Informal retail economy’s blind spot Clutch Fire

Walk through any Pakistani bazaar at dusk and you’ll see the country’s real economy at work. Kiryana shops tally credit in worn ledgers. Hawkers sell fruit at wafer-thin margins. Mobile accessories fly off glass counters as commuters head home. This is Pakistan’s informal retail sector, the everyday economy spanning small shops, micro-wholesalers, market stalls, home-based sellers and street vendors.

It is resilient and entrepreneurial. It is also indispensable. Yet it remains largely undocumented. Multiple studies estimate Pakistan’s informal economy at roughly 35-40% of GDP. Some estimates place it higher, depending on methodology.

Wholesale and retail trade sits at the heart of this informality, accounting for a sizable share of jobs and transactions that remain off the books. Around seven in 10 non-agricultural workers are informally employed underscoring the sector’s centrality to livelihoods and the scale of the documentation challenge. For fiscal authorities, the implications are stark: the tax-to-GDP ratio has hovered near the low double digits, improving recently but still constrained by a narrow base and weak compliance in retail. Turning this hidden engine into a documented, productive and taxable one is now a policy imperative.

Informal retailers solve last-mile distribution at the lowest cost. They operate close to consumers, extend store credit to the cash-constrained, and carry highly localised assortments. Pakistan’s Economic Census indicates that 95% of establishments employ fewer than 10 workers, a structure that naturally leans towards micro-scale retail. In employment terms, wholesale and retail trade engages roughly 9-10 million workers, serving as a powerful “employment shock absorber” when the formal sector’s capacity to hire is limited.

Informal retailers move domestic goods efficiently, plug local producers into demand, and stabilise prices in low-income neighbourhoods where formal chains have thin coverage. In periods of macro stress, they pivot quickly – altering pack sizes, switching suppliers, and extending credit – to maintain volumes. Yet the very attributes that make the sector flexible – cash, informality, low fixed costs – also lock it out of the digital and financial infrastructure that raises productivity over time.

Operating outside the net limits access to formal credit, supplier finance, and e-commerce platforms. Without verifiable financials, many shopkeepers cannot borrow to upgrade inventory systems, expand shelf space, or smooth cash cycles. Supply-side research on SME finance confirms persistent barriers – documentation requirements, collateral demands, and limited product fit – pushing small retailers towards informal lenders at higher costs. The result is that firms remain subscale and productivity stalls.

Informality typically means no social security coverage, minimal safety standards, and limited progression pathways. Pakistan’s labour statistics show the dominance of informal work; when agriculture is included, shares rise even higher evidence that the wage and welfare penalty is both real and widespread. Reducing informality is a precondition for “decent work” gains at scale.

For the state, informality translates to lost revenue – funds that could finance education, health, and infrastructure. For compliant firms, it creates uneven playing fields, discouraging investment and formal expansion. Pakistan’s tax-to-GDP ratio – reported near 10-11% in recent cycles with some progress – remains low relative to peers, and international institutions warn that gains will plateau without broadening the base, especially in retail.

Entrepreneurs cite multistep registrations, overlapping authorities and perceived risks of arbitrary enforcement as core deterrents to formalisation. Past attempts to register traders, including fixed tax schemes, have faced resistance. Uptake remained limited when compliance costs rose and benefits were unclear.

Formalisation should be framed as enablement, not punishment. The business case for a shopkeeper is: “Document your transactions and unlock cheaper payments, easier compliance, and access to finance.” Four elements can make that promise real.

First, create a streamlined microenterprise tax class with instant e-registration (NTN issuance via mobile in Urdu), low turnover-based dues, and a first-year fee holiday. Publish clear thresholds and simplify filings to a few taps per month. International guidance and local policy briefs stress that incentive-led, digital onboarding works better than blunt enforcement.

Second, Pakistan’s FBR POS programme already connects Tier-1 retailers’ tills to tax servers and mandates QR-coded e-invoices; enforcement tightened in 2025, requiring digital payment acceptance and verifiable invoice numbers at integrated outlets. Extending this backbone to micro-retailers means offering free cloud POS apps, simple e-receipt tools, and receipt verification for consumers – so the demand for a proper receipt comes from both sides of the counter.

Third, the State Bank’s Raast standards enable low-cost, interoperable QR payments. Fourth, once e-invoices and QR receipts build a transaction history, lenders can underwrite invoice-backed working capital and inventory finance. Supply-side studies of SME finance in Pakistan point to precisely this gap: reliable cashflow data. With consented data-sharing, shopkeepers can move from informal lender dependency to formal credit at better rates, lifting productivity and resilience.

Any headline number will depend on design and execution, but the direction of travel is clear. Retail has historically contributed far less to tax than its economic weight would suggest. As documentation expands – via POS, QR adoption, and simplified trader regimes – collections can grow without punishing microfirms, provided costs stay low and benefits obvious. Recent IMF-linked assessments show federal tax collections rising with digital enforcement but warn of stagnation ahead unless the base is broadened, notably in retail and services. The fiscal multiplier here is not just higher receipts; it is better data for policy, improved compliance norms, and more credible public finance.

A pragmatic framing is phased capture: Tier-1 and chains should enforce full POS and real-time invoicing for the largest immediate yield; mid-tier urban shops can use POS-lite/e-receipt apps and simplified monthly filing for moderate yield at scale; micro vendors can use QR payments and turnover-based presumptive dues, paired with visible benefits like fee holidays, microcredit access, and tenancy protections. Global research on informality suggests that such broad sets of policies – not one-off amnesties – sustain gains and avoid backsliding.

Policy and product design must reflect the reality that the modal Pakistani retailer is a one-to-three-person shop. Heavy hardware mandates should be avoided. Instead, mobile applications that issue compliant, QR-coded e-receipts and sync to cloud backends should be deployed. Complex forms should be replaced with short microsurveys in Urdu, supported by autofill and default options. Punitive audits should be avoided, with risk-based and predictable checks codified.

Receipt lotteries, fee holidays and access to credit are incentives; QR acceptance requirements for certain market categories and visible enforcement at the top end act are enforcement measurements. The Raast subsidy is a textbook nudge: it lowers adoption costs exactly where micro-retailers feel it. Harmonising sales tax on services, streamlining agri-income tax administration and sharing registries can reduce duplication and trader confusion. IMF commentary anticipates provincial roles in lifting the tax-to-GDP ratio as federal gains level off; retailer documentation sits squarely in this joint space.

THE WRITER IS AN INTERNATIONAL ECONOMIST