For too long, Pakistan’s economy has remained largely undocumented and informal. This has caused a lot of trepidation both within the country and internationally. Locally, everyone knows that the country’s real estate sector has been used to park a significant amount of black money as well as launder money.
When we say ‘black money’, we do not necessarily refer to the money earned from illegal sources but (as far as real estate is concerned) also that which has not been documented thanks to loopholes in the registering mechanism – caused, of course, by the negligence of the authorities. The people themselves are certainly to blame, too; it suited them to pay much lower taxes than they would have had to after registering their properties at their proper prices. Also, there was nothing actually stopping them from recording their properties at their actual market values.
Internationally, Pakistan has often been accused of not doing enough to curb terror-financing from within its borders. Regardless of the government’s willingness to effect some change in the prevalent situation – one overarching issue is that the economy isn’t documented enough to effectively restrain finances from being funneled towards any organization with potential terror links. Again the significant importance of taking account of the undocumented black money and the funds parked in real estate sector becomes evident.
All of this has eventually led the government to finally take action on the matter before the current decade sees its closure.
The issues caused by a minimally regulated, informal economy
In general, for the economy overall, the issues caused by the undocumented economy can be understood this way:
- The informal economy encompasses the entire economy, as well as that particular sector which is resistant to its advances. Any reforms introduced can be easily bypassed by its instigations, and when 30-40% of the economy is estimated to be undocumented (as is the case in Pakistan), this means that, at the end of the day, the reforms will not really take root.
- As mentioned above, the informal economy can serve well to hide illicit and downright criminal activities; even more so when the sector is as large as Pakistani real estate, which, according to some estimates, has a volume running in billions of totally unaccounted-for-dollars.
- Locally, an oft-discussed issue regarding the undocumented economy in general and real estate, in particular, goes along these lines: the authorities have been unable to tax the sector effectively because of its non-rationalized nature.
- The unregulated nature of the sector has also meant that it is highly uncompetitive and random. The prices have been raised on the basis of mere speculation; hence the preponderance of the frequent ‘bubbles’ that deflate the prices significantly ‘all of a sudden’ after every few years.
- Two issues attendant to and stemming from the ones mentioned above lead to the market not contributing anything, relatively speaking, to the national economy – when analyzed for its actual size and volume.
- And, despite such a large amount of investment being poured into the sector, it doesn’t contribute as much to construction (developmental) activity. Most of the money is allocated towards buying and selling land, which, at the end of the day, serves no purpose at all. It is not, then, surprising that Pakistan has a housing shortfall running into millions of rupees.
How the situation has stacked in this decade
Both the current and previous governments initiated efforts towards documenting the sector. The former made inroads; but whenever they faced internal political pressures, they capitulated. They did, however, set grounds for the current government to push through with what it is attempting right now.
The current government, led by Prime Minister Imran Khan, has been spending political capital left, right and center (literally) to change the very nature of the economy and bring in reforms where it sees fit.
Now the previous government, while it did capitulate on a number of matters, it did continue making efforts to generate revenue through real estate – even while it ignored the glaring regulatory loopholes exploited by citizens for not filing their income taxes or wealth statements.
The current government seems to have doubled down on those efforts and its stated goal in the current budget has been to document the economy. It has, of course, taking measures to increase its revenue generation capacity as well.
From a real estate perspective, these measures have included the following:
- The previous government had created the loophole of a ‘non-filer’ — a person who didn’t file taxes and who, as a result, was charged with exceedingly high tax rates. This government has not only imposed higher taxes on such people but has also stripped away any modicum of legal cover over the term; making the practice a prosecutable offense.
- Another loophole of the difference in valuations between the market and the ones announced by the government, which causes the black money in the market to accumulate, is also being remedied by raising the government’s valuation charts. This will help both in documenting the property sector and taxing it.
- Lastly, an overarching amnesty scheme was announced earlier this year. It is ironic that Prime Minister Khan, when he was in the parliamentary opposition only last year, basically sabotaged a similar amnesty scheme announced by the then Nawaz Sharif-led government. At the time, Khan had announced that after coming into power, he would be taking action against anyone found to have availed the amnesty scheme.
An easy way to keep the money and real estate sector undocumented has been to avoid formal banking channels. The current government has made efforts to make cash flows through this route either a mandatory or a recommended practice. In its recent budget, it imposed penalties on the avoidance of banking channels.
Data from the country’s top real estate portal, Zameen.com suggests that Pakistan’s real estate market has slowed down incredibly in the past couple of years; however, if one were to supplement this finding with anecdotal evidence, it would become evident that this is primarily just a bubble of ‘fake price appreciation’ created by the shady sections the sector which has now collapsed.
