Diesel Smuggling Badly Denting the Economy

According to a study by the UK-based firm ACE Money Transfer, illegal activities such as the black market, fuel (petrol & diesel) smuggling, and the smuggling of US Dollars into key sectors deplete Pakistan’s economy of a staggering $23 billion every year.

These illegal activities, which include fuel smuggling, gold smuggling, and black market currency exchange, have a devastating impact on Pakistan’s economic stability. They cause currency devaluation due to exchange rate distortion, which can fuel inflation by raising the price of imported commodities. Additionally, these actions damage the credibility of the financial system and weaken the effectiveness of monetary policies. The report highlighted:

“This not only leads to a loss of government revenue but also fuels a shadow economy, making it harder to track and regulate economic activities.”

Significant exchange rate volatility in recent years has made Pakistan’s economic difficulties worse. The interbank rate has been considerably stabilized at Rs282.62 per dollar thanks to a stern crackdown on these illegal practices. According to experts, Pakistan’s economic recovery depends on a sustained commitment to eliminating smuggling in important sectors.

According to the report, Pakistan loses around $150 million per month on account of dollar smuggling, culminating in an alarming annual figure of around $2 billion per year. Similarly, the report suggested that smuggled Iranian oil now commands a significant share estimated at over 30% of Pakistan’s diesel market. Around 10 million liters of diesel and 2 million liters of petrol are smuggled every day into Pakistan from Iran. This smuggled diesel eventually cost the government over $1 billion annually.

In September 2023 petroleum sales numbers were a rude awakening as High-Speed Diesel (HSD) and petrol sales went down 24% and 18% respectively.

The report also highlighted the unforeseen implications of import bans. These bans have resulted in the emergence of a shadow economy, with smuggling, misreporting, and product substitution becoming widespread methods of circumventing import restrictions. This has disrupted economic activity on a vast scale and has the potential to drastically increase unemployment rates, with forecasts topping 2 million people by the end of 2023.

Furthermore, the sales trend of HSD on a 12-month moving average, registered the lowest point in at least 13 years (barring peak Covid months of March and April 2020). It is obvious that the temptation to smuggle increases, particularly when retail prices increase. Although it’s not a new phenomenon either, anecdotal evidence suggests that HSD smuggling has increased significantly during the previous four to five years.

Earlier this month, the caretaker Interior Minister Sarfraz Bugti openly admitted that security personnel are involved in large-scale smuggling of currency, oil, and other commodities including NCP vehicles, across Pakistan’s borders with Iran and Afghanistan. However, the government along with the military leadership vowed to bring the menace to an end.