As a transaction of otherwise legal goods, smuggling is no different than trade, except that there is no government involved in this, at least in its formal and institutional meaning.

Smuggling provides a solution against excessive government intervention in the form of tariffs, excise duties and border closures. Smugglers provide us signals and offer information about policy distortions.

If smuggling of any product is on the rise, it implies that tariff rates in the case of imported goods and excise duties in the case of locally manufactured items have been set too high compared to prices of similar goods available in bordering countries.

It is well acknowledged that Pakistan’s import taxation (customs duties, additional duties, advance income taxes, advance sales tax, etc) results in probably the world’s highest ratio of import taxes as a percentage of total taxes collected in the country.

This poses a significant barrier against competitive products, which depend on competitive prices. Effectively, this import taxation system is a tax on exports.

Another way to look at smuggling is the impact of increase in excise duties on products made in Pakistan. A notable rise in excise duty usually leads to increase in the flow of illicit goods – cigarettes are the case in point. Last year, a significant rise in excise duty led to increase in prices and hence the inflow of illicit and counterfeit products.

Pakistan has already seen results of a complete ban on imports, which proved to be disastrous for productive and export sectors of the economy, while bringing short-term advantage in terms of reduction in trade deficit.

While large and formal firms were badly hit by these general restrictions on imports, the small and medium-scale enterprises increased their reliance on imports through informal means, ie smuggling. This led to a decrease in collection of customs revenues as well. Smugglers came to the rescue of SMEs.

Recently, a significant increase in smuggling has been observed in the case of petrol. If we allow Iranian refineries to sell petrol directly to Pakistan, the smuggling of petrol will vanish in one day.

Let’s now consider smuggling of currency. Our former finance minister believed that dollars are being smuggled in huge quantities, causing its appreciation. It is correct that there were a couple of successful raids in which dollars were forfeited, however, it should not be generalised. But for a moment, let’s assume he was right.

A sudden rise in dollar smuggling, if it happened, also signalled that the policy created arbitrage opportunity, which then increases the physical flight of dollars. Thus, once again, smugglers provided a signal to policymakers.

We now know clearly that the difference between open market and inter-bank rates was a signal of policy gap itself.

In a country where incomes are not rising whereas prices are on an upward spiral, smuggled goods, often less costly than “taxed goods”, offer an alternative to low-income households as well as street vendors. We see this in many large-scale markets.

Let’s take the recent seizure of NLC trucks where sugar was being “exported” in the name of other goods.

This also occurred because the government refused on-time permission to industrialists to export sugar, which was trading at a much higher rate before the world market crashed. Thus, the traders who were using those trucks also signalled a policy correction.

Whenever we hear about smuggling, the recommendation is to always take strict enforcement measures on borders, by increasing surveillance and security check posts in border areas.

In a system, where such security arrangements can be breached or rather purchased easily, these policies only increase the cost of goods but do not reduce the quantum of smuggled goods.

In Pakistan’s social system, it is often observed that smugglers become very religious and perform pilgrimages. Smugglers should indeed be rewarded for their service to economic and policy systems.

This Article was originally published in The Express Tribune on September 11, 2023.