The size of the informal economy, which grew quite rapidly in the 2000s, could have contracted significantly over the last few years on the back of the rolling blackouts, implying that the official economic growth numbers might be a bit exaggerated.

“The informal sector, which mostly comprises small (manufacturing and services) enterprises, is on the decline. We don’t yet have evidence to prove it but it is certain that the energy shortages have hit the small-scale businesses harder, slashing their share in the economy,” noted Ali Kemal, research economist at the Pakistan Institute of Development Economics (PIDE).Ali had estimated that the informal and unrecorded economy was 91pc of the size of the formal economy in 2007/08 on the basis of the gap between (the quantum of) private consumption indicated in the household survey for the total population and the one shown in the formal GDP (gross domestic product).

Now he thinks this gap should have shrunk owing to the ‘hit taken by the informal sector on account of energy crunch’. But how much? He’s reluctant to make a guess without data.

It also means that the official economic growth numbers that incorporate expansion in the small-scale businesses might be inflated, according to him. The extent of the reduction in the informality of the economy would be known only after an analysis of the new data, Ali said.

The informal sector, which consists of all shades of untaxed, unmeasured and unregulated economy, is considered backbone of the documented economy. In Pakistan’s case, it is not only consumer of goods and services produced by the organised formal sector but is also its major supplier of cheap inputs. It is estimated to employ almost three quarters of non-agriculture labour force, particularly the unskilled or semi-skilled workers joining the market every year.

The informal sector, which consists of all shades of untaxed, unmeasured and unregulated economy, is considered the backbone of the documented economy

“Informal activity can be detected in almost every sphere of the economy. Even the organised sector conducts certain activities that are part of the informal economy; the formal sector sometimes under-report the number of their employees and output to save tax and other levies,” contends Shahid Zia, an economic expert based in Lahore.

“It has been very helpful to the economy in some ways and sustained it in adverse circumstances; if, for example, the unemployment rate in the country has remained at 6pc and demand for consumer durables recorded considerable growth despite a very low average GDP growth of less than 3pc in the recent years, it is because of this sector,” he argued.

Even the State Bank of Pakistan (SBP) admitted in one of its reports on the state of the economy that the informal sector, which the bank estimated to be around one quarter of the official GDP, appeared to be pushing the formal economy forward. It, however, underscored the need for documenting the unrecorded sectors, blaming the government’s reluctance to broaden the tax net for increasing the informal segment of the economy.

Still, like many others, Shahid feels that the tremendous growth in the size of informal economy over the last decade and a half is fast becoming a drag on growth and expansion. “With larger amount of economic activity shifting to the informal sector, for instance, means the government will not be able to collect enough taxes for development and workers will continue to receive low wages without any benefits that jobs in the organised sector bring with them. The government can significantly increase the tax to GDP ratio of less than 10pc and cut its budget deficit by bringing even a part of informal sector into the net.”

The estimates for the size of informal economy have so far ranged between 30 to above 90pc of GDP. Some even say it was bigger than the official GDP, concluding it’d require “wholesale restructuring of the economy to regulate the informal sector”.

“The government could start bridging the gap between the formal and informal sectors by taxing the retailers,” suggested Sikandar Mustafa, chairman of Millat Tractor and the Pakistan Business Council (PBC).

He points out that the growing gap between the documented and undocumented sectors is a major factor restraining the corporations from investing in capacity expansion and new projects as they have to share a larger burden of taxes.

“If informal economy somehow gets documented, it will be a win-win situation for everyone; the government will collect revenues from it and the organised sector will have to take lesser burden of taxes. And by becoming part of the formal economy, the informal sector will enjoy all those benefits like access to bank finance and other incentives available to the organised sector,” contends Almas Hyder, a leading auto parts producer and exporter.

Although the Nawaz Sharif government has pledged to raise the tax revenues to 13pc of the size of domestic output over three years, it has done little to broaden the net and document the undocumented parts of the economy.

A few measures taken in its first budget last year were later reversed and an amnesty scheme was announced for tax dodgers. Little wonder then that it had to cut down its ambitious tax collection target of Rs2.475 trillion for the present fiscal by a whopping Rs200 billion. It is finding hard to meet even the revised revenue target despite holding back tax refunds worth Rs100 billion. There are few signs to show that it will take any measures to document the economy next year, for which it has again set a tax target of Rs2.8 trillion.

“I wish the government success, but I cannot bring myself to believe that it can meet its tax collection target without significantly increasing the net and taxing all incomes irrespective of their source,” asserted Shahid. Few disagree with him.

Published in Dawn, Economic & Business, June 2nd, 2014