Illicit trade costs Pakistan Rs 3.4 trillion annually: Report

Pakistan is losing Rs 3.4 trillion, including a nearly 30 per cent loss because of misuse of the Afghan Transit Trade facility due to illicit trade, according to a report by the Policy Research Institute of Market Economy (PRIME).

This colossal loss equates to 26% of the government’s annual tax collection target for the current fiscal year, reported The Express Tribune. The PRIME report, titled “Combatting Illicit Trade in Pakistan”, estimates that a shadowy informal economy worth USD 123 billion is quietly undermining the country's financial stability.

Illicit trade, the report warns, has become a formidable threat to Pakistan’s economy — crippling legitimate businesses, eroding critical tax revenues, and placing consumers at significant risk. The tentacles of the black market have gripped various sectors, from smuggled petroleum and fake pharmaceuticals to untaxed cigarettes and misdeclared consumer goods.

Intelligence and investigative agencies have recently turned the spotlight on customs officials, accusing them of aiding and abetting smuggling operations and under-invoicing schemes.

A significant portion of the revenue hemorrhage — Rs 1 trillion — is tied directly to the Afghanistan Transit Trade. Though Pakistan had initially tightened rules to clamp down on this abuse, the government backtracked last month, easing restrictions by allowing imports of Afghan-bound goods against insurance guarantees.

The report further exposes the smuggling of Iranian oil as a major contributor to the losses, with an estimated volume of 2.8 billion litres slipping into the market annually — resulting in Rs 270 billion in revenue losses. Given that the government imposes a Rs 16 per litre customs duty and a petroleum development levy of Rs 78 per litre, the incentive for smugglers to deal in illicit oil is abundantly clear.

Regarding the size of the informal economy, the report notes, “Independent experts consider the size of the informal economy to be one-third of the formal economy.” Adding to this, the Small and Medium Enterprise Development Authority estimates that the informal sector accounts for over 40% of the nation’s GDP.

High tariffs, convoluted tax systems, surging inflation, and an expanding informal economy continue to drive businesses and consumers away from legal channels. The report laments that “regulatory inconsistency and protectionist trade policies further add to the cost of doing legal business,” while “porous borders, outdated customs infrastructure, and limited inter-agency coordination allow the unchecked movement of illicit goods.”

Pakistan’s dismal performance on the global stage is also highlighted in the 2025 Illicit Trade Index by TRACIT, where the country ranks 101 out of 158 — trailing both global and regional averages. With a score of 44.5, far below the global benchmark of 49.9, the nation’s vulnerabilities in governance, enforcement, and trade regulation are laid bare.

According to the report, this ranking “reflects risks and vulnerabilities across multiple dimensions of trade governance, enforcement, and economic regulation,” painting a bleak picture of Pakistan’s capacity to tackle this deepening crisis.