ISLAMABAD: The Illicit Trade Index 2025 ranks Pakistan 101st out of 158 countries, a position well below the global average. The country’s composite score of 44.5 reflects serious vulnerabilities, particularly in areas related to taxation, regulatory enforcement, and supply chain security. This ranking reflects serious vulnerabilities in internal trade networks, sector-specific compliance, and enforcement mechanisms.
Illicit trade has emerged as a significant threat to Pakistan’s economy, draining billions from government revenues, undermining legitimate businesses, and exposing consumers to unsafe and counterfeit goods. With smuggling and illicit manufacturing expanding across key sectors, Pakistan loses Rs 750 billion in tax revenue due to illicit trade, a figure which could potentially escalate to Rs 3.4 trillion.
Of this, nearly 30% (Rs 1 trillion) is linked to the misuse of the Afghan Transit Trade facility. Originally established to facilitate Afghanistan’s imports through Pakistan’s ports, the Afghan Transit Trade Agreement (ATTA) allows goods to pass without customs duties; however, a significant portion of these goods never reaches Afghanistan. Pakistani smugglers exploit loopholes in the Afghan Transit Trade Agreement (ATTA) to divert duty-free goods into Pakistan’s black market, rather than delivering them to their intended destination in Afghanistan. This loophole has fueled illicit trade networks, undermining the formal economy and depriving the government of critical tax revenue. This practice severely undermines Pakistan’s economy, fostering illicit trade networks that operate beyond government control.
Among the most severely affected sectors, tobacco smuggling alone results in Rs 300 billion in losses, as unchecked illegal imports evade excise duties. In Pakistan, illicit tobacco trade has been a key issue in the discourse of tobacco control. The government is concerned about losing revenue due to tax evasion, while the tobacco industry argues that higher taxes drive consumers to cheaper, untaxed cigarettes, perpetuating illicit trade. The debate over the magnitude of illicit trade gained new momentum after the tax hike in February 2023, when Federal Excise Duty (FED) rates were enhanced by about 150 percent. Illicit market represents 38 percent of the cigarettes consumed in Pakistan, threatening the sustainability of the legitimate cigarette industry. A report by Ipsos claimed the size of the illicit market to be 40 percent in 2021.
Similarly, smuggled Iranian oil is a major contributor to Pakistan’s economic losses, with an estimated Rs 270 billion in annual revenue slipping through illegal trade networks. This persistent issue undermines the formal petroleum market, disrupting pricing structures and reducing legitimate fuel sales. As cheap, untaxed Iranian oil floods Pakistan’s fuel stations, government revenue collection suffers, impacting funding for energy infrastructure and subsidies.
Beyond financial losses, Pakistan’s energy security is weakened due to reliance on informal oil channels, which lack quality control and regulatory oversight. The smuggling of petroleum products also complicates trade relations between Pakistan and Iran, raising diplomatic concerns.
The pharmaceutical industry is another victim, with counterfeit medicines causing Rs 65 billion in revenue losses. Nearly 40% of medicines sold in Pakistan are counterfeit or substandard, posing a significant threat to both the pharmaceutical industry and public health. Fraudulent drugs often lack essential active ingredients or contain harmful substances, rendering treatments ineffective and potentially dangerous for consumers. As counterfeit medicines flood the market, they erode trust in the healthcare system, leaving patients vulnerable to serious medical complications.
The economic consequences of this illicit trade are severe, as the counterfeit pharmaceutical market disrupts legitimate businesses, reducing tax revenues and weakening investor confidence in the industry. The financial losses extend beyond companies, impacting government resources allocated for healthcare advancements and regulatory enforcement. Additionally, the presence of fake medicines leads to higher mortality rates, as patients unknowingly rely on ineffective or harmful treatments, exacerbating existing health conditions.
Weak enforcement and loopholes in drug import regulations have allowed counterfeit pharmaceuticals to flourish unchecked, making it difficult for authorities to track and eliminate the sources of fraudulent medications. Without stricter regulations, improved monitoring systems, and greater public awareness, the counterfeit drug market will continue to undermine Pakistan’s healthcare system, putting millions of lives at risk.
Illegally imported tea and tires are other items that bypass customs duties and taxes, creating a shadow market where cheaper, untaxed alternatives dominate, significantly undermining legitimate businesses. The tea industry, in particular, faces substantial challenges, with 30% of the market controlled by smuggled tea, resulting in Rs 10 billion in lost revenue. Much of this tea again enters Pakistan through loopholes in the Afghan Transit Trade Agreement (ATTA), where duty-free imports meant for Afghanistan are diverted into Pakistan’s black market.
Similarly, the tire industry suffers from rampant smuggling, with 60% of tires sold in Pakistan illegally imported, causing Rs 106 billion in revenue losses. This influx of untaxed goods disrupts local manufacturing, making it harder for domestic producers to compete. The unchecked smuggling of tea and tires not only weakens the formal economy but also reduces tax collection, limiting government resources for infrastructure and development.
Smugglers use various methods to manipulate the system. Through under-invoicing and false documentation, they declare lower values for imported goods, minimizing customs duties and allowing them to sell at artificially low prices within Pakistan. Additionally, goods such as tea, tires, electronics, and textiles meant for Afghanistan are diverted before crossing the border, enabling traders to evade import taxes. Some Pakistani merchants collaborate with Afghan businesses, importing products under ATTA provisions but illegally reselling them in Pakistan’s domestic markets. The misuse of informal smuggling routes, particularly through porous borders, further complicates law enforcement efforts, making it challenging to track and intercept illicit shipments.
Earlier this year, on April 30, 2025, the Policy Research Institute of Market Economy (PRIME) and the Transnational Alliance to Combat Illicit Trade (TRACIT) jointly released its policy analysis on illicit trade in Pakistan. Its comprehensive analyses sheds light on the systemic factors enabling illicit markets to thrive in Pakistan. They examine the policy weaknesses, enforcement gaps, and structural economic distortions that have fueled black-market activities, leading to substantial revenue losses and posing challenges to regulatory authorities.
Despite the implementation of a Track and Trace System across excisable products, low adoption rates—particularly in the tobacco sector—highlight its underutilization and inefficacy. Smuggling, tax evasion, and illicit manufacturing continue unchecked, depriving the government of critical revenue and undermining the formal economy. Compounding the issue is the absence of systematic collaboration between Customs, the Federal Board of Revenue (FBR), excise departments, and border forces, creating gaps in enforcement that allow illicit trade to flourish with impunity. Without urgent structural reforms, stricter policy enforcement, and coordinated inter-agency action, Pakistan’s excise trade will remain vulnerable, further straining the economy and weakening investor confidence.
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