Pakistan is confronting a deeply troubling economic reality that receives far less attention than fiscal deficits, IMF programmes, or exchange-rate volatility. The real structural crisis lies in the extraordinary imbalance between the documented and undocumented segments of the economy. At present, Pakistan’s documented economy is estimated at around 400 billion dollars, while the undocumented economy is believed to exceed 1,000 billion dollars, making it roughly two and a half times larger than the formal economy. Various national and international studies estimate that 35 to 60 percent of Pakistan’s total economic activity operates outside the formal system, placing Pakistan among the most undocumented economies in the region. Research indicates that over 70 percent of non-agricultural workers are employed informally, particularly in wholesale, retail, transport, and services. While this sector absorbs labor, it remains largely invisible to tax authorities, regulators, and policymakers, severely limiting the effectiveness of economic planning.

The undocumented economy has a direct and damaging impact on Pakistan’s export performance. Exporters operating within the documented economy bear the full burden of taxation, energy costs, banking regulations, and compliance with international standards. These costs significantly raise their price base. In contrast, undocumented operators evade taxes and regulations through misdeclaration and informal trade channels, distorting prices and undercutting compliant exporters. Estimates of illicit trade and misinvoicing running into tens of billions of dollars annually erode Pakistan’s export competitiveness, discourage value addition, and confine exports to low-value segments.

The persistence and expansion of the undocumented economy also point directly to the chronic institutional failure of the Federal Board of Revenue (FBR). Despite repeated reform agendas over the past two decades—including digitisation, track-and-trace systems, POS integration, and data analytics—the FBR has failed to expand the tax base meaningfully or reduce informality. Enforcement has largely targeted the already-documented sector, leaving wholesale, retail, real estate, agriculture-linked trade, and informal services largely untaxed. This selective approach penalises compliance, incentivises informality, and allows the shadow economy to flourish.

On the trade and customs side, the FBR’s performance has also been inadequate. Despite access to international price databases and digital customs platforms, under-invoicing, misdeclaration, and smuggling continue at large scale.

Gaps in coordination among banks, customs, and tax authorities mean that transactions often appear compliant on paper—letters of credit (LCs) are opened with taxes and duties paid—yet there is no verifiable money trail for foreign-exchange settlements to exporters. Reports suggest that such undocumented trade and foreign-exchange practices may involve nearly one billion dollars per month, highlighting massive systemic leakage.

Equally troubling is the absence of incentive-based compliance. Complex tax laws, discretionary powers, frequent policy changes, and fear of harassment discourage voluntary registration. Public trust in the FBR remains weak, further encouraging informality. Without decisive institutional accountability, technological reforms alone cannot succeed.

The dominance of undocumented activity also undermines Pakistan’s credibility in international trade. Global markets demand transparency, traceability, and financial compliance. Persistent gaps in documentation, regulatory enforcement, and foreign-exchange tracking weaken investor confidence, raise transaction costs, and reduce Pakistan’s ability to compete globally. Illicit trade and under-invoicing also drain foreign-exchange reserves, exacerbate the trade deficit, and put continuous pressure on the rupee.

In the final analysis, Pakistan’s economic challenge is not merely about growth rates, exchange-rate stability, or external financing; it is fundamentally about governance, enforcement, and institutional credibility. As long as a 400 billion dollar documented economy is forced to carry the fiscal and regulatory burden of an undocumented economy exceeding 1,000 billion dollars, sustainable exports and credible international trade will remain unattainable.

Formalising the economy is therefore no longer a policy option but a national economic necessity. It requires a decisive shift toward institutional accountability, incentive-based documentation, simplified and predictable taxation, end-to-end digital tracking of trade payments, and strict enforcement against misinvoicing, smuggling, and undocumented foreign-exchange flows. Without confronting the structural failures of the FBR and other regulatory authorities, Pakistan will remain trapped in weak export growth, recurring balance-of-payments crises, and persistent investor distrust.

Conversely, even partial success in documenting these flows would expand the tax base, strengthen export competitiveness, restore trade credibility, stabilise the currency, and allow Pakistan to transition from perpetual crisis management toward sustainable, export-led economic growth.

Dr Alamdar Hussain Malik
Advisor,Veterinary Sciences
University of Veterinary and Animal Sciences, Swat
Former Financial Adviser,Finance Division
Government of Pakistan