Growing Scourge Of Pakistans Industry

Picture a smugglers bazaar on the Khyber Pass road north of Peshawar in Pakistan. Images might come to mind of hood-eyed Pathan tribesmen huddled over glinting oriental treasures on worn carpets, the air charged with haggling and spices. Perhaps once upon a time.

Today, though, Hayatabad Bazaar is an unromantic sprawl of concrete and glass stores stacked to the beams with Nike shoes, Panasonic TVs, Sony video-disc players, Marks & Spencer sweaters and Compaq computers. Hayatabad is bigger than Londons Covent Garden and cheaper than Dubai. It may be the biggest tax-free market in the world, and smells mostly of dust and lucre.

 

Mohammed Ishaq Dar, Pakistans commerce minister, believes the market might enjoy up to $1.5bn worth of trade which Pakistan never officially registers.

The full scale of such trade is, however, a guess in a country where some economists believe the black economy may actually equal Pakistans official gross domestic product of $65bn. Hayatabad is not Pakistans only thriving smugglers den - indeed the countrys porous borders with Afghanistan and Iran have kept generations of Afghani, tribal and Pakistani smugglers in business since the days of the Silk route.

But Hayatabad is a prime and flourishing example of why foreign manufacturing investment in the country has proved so limited,why foreign consumer goods companies in Pakistan are hurting, and why, because of lost excise and duties revenues, Pakistans government has such chronic difficulty in balancing its books.

The illicit flow of consumer goods across Pakistans leaky borders - chiefly from Afghanistan - has already ruined some domestic manufacturing industries, according to local executives. Among industries hardest hit, they say, are tea, soap and other personal goods, domestic appliances, batteries, tyres, bicycles and televisions.

Industrialists say smuggling is a strong contributor to Pakistans poor recent economic performance. Foreign direct investment, for instance, fell last year to $540m from $1.1bn a year earlier, while manufacturing output contracted by 1.4 per cent - for the first time in the countrys 50-year history.

A lot of people are now shy of putting money into the country because of this, says the sales manager of one multinational in Karachi. As things stand, you can only make money in this country by producing things people cant smuggle - like electricity or ice cream.

In tea, for example, Lever Brothers, the Pakistani subsidiary of Unilever, estimates that up to 60,000 tonnes of the countrys annual consumption of 140,000 tonnes is now smuggled and that, while tea duties remain at 45 per cent, this proportion will continue to rise.

The company says its branded tea can no longer compete on price with highly organised smuggling of Kenyan tea.

There Industrialists attribute the rise in smuggling to the previous governments moves to raise excise and customs duties on most imported goods. Facing a spiralling fiscal deficit and the traditional difficulty of Pakistani governments in enforcing tax compliance on personal and agricultural incomes, Ms Benazir Bhuttos government placed punitive duties on almost all consumer and manufactured items.

Television sales provide a further example. Philips, one of few foreign electronics manufacturers in Pakistan, estimates that 600,000 of the countrys annual market of 700,000 TVs are smuggled. Such illicit TV imports alone are costing the Pakistan government an estimated Rs2.7bn (