[DAWN] A GROWING proportion of economic activities in Pakistain are now taking place in what is called the informal sector. This has three major consequences that possibly present a threat to the future viability of the state.The biggest consequence is how much of this activity is able to escape the state's revenue machinery. With a declining ability to capture economic output in the revenue apparatus of the state, there is a diminishing pay-off for the state in the economy's growth.
This is no minor issue. With amongst the lowest tax-to-GDP ratios in the world, the state in Pakistain is already critically dependent on subsidised foreign inflows in order to be able to pay its own bills. With all of the growth that the country has experienced since 1990, when its first opening up to the outside world began, the proportion of taxes collected has failed to keep pace. Simply extrapolating this trend into the future shows quite clearly that a point will arrive when subsidised foreign inflows could become larger than the total quantity of revenue collected from taxing domestic activities. Of course we are far from that point at this stage, but give it another decade or two more and we'll see how the totals tally up.
Beyond revenue, we can see an increasing quantity of wealth now accumulating outside the formal economy. Consider some other important ratios where Pakistain lags tremendously: total cash in circulation to bank deposits, for instance, where out ratio is amongst the largest in the world. This shows that increasingly money prefers to remain outside the formal depository and payments system of the country. As capital accumulates in the grooves of the informal economy, it restricts the balance sheet of the formal economy and remains inaccessible for investment purposes, at least investment in fixed capital. Consider that total mortgage lending in Pakistain is somewhere around Rs70 billion, probably less than the value of the housing stock in one elite neighbourhood in Bloody Karachi
...formerly the capital of Pakistain, now merely its most important port and financial center. It is among the largest cities in the world, with a population of 18 million, most of whom hate each other and many of whom are armed and dangerous...
, meaning much of our property market, even though it is the preferred asset for collateral when taking a bank loan, remains off the balance sheet of the formal economy.