LAHORE: If Pakistan could eliminate corruption, smuggling and tax evasion, the country’s reliance on domestic and foreign loans would significantly decrease. The annual tax loss due to corruption, under-invoicing and smuggling is estimated to exceed $10-15 billion, an amount greater than what Pakistan borrows from the IMF and other international lenders each year.
Despite the repeated identification of serious economic issues, these problems persist. Fake sales tax invoices remain a challenge, while encroachments often reappear after being cleared. Although smuggling has slightly decreased, as evident from the reduced diesel smuggling, large quantities of smuggled goods are still easily found in markets.
The funds supporting smuggling and under-invoicing are often sourced through money laundering, indicating the persistence of illegal financial flows. Petty corruption has also intensified, with people still required to pay bribes for basic services like water, gas and power connections, while corrupt practices within the police force continue unchecked.
These recurring issues are rooted in weak institutional frameworks, inconsistent enforcement of laws and vested interests that benefit from the status quo. While laws exist, they are not applied uniformly. Periodic crackdowns may offer temporary relief, but without long-term institutional reforms, the problems resurface. Bureaucratic inefficiency and political interference further enable corrupt practices to thrive. Reforms often depend on individuals rather than systems, leading to temporary improvements that fade once a reform-minded official is transferred or removed. Powerful business lobbies and mafias also resist changes that threaten their interests.
Citizens are often left with no choice but to grease the palm because legal processes are slow and inefficient. Some businesses also resort to under-invoicing or smuggling as navigating the formal system proves costlier due to high taxes and bureaucratic red tape. Smuggling and fake invoicing are sustained by illegal money transfer systems like hundi and hawala, which allow black money to circulate freely. While diesel smuggling has slowed due to targeted enforcement, other forms of smuggling continue unabated. Selective enforcement encourages criminals to adapt, shifting their focus to other illicit activities.
Addressing these issues requires systemic changes. Moving business transactions, taxation and public services online would minimise human discretion and reduce opportunities for bribery. The use of AI and data analytics could help detect patterns of fake invoicing, under-invoicing and smuggling. Strengthening institutions, rather than relying on individuals, is crucial. Reforms should be institutionalized to ensure their sustainability beyond temporary crackdowns.
Accountability within the bureaucracy can be improved by tracking decision-making processes and conducting regular audits. Strengthening banking regulations would help curb illegal money flows. Encouraging digital transactions while imposing taxes on large cash withdrawals could also reduce the informal economy. Consistent law enforcement is key — smuggling hotspots such as border areas, transit routes, and major markets should be monitored continuously, not just during sporadic raids.
Incentivising compliance is equally important. Reducing excessive taxes that push businesses into the informal sector, and rewarding those who adhere to the law, could foster a culture of legality. Corruption cases should be resolved swiftly, ideally within months, through the establishment of special courts for economic crimes.
If reforms such as digital invoicing and real-time tracking of goods are enforced, significant tax recovery could be achieved within six to twelve months. Smuggling and under-invoicing could be brought under control within one to three years with effective monitoring of currency movements and strict action against corrupt officials. However, fostering a cultural shift where corruption is no longer normalized will take longer — potentially five years or more — requiring sustained efforts in education and institutional reform.
While eradicating corruption entirely is an ambitious goal, even reducing it by 50 per cent could put Pakistan on a path toward financial sustainability. The real challenge lies not in identifying these issues but in maintaining reforms without succumbing to political or bureaucratic interference. The critical question remains: will the political leadership and business elite allow such transformative changes to take root?
