The informal sector: A significant contributor to Pakistan’s economy

Writing for Dawn, author Dr. Abdul Wahid explains that the informal sector has become a significant contributor to Pakistan’s economy, adding approximately $661 billion, equivalent to 35.6% of the country’s GDP. 

According to the International Labour Organisation, this sector employs 75% of the rural workforce and 68% of the urban workforce. However, the informal sector is fraught with issues such as child and bonded labor, gender-based discrimination, and workplace insecurities.

This sector comprises small and medium enterprises (SMEs), which include self-employed entrepreneurs, small businesses, informal associations, and street vendors in agriculture and micro-enterprise setups. These businesses tend to be more resilient to economic downturns, making them an essential component of Pakistan’s economy. Despite its significant contribution to the economy, the informal sector creates financial vulnerabilities for formal businesses.

The Growth Enterprise Market (GEM) board of the Pakistan Stock Exchange (PSX) was established to provide a sub-market for SMEs and high-growth companies looking to go public. This board is similar to the Alternative Investment Market established in London by the London Stock Exchange in 1995 to provide a platform for SMEs, business startups, and incubates to raise capital and for investors to access returns from small businesses.

The GEM board in Pakistan has less stringent listing criteria and regulations compared to the main board of the PSX. However, to date, only three SMEs have made it to the GEM board, namely Pak Agro Packaging Ltd, Supernet Ltd, and Universal Network Systems.

One of the reasons for this is the low investor participation in Pakistan’s formal sector. Only 0.3 million accounts are registered with the National Clearing Company of Pakistan Limited out of around 57.5 million bank accounts, indicating less than 0.5% investor participation at the PSX forum. Moreover, the informal sector’s regulatory burden is less stringent than that of the formal sector, leading to investor participation in avenues such as real estate property pricing bubbles, higher forex trading returns, and inflationary pressure.

The Imran Khan-led government launched a construction amnesty scheme to promote housing, generate jobs, and fill the gap of millions of housing unit shortages. Since 2018, the average per square feet price has increased from Rs3,300 to 7,000, resulting in 26% returns per annum in open plots investment in Islamabad. This scheme has doubled real estate prices in other cities, such as Karachi, Lahore, Peshawar, and Faisalabad, and shifted the investment chunk toward the real estate sector, leading to industrialists shifting their attention to the real estate sector.

Similarly, the gold price has increased significantly, from Rs56,200 per tola in December 2017 to Rs 201,000 per tola, leading to more than 50% return per annum in gold investment. The exchange rate of rupees to the dollar has also increased from Rs110 to a dollar on 14 Jan 2018 to Rs278, resulting in an average of 30-35% returns per annum.

On the flip side, the KSE-100 Index provided compounded annual returns of 14.55%, and industrial profit was recorded at less than 15% per annum. The inflation rate in 2018 was 5.08%, and now it is above 30%. If the inflation-adjusted returns per annum are calculated, it can be said that the real return an investor receives in the formal market and industrial setup is negative.

Moreover, Pakistan already has one of the highest income tax rates in the world for corporations, further decreasing the wealth of formal sector investors. Consequently, since 2013, more than 200 companies have been delisted from the PSX, and only 526 companies are listed on the main board. 

In conclusion, Pakistan’s informal sector plays a crucial role in its economy, providing jobs and contributing significantly to the GDP. However, the lack of investor participation in the formal sector and stringent regulatory burden make it less attractive for SMEs and high-growth companies to list on the GEM board of the PSX. 

This has resulted in a shift of investment towards real estate, gold, and forex trading, leading to a negative impact on the formal sector and industrial setup’s real returns. The government needs to address these issues by providing incentives for investor participation in the formal sector and reducing the regulatory burden, leading to a more inclusive and sustainable economic growth path for Pakistan.

To read the full article visit www.dawn.com

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