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Leaving no one behind
By: By Muhammad Adnan

Like formal sector employees who are entitled to receive provident fund, pension and other old-age benefits at the age of 60 and above in Pakistan, the informal sector workers also desire to be provided with the same benefits when they reach the age of superannuation. But the provision of such benefits are limited to the formal sector and sadly in Pakistan and most of the countries of the world there is no set-up of provision of these benefits to informal workers.

A number of social protection arrangements that are operating in the public as well as private sector covering a very small proportion of old-aged people of the country, whereas a major proportion of the old-aged people working in the informal sector remains generally unprotected by these social protection arrangements.

A provident fund is an investment fund contributed by employees, employer and sometimes the state, out of which a lump sum amount is provided to each employee on retirement. Whereas, a pension is a fund into which a sum of money is added during a worker’s employment years, and from which payments are drawn to support the person’s retirement from work in the form of periodic payments.

The informal sector plays a key role in developing countries like Pakistan. This sector can be classified as self-employed workers and wage workers performing different jobs from traders to small producers. The informal sector has grown more rapidly since the last three and a half decades than the formal sector in Pakistan. According to the Pakistan Labour Force Survey 2014-15, almost 72.5 per cent non-agricultural labour force is earning its livelihood through the informal sector. This sector is more or less evenly distributed in rural and urban areas. According to the survey, the total civilian labour force in Pakistan is 61.04 million, and among them 44.25 million employed labour force is associated with the informal sector.

The government can get advantage of this huge informal sector in two ways: first, it can collect a specific share of provident fund and pension every month equivalent to the share of formal sector employees and second, it can also receive income tax from informal sector workers equivalent to the share of formal sector employees. This will become a win-win situation for both government and informal sector employees.

Let’s discuss first about the old-age benefits to the informal workers, the largest current provider of pension and other old-age benefits to the formal private sector is the Employee Old-Age Benefit Institution (EOBI) which is a semi-government organisation working under the Ministry of Overseas Pakistanis and Human Resource Development. Employees contribute Rs130 and the employer contributes Rs650 a month.

In the case of the General Provident Fund (GPF), as per rules government employees’ contribution is for BPS-1 it’s 3%, BPS-1 to 11, it’s 5%, and BPS-12 to 22, it’s 8% of monthly salary. The government contributes an equivalent amount monthly to every employee. The BPS-1 annual salary is around Rs178,080 and BPS-22 annual salary is around Rs1,640,640. The BPS-1 employee’s monthly provident fund deduction is Rs337 and BPS-22 employee’s monthly provident fund Rs8,210.

It would be good if the government designs a set-up for provision of pension and provident fund to informal sector employees through EOBI or any other organisation as per rules of formal sector employees and divide them into income groups like government employees. And if the informal sector employees contribute Rs780 a month as pension and provident fund according to their annual income, the government can get a huge amount of income from this source. Suppose on average an informal worker contributes Rs2,000 a month then the government can get Rs1.06 trillion ($10 billion) annually. The government has to return this amount in a minimum of 15 years as per its pension and other related rules, so it can invest this huge amount annually in development projects and can generate more money.

Islamabad is currently facing a huge budget deficit of around Rs1.2 trillion. The government tries to bridge the gap between income and expenditures through external and internal borrowings. This is because we have a low number of taxpayers in the country. According to the Federal Board of Revenue (FBR), as of 9th March 2017 the total number of taxpayers in Pakistan is 1,039,291. In a country of around 200 million population, only a little over one million people pay taxes, which is around 0.5% of the total population.

The informal sector is not under the tax net of the country, and there is a dire need now to bring them under the tax net. The informal sector employees are ready to pay taxes but they need facilities like formal sector employees. With the above set-up and other benefits, if provided, to the informal sector, more people will be willing to pay taxes but they should be asked to pay taxes according to the rate of salaried employees and not according to the self-employed rate. If we suppose that on average they pay PKR 1,000 a month in income tax then the government can get Rs531 billion ($5.15 billion).

The government is continuously borrowing from domestic and international financial institutions, and its debt and liabilities have increased to Rs22.5 trillion now. Recently, the World Bank approved a loan of $450 million and China sanctioned $600 million. There is no long-term plan for repaying this huge debt, in fact we are taking further loans on high interest rate for debt servicing. The government seriously needs to develop trust among informal sector workers in order to achieve the mutual gains.

With the help of Rs1.6 trillion annually, the government will not need any borrowing for bridging the gap of budget deficit, rather it will have a budget surplus every year. With investment in more development projects, we will be able to pay back all our debts and join the ranks of developed countries.


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The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.