The informal sector’s contribution to Pakistan’s economy is

remarkable as it adds a handsome volume of approximately $661

billion, tantamount to 35.6 per cent of GDP. According to the
International Labour Organisation, it constitutes 75pc and 68pc
of jobs in rural and urban areas; however, it is pregnant with
issues like child and bonded labour, gender-based
discrimination, and insecurities in the workplace.

Moreover, it embodies small and medium enterprises (SMEs) that are

populated by self-employed entrepreneurs, small businesses, informal
associations, and street vendors in agriculture and micro-enterprise setups,
and thus, they tend to be more resilient to economic downturns. Despite its
volume and contribution to the economy, the informal sector creates
financial vulnerabilities for formal setups.

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

It has become one of the world’s leading growth markets in the UK for
smaller companies, with over 3,000 listed companies from over 70
countries. Though companies listed on the GEM board in Pakistan are
subject to less stringent listing criteria and regulations as compared to the
ones listed on the main board of the PSX, to the present date, only three
SMEs made it to the GEM board, i.e. Pak Agro Packaging Ltd, Supernet Ltd
and Universal Network Systems.

Informal setups are backed by special interest groups through a complex

mix of tax laws and regulatory compliances for the formal sector

This anomaly has a handful of reasons, like investor participation seems

minuscule as only 0.3 million accounts are registered with the National
Clearing Company of Pakistan Limited out of around 57.5m bank accounts.
This indicates less than 0.5pc of investor participation at the PSX forum.

Investor participation, driven by incentivisation and a less stringent

regulatory burden to the informal sector, is visible in real estate property
pricing bubbles, higher forex trading returns, and inflationary pressure.
These avenues produce ample easy money with the least risk and low
regularity compliances under state patronage.
The Imran Khan-led government launched a construction amnesty scheme
to promote housing to generate jobs and fill the gap of millions of housing
unit shortages. According to Zameen.com, since 2018, the average per
square feet price has increased from Rs3,300 to 7,000, which is 26pc
returns per annum in open plots investment in Islamabad.

It not only doubled the real estate prices in other cities such as Karachi,
Lahore, Peshawar and Faisalabad but also shifted the investment chunk
toward the real estate sector. Many industrialists shifted their attention to
the real estate sector.

Similarly, the gold price in December 2017 was Rs56,200 per tola, but now
it is Rs201,000 per tola, which is more than 50pc return per annum in gold
investment. Likewise, on 14 Jan 2018, the exchange rate of rupees to the
dollar was Rs110 to a dollar, and now it is Rs278 — an average of 30-35pc
returns per annum.

On the flip side, KSE-100 Index provided compounded annual returns of

14.55pc, and industrial profit was recorded at less than 15pc per annum.
The inflation rate in 2018 was 5.08pc, and now it is above 30pc. 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.

Pakistan already has one of the highest income tax rates in the world as far
as corporations are concerned, which further depicts a decrease in the
wealth of formal sector investors. Consequently, since 2013, more than 200
companies have been delisted from PSX. Only 526 companies are listed on
the main board, and just three SMEs are listed on the GEM board; however,
the total number of registered companies with the Securities and Exchange
Commission of Pakistan now stands at 176,000.

The prominent explanation for delisting is a cost-benefit trade-off. If a

listed firm’s marginal benefit/cost ratio is less than shedding avoidable
costs, this may lead to de-capitalisation.

Nevertheless, investor participation is more in informal sectors in which

most of the businesses are unregistered. The Asian Development Bank
(ADB) confirms that more than 90pc of the SMEs that operate in the
informal sector are set up with the help of family members and friends.

These businesses generally operate in agri-business, food chain, agri-

machinery, and textile sectors. Some of these raise money for seasonal
products and services and wind up their business when the season ends.
These setups are more visible during harvest in rural areas and in food
chain industries in urban areas. They earn money by stocking up on
necessities like sugar, flour, wheat, grains, oils etc.

They employ the staff on a seasonal or contractual basis and then lay them
off. Furthermore, fewer salaries are paid to them compared to minimum
wages in cash form without any social security i.e. health insurance and
accommodation. Consequently, social and financial vulnerabilities for
unemployed youth are increasing drastically, resulting in modern slavery.

Informalisation is proliferated to avoid income tax, intense documentation

and regulation, which further fuels decapitalisation and insecurities in the
labour market. These informal setups are backed by special interest groups
of local politicians, families of bureaucrats, and land elites through a
complex mix of tax laws and regulatory compliances for the formal sector.

The writer is an Assistant Professor (PhD Financial Economics) at the

National University of Modern Languages, Islamabad. He can be reached
at (abwahid.fms@gmail.com)

Published in Dawn, The Business and Finance Weekly, March 13th, 2023