and tax obligations that informal competitors ignore. This discourages investment, undermines productivity, and keeps the economy trapped in low-equilibrium growth. Informal labour is cheap but unprotected-no pensions, no health insurance, no legal recourse. Environmental regulations are bypassed. Urban planning is distorted by informal settlements and unrecorded commercial activity. In short, the invisible giant undermines both fiscal capacity and economic modernisation.
Other countries have faced similar challenges and managed gradual transitions. Turkey introduced simplified tax regimes for small enterprises alongside digital invoicing and VAT reforms, slowly integrating informal actors without sudden shocks. Indonesia combined a tax amnesty with robust enforcement against large evaders, bringing billions into the net. Brazil built municipal-level tax systems for micro businesses with minimal compliance costs, giving them incentives to formalise in exchange for access to credit and services.
Pakistan has tried piecemeal measures-amnesties, documentation schemes, presumptive taxes-but they have largely failed because they lacked sequencing, consistency, and trust. Amnesties rewarded evasion without follow-up enforcement. Documentation drives were politically reversed. Presumptive taxes became permanent loopholes rather than transitional tools. What Pakistan needs is a clear, multi-year roadmap that blends incentives with credible enforcement.
Digitisation offers the strongest lever. Linking payment systems, utility bills, mobile wallets, and bank transactions can gradually map undocumented flows. Simplifying registration and tax filing for micro enterprises can reduce fear and friction. Trader schemes must be co-designed with chambers and associations, shifting the relationship from adversarial to cooperative. Municipal licensing and property registration reforms can close loopholes in retail and real estate. VAT reform, with automated refunds and invoice matching, can bring supply chains into the net without punishing honest actors.
Equally important is political will. Any government serious about reform must be willing to confront entrenched interests and build administrative capacity. This means investing in data systems, depoliticising the tax machinery, and sustaining reforms beyond electoral cycles. The invisible giant cannot be tamed through one-off campaigns; it requires patient state-building, credible enforcement, and a new social contract where citizens see value in compliance.a
The stakes are high. As Pakistan negotiates with the IMF, struggles with debt repayments, and seeks to attract investment, it cannot afford to ignore the informal economy. Expanding the tax base is not just an IMF condition-it is a prerequisite for fiscal sovereignty and economic resilience. Bringing even a portion of the shadow economy into the light could unlock trillions in revenue, fund development priorities, reduce distortions, and level the playing field for businesses. The invisible giant has thrived in the shadows for decades because it suits too many powerful players. But the cost of this complacency is now unaffordable. If Pakistan wants to break free of perpetual fiscal crises and low growth traps, it must bring this giant into the fold-not through slogans and half-measures, but through deliberate, sustained, and politically courageous reform.
The writer is a financial expert and can be reached at jawadsaleem.1982@ gmail.com. He tweets @JawadSaleem1982