Inclusion before enforcement

The shadow economy in Pakistan has survived every action by the authorities until now. But the actual difference lies not with the tax code, but with the fact that some people don’t have a bank account, and some people don’t trust the one that they do have.

Perhaps Pakistan is asking the wrong question. For years, the argument is limiting the shadow economy with more enforcement, broadening documentation and taxation. However, a significant 35-40 percent of the economy, a large portion of the economy remains informal, and is outside of the formal system. Instead of asking why people are escaping the tax net, the question should be: Why do millions of Pakistanis remain outside the financial system? Informality will thus be less a policy failure than an enduring structural reality until formal finance becomes the most convenient option for saving, borrowing and transacting.

Arguments about the shadow economy are often framed as something to do with tax avoidance. While the loss of revenue is real, the cost of informality runs deeper. Around 6 percent of GDP escapes reporting every year, undermining fiscal space, reducing transparency and competition, increasing corruption risks, and constraining governments’ ability to fund public services. Businesses operating outside the formal economy rarely keep documented transactions, while financially excluded workers continue to rely on cash, making the tracking and regulation of economic activity hard.

This has not been addressed by enforcement alone. Historical estimates compiled that regardless of whether researchers used monetary, structural or electricity-consumption approaches, the shadow economy has stayed around one-third of GDP for decades. A regional comparison indicates that Pakistan’s shadow economy exceeds the South Asian average (32.8 percent) and significantly exceeds the levels observed in India (23.6 percent) and Bhutan (25.6 percent). This is indicative of structural problems, not of weak enforcement.

Financial exclusion is one such weakness. It is not just about having a bank account, it is about people and businesses being able to access and regularly use an affordable service for payments, saving, accessing credit, insurance, and digital transactions. Where these are not available or underutilized, cash dominates economic activity, with little documentary evidence and making registering businesses, reporting income and tax compliance harder.

Pakistan has done very well on this front. World Bank Global Findex (2024) data shows adult account ownership rising from 13 percent in 2014 to 27 percent in 2024. The State Bank of Pakistan has noted substantial growth in the branchless banking and digital payments sector and the National Financial Inclusion Strategy has increased access to formal services. The enabling infrastructure for a more inclusive financial system is gradually being developed.

However, progress remains uneven. The World Bank (2024) reports that out of the 155.8 million adults, almost 113.3 million do not have a formal financial account, leaving more than two-thirds of the population outside the regulated system. There is also a significant gender and income gap in the rates of inclusion. As opposed to 12 percent of women have an accounts and 42 percent of men, only 13 percent of women use digital payment whereas 40 percent of men. However, this share is 36 percent for the richest 60 percent of population compared with only 14 percent among the poorest 40 percent. These additional gaps hinder upgrading from informal arrangements for women, poorer households and underserved communities.

Informality not only causes exclusion but also sustains the cycle of informality

The real problem is not access but participation. SBP’s Annual Payment Systems Review (2025) indicates that digital payment transaction volumes have reached 88 percent of retail transactions, but the total transaction value has only reached 29 percent, suggesting that the high-value transactions still move largely in cash. According to Karandaaz Pakistan’s Financial Inclusion Survey (2025), 85 percent of adults rely on informal borrowing like family and friends, and only 9 percent of excluded adults trust formal banks. This is because of the behavioural realities that, in practice, have not yet led to formalisation when access has been increased.

This is why the goal of financial inclusion should be seen as a target for the economic sector, not the banking sector. More households and businesses are accessing accounts, wallets and digital payment platforms, making transactions more transparent and formal participation increasing.

This journey has already started in Pakistan, with the National Financial Inclusion Strategy, fintech reforms, branchless banking and digital payments being integrated into public programmes. They are a significant advance towards enabling formal finance to be more available and more useful for the everyday.

The way forward for Pakistan is to make financial inclusion the cornerstone of formalization policy through the use of digital payments via Raast and mobile wallets, zero-fee accounts linked to NADRA for women, savings via wallets for informal labourers, and reasonable cash-reporting requirements. The goal would be to lessen reliance on cash transactions, build trust in the formal financial sector and eventually transition the informal economy into the formalized economy.

Reducing the size of the shadow economy will require moving beyond audits and documentation efforts to a financial system people can trust, can afford, and choose to use; when formalization becomes a permanent reality in the Pakistani economy, and not just an aspiration that never materializes.

Copyright Business Recorder, 2026