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The hidden economy

Going by the numbers alone, it would appear that no significant economic activity takes place west of the Indus. Look at the provincial GDP numbers, the revenue figures and you see no movement, no activity on any significant scale.

More detailed metrics of economic activity also show great ‘tranquillity’ in the west. Detailed figures on consumption of electricity by industrial and commercial categories of consumer, for instance, show very little change over the years.

The number of bank branches operating in the western provinces doesn’t change much, nor does the provincial ratio of deposits to total bank deposits in the country.

But take a closer look and you’ll find something odd. The State Bank has a data series on its website that shows something enormous, of truly gigantic proportions, stirring beneath the tranquillity suggested by the formal macroeconomic data.

Here is what the data reveals: the amount of money passing through the clearing houses of Quetta and Peshawar is so large that it rivals the amounts in clearing houses of cities like Faisalabad, Multan and Rawalpindi.

First some background. Every time you write a cheque and the other party deposits that cheque in their account, it goes through a process called “clearing”. Because banks don’t hold your money themselves — much of it is held by the State Bank — the task of actually taking the money out of the books of one bank and transferring it to the books of another every time a cheque is cleared, is performed by the State Bank at its clearing house.

The State Bank operates 16 clearing houses in cities all over the country. Every month it releases data on how many cheques were presented for clearing in each of these, and what the total amount cleared by cheques was.

If you take this data, which stretches back to 1999, and plot it for each city in Pakistan, you notice something very interesting. Remove the cities of Karachi and Lahore from the sample for the time being, because these are global cities in a sense with long-distance connections. Compare only the regional cities and here is what you’ll find.

Following 9/11, half the cities in the total sample will show a sharply rising trend in the amount of money going through their clearing houses. For the other half, the line is flat.

The cities that show a rising trend are led by Peshawar, with Faisalabad, Multan, Rawalpindi and Quetta in close succession. For Peshawar, the amount of money being cleared via cheque in the year 2011 crosses Rs1.3 trillion! For Quetta, in the same year, the amount is just under Rs900 billion, meaning between them these two regional cities are seeing almost Rs2tr going through their clearing houses in one year alone.

This figure compares with Faisalabad at Rs1.3tr, Rawalpindi at Rs1.4tr, and Multan at Rs826bn.  Cities that show a flat trend over the entire reporting period include Sukkur, Hyderabad, Sialkot and D.I. Khan.

What the data shows is a steep intensification of transactions being cleared by cheque in some cities, and no change in others, meaning the pace of economic activity accelerated unevenly over the decade, sweeping some along its path and leaving others behind.

But what are Peshawar and Quetta doing on this list? With Faisalabad and Multan, it’s easy to understand. These are regional hubs, productive centres, large seats of agrarian operations.

Faisalabad hosts Suter Mandi, one of the world’s largest yarn markets, where settlements are made largely using banks. It’s where more than $5bn of exports are produced, where massive fixed investment was installed precisely during this decade.

Multan is a major site for agricultural procurement, which is conducted entirely using cheques, as well as being an industrial city in its own right. In both these cities, large-scale economic activity is visible in many other indicators too, from bulk consumers of electricity to massive growth in branchless banking.

In fact, after Karachi and Lahore, it is Multan, Faisalabad and Rawalpindi that account for the bulk of transactions in branchless banking, which shows the intensification of activity in the clearing houses of these cities is accompanied by an overall deepening of the financial sector.

But in Peshawar and Quetta, there is no other accompanying trend, not in branchless banking, TT transfers, bulk consumption of electricity. There is only one lone spike, showing an increase in clearing house transactions that keeps pace with the agricultural and industrial heartland of the country.

The obvious question is: what is driving this spike in Quetta and Peshawar? Where is the economic activity that is sending such spectacular sums of money through the clearing houses of these two cities? And why does this money leave no trace on any other economic indicator of the city or the province?

Perhaps the answer is a simple one. Maybe the spike is explained by the fact that there is only one clearing house each in Khyber Pakhtunkhwa and Balochistan, while there are at least five in Punjab and four in Sindh. Or maybe it’s just the Afghan transit trade. But that still doesn’t explain why the clearing house spike isn’t showing up in any other provincial indicator.

Here’s another explanation: these cities are engulfed by a very large hidden economy, from where a massive river of transactions briefly appears on the official record, then disappears from view again.

This intersection between the hidden and the formal economy generates an accidental record which gives us a glimpse of something massive stirring beneath the tranquillity of the macroeconomic indicators of the western provinces. The amounts involved tell us that the size of this hidden economy rivals Faisalabad and Multan, which is impressive if you know anything about those cities.

It is crucial for us to develop a better understanding of this hidden economy because its interaction with the settled economy to the east of the Indus is likely to become an important fault line in the near future.

The writer is a Karachi-based journalist covering business and economic policy.


Khurram Husain, "The hidden economy," Dawn. 2013-02-28.