Rethinking black money

IN Pakistan, ‘black money’ is frequently mentioned as a problem that must be eliminated. Politicians, officials and talk shows describe it as money that is illegal, untaxed or linked to crime. However, this way of thinking is too simple and hides the real issue. When very different kinds of money are grouped together, it leads to poor policies. These policies create confusion, unfair treatment, and slow economic growth. Because of this mindset, many people choose to hide their wealth instead of using it productively. Money remains stored in cash, gold or property instead of being invested in businesses. The government’s failure to understand the differences between types of wealth is one of the reasons Pakistan struggles to grow and depends heavily on foreign aid.

To fix this, we must first understand that ‘black money’ is not just one thing. It comes from three different sources, and each requires a different response.

The first type is money earned through criminal activities. This includes drug trafficking, smuggling, illegal gambling and bribery. This money should be investigated and punished through strict enforcement. The second type is money earned legally but hidden to avoid taxes, by reporting less income on sale of goods and services or by faking expenses to reduce taxes owed. This money is not criminal in origin, but the act of hiding it makes it illegal. It should be brought into the tax system with appropriate penalties. The third type is the most common and important. This is money that is neither criminal nor always deliberately hidden. It simply exists outside the formal system because that system is complicated, unreliable or unfair. Many people earn in cash, save informally, or hold assets in someone else’s name because dealing with official systems is difficult or risky.

Most of what is called ‘black money’ actually falls into this third category. This does not mean avoiding taxes is acceptable, but it does mean we must understand why people stay outside the system. When the government treats all wealth as suspicious, it does not make it disappear but pushes it further into hiding.

Pakistan cannot grow if it continues to treat its own savings as suspicious.

Another common misunderstanding is that the formal economy and the informal economy are separate. In reality, they are closely connected. Informal businesses buy from formal companies, and formal companies sell to informal ones. Money flows between them constantly. For example, in property deals, it is common to conceal part of the payment even in an otherwise legal transaction. This creates an unfair burden on formal businesses. They must follow strict rules, pay taxes and keep records, while competing with businesses that do not face the same requirements. As a result, the system discourages compliance.

When people feel their wealth is always under suspicion, they lose trust in the system. They prioritise safety over growth. Instead of investing in businesses or banks, they store wealth in cash, gold or real estate. These options are not very productive, but they feel safer. This leads to a larger economic problem. For a country to grow, savings must be turned into investment. Banks and financial systems help move money from savers to businesses. But when wealth stays outside the system, this process breaks down. Businesses cannot get loans easily, investment slows and growth suffers.

Pakistan’s dependence on foreign loans and aid is closely linked to this issue. A large amount of domestic wealth exists, but it is not being used effectively because it remains outside the formal system. Government policies have often made things worse. Informal channels allow money to leave the country and return as ‘foreign investment’ or remittances, gaining legal status at low cost. Tax amnesty schemes also send the wrong signal by suggesting that tax evasion may eventually be forgiven at a discount. At the same time, unpredictable enforcement discourages people from becoming formal. If individuals fear harassment, unfair taxation or sudden penalties, they prefer to stay informal. In many cases, remaining outside the system seems safer than complying. Calling all this money ‘black’ and trying to exclude it from the economy is not only inaccurate but also harmful. No successful country has grown by rejecting its own wealth. The goal should not be exclusion, but inclusion.

This does not mean all wealth should be accepted without question. Criminal income must be dealt with firmly through investigation, punishment and confiscation. But money earned legally, even if untaxed, should be brought into the system through normal tax rules, with reasonable penalties, not fear.

A deeper problem is that the government lacks clear information about who owns what, where income comes from, and how assets are transferred. Land records are incomplete, and business ownership is often unclear. Because of this weakness, the term ‘black money’ is used as a vague label instead of solving real administrative problems. At the same time, businesses and individuals face too many rules, approvals and delays. Court cases can take years, and land is often poorly managed. These issues act like hidden taxes because they reduce profits and increase uncertainty. When the system already feels unfair, people are less willing to pay taxes honestly.

A better approach would start by abandoning the vague term ‘black money’ and replacing it with clear categories. Criminal income, untaxed income and undocumented wealth should each be treated differently. Untaxed but legal income should be integrated into the tax system through consistent rules. Hidden or proxy-held assets should be made transparent, with proper penalties where needed. Criminal wealth should be handled strictly under the law. At the same time, the government must make it easier and safer to be part of the formal system. Taxes should be simple, rules clear, and records digitised. Most importantly, people should see real benefits from being formal, such as access to finance, legal protection and business opportunities. Being part of the system should feel like an advantage, not a risk.

Pakistan cannot grow if it continues to treat its own savings as suspicious. Growth will come from using these savings productively. Instead of seeing domestic wealth as a problem, the country must treat it as a valuable resource.

Nadeem ul Haque is former VC PIDE and deputy chair of the Planning Commission.

Shahid Kardar is a former governor of the State Bank of Pakistan.

Published in Dawn, April 22nd, 2026

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