Profit E-Magazine Issue 310

08 Bad practices and over-reliance on govt has made Pakistani agriculture volatile and uncompetitive. It doesn’t have to be.

14 The bull case for Pakistan

24 Pakistan has a serious taxation problem. Its answer is in the constitution

28 Getting to the root of the subsidy addiction

34 A major multinational has been fined Rs 6 crore for deceptive marketing of their soap. They aren’t the only ones

38 Pakistan is in the midst of an investment winter. Could Patient Capital be the way out?

44 It’s been a great year for the stock market. Was it for real?

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Bad practices and over-reliance on govt has made Pakistani agriculture volatile and uncompetitive. It doesn’t have to be.

It is a very simple equation. Pakistan has a set amount of land (possibly shrinking) and a growing population. That means we need to grow more food on less land

By Abdullah Niazi

Pakistan is food insecure. This means that people can’t access the food they need to live their fullest lives. Even though a lot of households might have access to food, there is a severe lack in the quality and quantity which leads to issues of malnutrition and a population that is growing weak, unhealthy, and inefficient.

This is despite the fact that Pakistan is ranked 8th in producing wheat, 10th in rice, 5th in sugarcane, and 4th in milk production. Even these figures are there thanks to Pakistan’s land being arable, its farmers being seasoned experts in staple crops, and there being enough room and fertility in the land to grow these crops despite the lack of farm mechanisation.

It is a sad state of affairs, but there is an opportunity to be found in this. Pakistan has the basic building blocks to let agriculture thrive. But to get to this point, we need to begin by understanding the scale of the problem, identifying the key factors that hold this country’s agriculture back, and mapping a clear path of action that does not involve the government.

Food insecurity is killing us

In 2019, the State Bank of Pakistan (SBP) released a report with alarming data on food insecurity in the country. The report claims that nearly 37%

of households in Pakistan are food insecure. In the five years since the SBP’s report, matters have only worsened. Food price inflation in Pakistan has been in double digits since August 2019. The cost of food has been 10.4-19.5% higher than the previous year in urban areas and 12.6-23.8% in rural areas, according to figures published by the Pakistan Bureau of Statistics.

So how does a country with one of the largest agrarian economies in the world find itself unable to sufficiently provide food for nearly 40% of its population? For decades, agriculture has been neglected and people’s earnings have been hit by one economic crisis after another. On top of this, particularly in the past decade or so, climate change related disasters and changes in the environment have resulted in our already neglected agriculture becoming less competitive.

It sounds baffling that a country with the capability of producing food sufficient not just for itself but also to export would be facing food security issues. Despite the fact that Pakistan produces vast quantities of major staple and nonstaple food crops, the state of food security in the country is inadequate.

According to the UN’s Food and Agriculture Organization (FAO), the concept of food security is flexible, but is widely believed to “exist when all people, at all times, have physical, social and economic access to sufficient, safe and nutritious food which meets their dietary needs and food preferences for an active and healthy life.”

In short, for a country to be considered food

sufficient it does not just have to produce a sufficient amount of food, but that food should be easily available, affordable, and of a quality that meets basic nutritional requirements. For a reliable level of food security, it is vital that the access and affordability of food is not affected by shock events such as floods and economic crises that result in inflation. The concept is not difficult to grasp, but it is so simple that it often gets lost in the cracks. Food is the most basic building block of human life. The quality and quantity of caloric intake of a population affects its overall productivity, standard of living, and most importantly happiness and satisfaction.

While access to food is a basic, fundamental human right there is a way to put an economic cost on food insecurity. The lack of food security has strong economic implications. According to a special section of the SBP’s annual report from 2019-20, the state of food security has strong linkages with the state of human capital in the country. The Food and Agriculture Organisation of the United Nations has also estimated that a high rate of malnutrition can cost an economy around 3-4% of GDP. In the case of Pakistan, estimates suggest that malnutrition and its outcomes cost the economy 3% of GDP (US$ 7.6 billion) every year.

To put this in very mathematical terms, malnutrition and food insecurity manifests in the shape of high child mortality rates, prevalence of zinc and iodine deficiencies, stunting, and anaemia, which lead to deficits in physical and mental development that weakens labour productivity and loss of future labour force in the country.

On a much more human level, however, the lack of food security means a whole lot of misery, hunger, and anguish. According to the State of Food Security and Nutrition in the World report for 2023, nearly 10.5 million people (29 percent of the population analysed) are experiencing high levels of acute food insecurity between April to October 2023. The last detailed report on the issue came out in 2021, and that indicated the prevalence of undernourishment in Pakistan is 12.3% and an estimated 26 million people in Pakistan are undernourished or food-insecure. Pakistan’s children have suffered and are continuing to suffer. Malnutrition from an early age results in consequences that last entire lifetimes. Add on top of that a high population growth and unfavourable water and climatic conditions and you have a scenario that threatens to spill over and cause mayhem. Pakistan is barely maintaining its current food security level of just over 60%. According to the SBP report mentioned earlier, “of the 36.9 percent of the households in Pakistan labelled as “food insecure”, 18.3 percent face “severe” food insecurity.”

Imports, R&D, and climate change

So what exactly is holding our agriculture back? There is of course the reality of government interference and incompetence that we will not get into at this stage. But if Pakistan was an open field and a large corporation was coming in to farm on it, what would be the issues they would have to tackle?

Imports

This is the first one and a big one. Despite being a large producer of food, Pakistan will need to import certain foods no matter what because they simply cannot be grown in Pakistan. akistan produces a lot of its food on its own. When it comes to vital crops like sugarcane, wheat, and rice farmers are regularly backed by support prices and manage to produce enough to export as well. However, some of our most basic caloric inputs are imported with very little attention being paid to growing them domestically. And there is no example more pertinent than oilseeds.

Oilseeds is a term used to describe any kind of seeds or plant product that can be compressed to extract and produce oil for cooking – basically the raw product for edible oil. Oilseeds have two purposes. The first is to produce edible oil for cooking purposes. The other is to produce ‘meals’ using the mulch and byproducts of the compression process that

are then fed to livestock including poultry and cattle.

In Pakistan, nearly 90% of the import of oilseeds is constituted by palm and soybean oilseeds. In its recently released report for the first quarter of the FY 2021-22, the SBP included a special section on rising palm and soybean imports. According to the report, Pakistan’s palm and soybean-related imports stood at US$ 4 billion in FY21, rising by 47% year-onyear, compared to compound average growth of 12.3% in the last 20 years. Pakistan’s reliance on these two oilseeds is not out of sync with global trends, and some of the largest producers of canola and sunflower – which are the third and fourth most consumed vegetable oils in the world – still rely heavily on palm and soybean.

Now, these seeds cannot be grown locally. Canola, sunflower, cotton and mustard seeds are indigenous to Pakistan and easily grown, but soy and palm still make up an important chunk particularly for the poultry industry. The issue here is less about finding alternatives and more about being able to trade, which means Pakistan needs crops that they can produce in massive numbers and export to the world and get whatever we need in exchange. This requires dedicated efforts and a huge focus on research and development, which brings us to our next issue.

Research and development

R&D. It is a buzz-term that you will find everywhere in organisations, think tanks, and

government departments. But in the field of agriculture, it is an oft touted but rarely implemented mantra. One of the most important things to understand is that as the world’s population has grown, more land has had to be brought under cultivation to meet humanity’s caloric needs.

And as the world has progressed, this has required a serious scientific approach. Research in the field of agriculture has led to mechanisation of farms, the development of seeds that give higher yields and are more resistant to different weather conditions, and areas before thought uncultivable have been turned into rich sources of food. The primary role of agricultural research is to heighten knowledge and improve technology. It heightens understanding of the interactions and interdependence between production systems and farming communities. This requires a holistic and interdisciplinary approach to problem identification, analysis and solution-finding.

This has been entirely missing in Pakistan. A major reason for the food price inflation in recent times are increasing input costs for agriculture over the past two years. Higher fuel prices and the devaluation of the rupee have led to a rise in costs in both fertiliser and seeds. Prices increase more in rural areas because commodities are diverted to cities due to higher profit margins, and because of the higher cost of imported items such as pulses and cooking oil.

Some of these situations are largely out of the control of farmers and provincial agricultural departments. However, low yields and production losses due to climatic changes have also had a detrimental impact on commodity prices. These factors could have been avoided if Pakistan had robust agricultural research organisations focused on producing better quality seeds, providing farmers with better techniques, and tailoring solutions for different regions. While organisations such as the Pakistan Agricultural Research Council (PARC) do exist, their role is vastly underplayed. Until a scientific approach can be taken to try and resolve the issue, there is very little that can actually be done.

As things stand, Pakistan may face an issue of even self-sufficiency in the coming years. And even if we manage to stay sufficient, that does not guarantee food security. A country is considered food secure if food is not only available, but is also accessible, nutritious, and stable, regardless of its origin. Pakistan provides support to its farmers on various levels, particularly when it comes to crucial crops such as wheat. However, even this may become difficult.

According to the SBP special report, land extension is not an option anymore

for Pakistan, and in the presence of current cropping practices, water shortages and expected climatic changes, it will be challenging to improve yields substantially. This means Pakistan’s best bet is to invest heavily in research and development in the hopes that we can produce research that allows us to grow high-yield crops with a tolerance for rapidly changing climate conditions. And that is what brings us to our next time-bomb, and perhaps the biggest one there is — climate change.

Climate change

This one is the Big Kahuna, and we need not look beyond the events of the 2022 floods. Climate change in Pakistan is a ticking time bomb that has already gone boom. If there was need for any other proof, then all you have to do is look at the disastrous flooding we saw less than two years ago. The water ravaged millions, destroyed crops, levelled entire villages, displaced 33 million people, and caused an estimated $40 billion in damages all over the country.

Climate change has resulted in a gargantuan increase in the amount of monsoon rainfall that Sindh and Balochistan have seen this year. The two provinces saw the highest amount of water fall from the skies in living memory, recording 522% and 469% more than the normal downpour this year according to the met department.

The effects are devastatingly clear. Pakistan was hit with a major wave of climate-change related activity that resulted in death, destruction and total annihilation in some areas. And this will by far not be the only time the issue strikes us. According to UNESCAP, Pakistan could lose more than 9% of its annual GDP due to climate change. Severe heat waves and untimely rains have also severely impacted Pakistan’s agricultural production. The Intergovernmental Panel on Climate Change has warned that the frequency of such extreme weather conditions will increase in the future, causing a severe risk to Pakistan’s food security. The Asian Development Bank projects sharp declines in key food and cash crops (such as wheat, sugarcane, rice, maize, and cotton) in the coming years due to rising cultivating costs and climate change. And the problem is all encompassing. On the one hand, there is increased rainfall and erratic weather patterns that our farmers are unable to keep up with because they do not have the resources to do so. On the other hand, there is a much more critical hold that changing weather patterns have on the jugular vein of Pakistan’s agriculture.

In addition to the many historic reasons for the state of the Indus River, climate change is causing direct consequences already, adding another layer of complexity to an already troublesome issue. What is clear is that the early effects are already visible. In an arti-

cle published in the journal for Global and Planetary Change, a report on the state of the Tibetan Plateau published a few years ago reads that the region has faced “evident climate changes, which have changed atmospheric and hydrological cycles and thus reshaped the local environment.”

To put that into perspective, more than 1.4 billion people depend on water from the Indus, Ganges, Brahmaputra, Yangtze, and Yellow rivers which are fed by these water towers. Without an effective policy on how to manage and handle this crisis, Pakistan does not stand a chance on the food security front.

Jo Banain Gai, Khain Gai

This is what it all comes down to. Allow us the liberty here to divert from agriculture for just a moment.

For a very long time, Pakistan has been in a bad relationship with debt. And like all toxic relationships, it is a boom-and-bust cycle of taking a loan at a bad time, getting into bad habits, having a falling out, pretending to go through a period of change (symptoms may include political instability, jingoism, and reliance on religious symbolism), before finally becoming desperate enough to once again go back to the debt equation.

Pakistan faces severe external financing challenges with rampant domestic political instability and higher rates in developed markets hitting capital inflows on the one side, while on the other rising commodity prices pump-up the import bill to unsustainable levels at a time when the country’s largest export markets in advanced economies are facing recession.

What that means, essentially, is that as prices rise on the global market Pakistan is left vulnerable. Since we rely majorly on exports, we need more dollars at home to buy commodities. And since the American federal reserve is in Washington and not Karachi, the only way to get those dollars is to earn them by selling our products on the international market.

This is what it boils down to. The simple fact is that in the absence of borrowing all we are left with is what we as a nation can produce. This means that all the accountants, journalists, marketing professionals, video editors, HR managers and other members of the services industry are useless to what we can call the very basic core of what we as a nation must produce. So what

does that leave us with? This is a very basic economic equation but at the end of the day, what we produce we consume ourselves and then send the excess of our production to the world to earn dollars and trade with other countries and get products we can’t produce as imports. Our manufacturing sector and our agricultural sector produce the goods that we can consume. And that is our little segue back into agriculture. Jo Banai Gai, Khain Gai. What better thing for an agrarian food insecure country with a reliance on certain imported foods to make than more food?

Pakistan’s manufacturing industry has a long way to go to be competitive on the international market. But perhaps one of the fields in which Pakistan has the potential, the raw materials, the space, and the natural inclination to succeed is the agriculture sector. And more importantly than that, for a food insecure country like Pakistan, focusing on agriculture gives us the added advantage of regaining our food security and self-sufficiency.

Pkistan’s agriculture has suffered from a lack of attention for decades. The country’s natural resources, soil fertility, and robust rivers have kept Pakistan in the running as a solid agrarian economy for almost its entire existence. However, shortsightedness has meant that successive governments have been very comfortable allowing things to run as is without investing in the future. As the population has increased, climate change has dug in its claws, and water scarcity has started hitting farmers, it is quickly becoming apparent that we have fallen behind. Immediate attention is needed, but only time will tell whether decision makers realise the urgency before it is too late. After all, this is not a question of just our agriculture. It is a question of what we are willing to do to thrive. n

The bull case for Pakistan

WHY, DESPITE ALL THE NEGATIVITY, THE FUNDAMENTALS OF THE COUNTRY’S ECONOMY ARE ABOUT TO HIT A POSITIVE TIPPING POINT, FOLLOWED MOST LIKELY BY A MULTI-DECADE BOOM

By Farooq Tirmizi

If you read about Pakistan’s economy, you have probably – at some point – felt some optimism about Pakistan’s prospects as a country. Just as equally likely, you have probably felt that optimism fading away some time over the past 2-3 years, if not even earlier. It is our contention that you were not wrong to feel that optimism. You saw something real. And it is still there.

This article is not a pie-in-the-sky optimistic view of Pakistan that believes in stupid things like “if the government were to solve these problems, we would be prosperous.” No, our view of Pakistan’s economy is that for it to be successful, the ingredients that make it successful need to be idiot-proof. Because the only logical assumption is that Pakistan will continue to be run by idiots for decades to come.

What we describe below, therefore, is a view of Pakistan’s economy that does not expect the government of Pakistan to do anything to help the economy at all. Indeed, we go so far as to assume that the government of Pakistan will continue its destructive ways and that the growth we describe will simply have to make room for that destructive behaviour.

Luxuries like “political stability” and “a conducive environment for foreign investors” are not factors we will be listing in our bull case for the Pakistani economy.

We do not, however, have a completely cynical view of the government. It is not as though the government of Pakistan does nothing right. It is just that it tends to find the most inefficient ways of doing the right thing, starts doing them decades after other countries, and makes slower progress. We do not anticipate any of that changing any time soon.

This article is the fourth in a four-part series we have been publishing over the past few weeks. It tackles the fourth in what we think will likely be the four key ingredients of Pakistan’s ability to capitalize on its demographic dividend. The four ingredients are:

1. Electricity generation, which needs to be above 500 kilowatt-hours per person per year in order for the country to have enough electricity to begin the industrialisation process;

2. Stabilising fertility, which means having a fertility rate below 3.0 in order to have the right balance of dependents and working age adults in the population to work, save, and grow the economy;

3. Sufficient literacy, specifically meaning adult literacy above 70% in order to have a workforce that can do basic skilled tasks in industrial settings, and educate their children to move even further up the value-chain

4. Sufficient domestic savings, specifically a domestic banking sector large enough to result in relatively lower costs of capital.

Every country that has industrialised over the past 75 years has had all three of the first of these characteristics come together at the same time (the fourth one is an almost inevitable byproduct of the second two). Many countries that did not have these characteristics come together are very likely to have missed the boat on industrialization – and therefore creating a mass middle class – entirely.

You would think that Pakistan will be in that second category of countries, because that is how our luck seems to run. Call it Murphy’s Law of Pakistan’s political economy: any bad thing that can happen to a country usually does happen to Pakistan.

Except, you would be wrong. Pakistan has already achieved the first milestone, and is on track to achieve the second two by some time early next decade, and possibly as early as 2030. And it will do so in a manner that is almost immune to government actions, meaning Pakistan’s politics can continue to be the dumpster fire that it is and we will still hit each of those three milestones at the same time, meaning we will – just barely – be able to make it to becoming one of the lucky countries that is able to capitalise on its demographic dividend.

What follows is a summary of how the first three ingredients were put in place (we already covered them in three previous editions), as well as how the fourth one will answer the question: “but how will we achieve economic progress without political stability?”

We will, because there is no set pattern to political stability and economic progress. Some nations achieve political stability, and then economic progress. Some attain economic progress first, then political stability. Clearly, we are the second type of country.

But first, a recap of the previous three stories, told through the lens of how they put in place each of the necessary pillars of economic progress.

Electricity availability

This is the one area where the government of Pakistan has taken meaningful action, though perhaps in the most inefficient way imaginable. Here is the punchline: for any country to industrialise, it needs to have electricity generation (not just capacity, but actual generation) of above 500 kilowatt-hours per person per year, according to research by Charles Robertson, an economist at FIM Partners, a London-based investment firm, and author of the book The Time Traveling Economist.

Pakistan has been at that level since at least 1999, though it helped that in the third Nawaz Administration from 2013 to 2018, Pakistan expanded its power generation capacity by a lot – actually, by too much.

The debt and capacity payments from that building spree are an issue, to be sure, but most crucially, if we are going to take on debt like we always do, at least this time it was for an investment in the future productivity of the country. In purchasing power terms, this is the most expensive electricity will likely ever be in Pakistan, and costs are likely to decline as more and more consumption means less and less of your bill needs to go to pay for capacity payments. That will – eventually – reduce the per unit cost, at least in inflation-adjusted terms, over time.

You cannot build prosperity in a country without a mass middle class, and you cannot build a mass middle class without industrialization, which in turn is impossible without sufficient electricity. On that front, at least, Pakistan appears to have what it will take.

Stabilising fertility

This factor is perhaps the most under-appreciated: family size in Pakistan is getting smaller, because more and more women are choosing

to have fewer children. So long as we do not overcorrect and start having too few children, this factor alone is an important driver of economic growth even if nothing else happens.

This fact is best illustrated with an example: suppose you have a family with a husband and wife and six children, the oldest of whom is 10 years old. The husband works for a minimum wage job bringing in Rs25,000 a month and the wife works as a domestic worker, bringing in maybe another Rs15,000 per month. That’s a Rs40,000 per month income spread over an 8-person household, or Rs5,000 per person per month. Now suppose they had just three children instead of six: that same income gets spread over five people, meaning Rs8,000 per person per month.

Where is that extra Rs3,000 per person per month going? More food, so probably less malnutrition. And more education, so the children will have a higher income than the parents.

Note that we did not add education or higher earning ability of any kind to either parent in that household. Just by reducing the number of children, their economic situation improved, thereby improving the economic wellbeing of the country as a whole.

The scene we describe above has been happening across Pakistan since 1990. Right now, the average Pakistani woman has 3.3 chil-

dren, down from 6.0 as recently as 1992. This has the effect of increasing the proportion of the population that is part of the labour force, which improves household economic conditions. And in Pakistan, at least, it has been a precursor to rising human capital levels.

As state above, countries that are able to go below 3.0 in fertility begin to have the kind of rising domestic savings and rising literacy to attempt industrialisation. There is no such thing as an industrialised country with 6-children families as the norm.

Rising literacy

Talk about the advantages of a larger population and most Pakistanis’ first objection will be pointing out that most of that population is illiterate, or at least badly educated. We would like to point out two things: firstly, the majority of the population in Pakistan is now literate, and every successive generation is better educated than the previous one. And secondly, while it would have been better had they had a good education, this is Pakistan’s first majority-literate generation, and basic literacy may be sufficient for now (emphasis on “now”; it will not be enough in the long run).

In urban areas in Pakistan, particularly in Punjab, we now have near-universal youth

literacy, and the gender gap has almost completely closed. This has been made possible almost entirely due to the previous factor we just described: smaller family sizes means that each household has more money to spend per child, and a majority of Pakistani households are choosing to use those extra resources to educate their children.

Overall, adult literacy rates in Pakistan are just above 60%, which is below the 70% that economists like Robertson believe is the minimum required level to start industrialising, but in urban Pakistan, where that industrialisation is likely to begin, adult literacy is above 70% and youth literacy is above 90% in most major cities. Perhaps most promisingly, the youth literacy rate for boys in urban Punjab, where over half the population lives, is only 1% higher than that for girls.

While part of this progress is certainly driven by improvements to the government’s own infrastructure, measured purely by proportion of the increase in student enrollment, the private sector has contributed just under 75% of the total growth in enrollment between 2009 and 2022, according to enrollment estimates published in the Pakistan Education Statistics reports published by the Pakistan Institute of Education. The public sector accounts for the remaining 25%.

In other words, Pakistanis are not

waiting around for the government to fix the schools (even though the government is making some progress on that front). They are simply going ahead and paying for private schools themselves as soon as they have the ability to pay. And they have that ability to pay just because the earlier, illiterate generation had fewer children.

As we have argued before, education in Pakistan is not good. But it might finally be good enough for us to get started on the path to prosperity.

Put these three ingredients together, and you get the fourth one, the one that will make this all immune to government stupidity: rising domestic savings.

Rising domestic savings

It bears repeating: any model of economic growth and prosperity for Pakistan cannot rely on some magical reforms undertaken by the government because the absolute fecklessness of Pakistan’s ruling elite simply cannot be counted upon to change in any predictable time frame. But Pakistan’s upward march towards industrialisation will happen because the government’s failures will be neutralised.

That will happen when Pakistan’s bank

deposits rise from the roughly 32% of gross domestic product (GDP) they are right now to the roughly 50-60% of GDP they will be by around 2035. Why will bank deposits rise that fast? Because when a country crosses the tipping point of 3 children per adult woman, it sees what is typically the sharpest increase in its bank deposits as a percentage of GDP.

According to research by Robertson, an economy that has between 3-4 children per woman has deposits equal to an average of about 30% of GDP, which is very close to the number Pakistan is at right now. When it goes below 3 children per woman, it sees a rapid increase in its household ability to save, and bank deposits as a percentage of GDP effectively double to about 60% of the total size of the economy.

Pakistan will hit that tipping point sometime around 2030, at which point the rise in deposits is likely to be quite rapid. Crucially, this is the kind of change that is already baked in and the government can do almost nothing to mess it up.

This matters because, while there are many ways the government of Pakistan is dysfunctional, the one that harms the economy the most is the fact that it persistently runs very large fiscal deficits relative to the total size of the economy, or GDP. The government does this because Pakistani politicians are a notoriously bad at determining what is a good or bad use of government money.

Over the course of a business cycle, Pakistan’s budget deficit tends to clock in at about 6% of GDP per year. Financing that from domestic savings with bank deposits equaling just 32% of GDP is effectively impossible, which is why the government does two things that are both inflationary:

1. It borrows from outside the country, which causes the currency to weaken whenever repayments are due, which causes inflation.

2. It simply prints the money.

But what would happen if you needed to finance a 6% of GDP budget deficit with a bank deposit base that was equal to 60% of GDP? You would have a much easier time being able to do so.

Over the past 15 years, the government of Pakistan has run a fiscal deficit equal to an average of about 6.4% of GDP per year. It has financed just under 41% of that deficit from bank borrowing, with the bulk of the remainder coming from foreign borrowing or printing money. This borrowing represents an average of about 8.2% of the banking sector’s deposits in any given year.

Sure, the government could try to reduce its frivolous expenses like the bailouts of loss-making state-owned companies, and it could tax the untaxed sectors of the economy. But that would involve an improvement in the quality of our government and we at Profit simply do not believe in that. So instead, we assume this level of borrowing will remain the same over the course of any business cycle.

Now imagine what happens if Pakistan’s banking sector is larger, at around 60% of GDP. Apply that same 8.2% of banking sector deposits as being a sustainable path towards deficit financing, and you get the banking sector being able to comfortably finance a budget deficit of about an average of 5% of GDP, leaving an average of about a 1.4% of GDP deficit per year over the course of a business cycle that needs to be financed by foreign borrowing or printing money. That is a much more manageable number.

But, see, the progress does not simply end there. Because once the government can finance the bulk of its deficit from domestic bank deposits, it will not need to print as much money, which in turn will cause a long-term reduction in the inflation in the economy, which currently averages 8% per year. A reduction in the interest rate will spark a reduction in the government’s own cost of

borrowing, which currently averages over 10% per year for its long-term bonds, implying an average 2% real interest rate.

Two things are likely to happen once the government starts financing the bulk of its deficit domestically: the inflation rate is likely to start coming down, and is likely to vary a lot less than it does (that 8% average is hiding the fact that inflation swings from as low as 4% to as high as 35% over the course of a business cycle). Inflation will be both lower, and will likely swing more narrowly than it currently does. That will reduce the government’s cost of borrowing, which will reduce its need to borrow in the first place, reducing further its need to print money, further reducing the fiscal drag on inflation.

And since the fiscal deficits will be lower, the government’s need to borrow from foreign lenders – which creates this artificial cycle of currency stability followed by crashes in the exchange rate – will also decrease both in intensity and frequency. We might – just maybe – be able to say good bye to the International Monetary Fund (IMF).

Pakistan’s current account deficit tends to be around 1% of GDP in years when the government leaves the exchange rate alone and stops trying to artificially prop it up. That level of current account deficit will probably still cause the Pakistani rupee to continue depreciating – but probably much more slowly than the current average of over 7.5% per year.

Notice that all of this positive shift is likely to happen with absolutely no improvement in the behaviour of the government with respect to its fiscal prudence.

Other countries – with governments that are capable of getting their house in order – would use the increased domestic capital to allow businesses to finance their growth, and further increase the economic growth potential of their economies. That will likely not happen in Pakistan.

But what will happen is that the people will have collectively developed more capacity to absorb the pain that comes from the government’s refusal to fix itself, and we will be able to get on with our lives.

Once the country’s economy has a lower (not low in absolute terms, but low relative to current levels) and more predictable level of inflation, the cost of borrowing for businesses is lower, and they have a literate workforce and a reasonably plentiful supply of electricity, they can begin the work of industrialising the economy in earnest.

Yes, the government will continue to harass legitimate businesses, will continue to tax what it can and not what it should, and will continue to be capricious in its rulemaking activities. But all of those are much more manageable problems to deal with. Aggravating, to be sure, and the country’s economic growth would increase if the government were to improve its delivery of services to its citizens, but at least it would no longer be as regularly debilitating as it is now.

Here is the truly important part: once

this boom starts, it will likely continue almost uninterrupted for at least three to four decades. Meaning for anyone who was born in the 1990s or later, they will experience nearly the entirety of their careers in a booming Pakistani economy.

Conclusion

The point of this article is not to suggest that politics is not important or that we as a country should not try to have more political stability. It is to establish that the baseline of economic progress we can expect without succeeding in changing our political stability is still high enough that it may get us to become at least a solidly middle income country within the next three decades. If we achieve political stability before then, that will serve as an accelerant to growth. But not achieving that stability will probably not slow us down much more than the scenario laid out here.

Based on just the reduction in the gyrations caused by the fiscal deficit alone,

the Pakistani economy is likely to increase its growth rate back towards its historical average of about 5% per year in inflation-adjusted terms, which would put the country on track to become a solidly middle income country over the course of the next 30 years.

More importantly, it would do so while remaining a young, vibrant society at a time when the vast majority of the world consists of societies getting older and slowly dying off. As many of Pakistan’s best qualified professionals search for the exits, these longer-term trendlines may be worth keeping in mind.

Right now, the difference in economic opportunity between Pakistan and richer economies is quite high. But that difference is likely to narrow over time, and the social and family aspects of life become much more salient as one ages. To the future emigrant from Pakistan, we would suggest considering having a plan to come back home even if you do decide to leave.

Pakistan is about 5-7 years away from economic lift off. And you will not want to miss it. n

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Its answer is in the constitution Pakistan has a serious taxation problem.

A little thing called the 18th Amendment has set out a three tiered democracy in which taxation is a local government subject

By Abdullah Niazi

It was the kind of news one can really only laugh and shake their head at.

Early in the month, a report emerged indicating that salaried individuals had overtaken the country’s powerful textile industry when it came to income tax payments.

And the salaried class beat the textile sector by a pretty big margin. In the year 2023-24, income tax from the textile industry amounted to Rs 111.23 billion. In comparison, the salaried class pitched in with Rs 367.8 billion in income tax payments. That is more than three-times more than what the country’s largest sector paid.

This isn’t some coincidence of course. The burden on the salaried classes has increased at an alarming rate in recent times. The Rs 367.8 billion that were paid in income tax by salaried individuals was already up by nearly 40% from Rs 263.8 billion in the 202223 financial year. This contribution exceeds that of wealthy textile exporters by Rs 276.57 billion, even though they exported $16.655 billion worth of goods last year.

Put the contribution of the salaried classes to Pakistan’s tax net in context and it becomes clear just how massive it is. Out of the biggest contributors in the country, only commercial banks and petroleum products produced more tax income for the government

than salaried individuals.

The banking sector contributed Rs 946.08 billion to income tax collection in FY24, a significant 66 per cent increase, from Rs 568.68 billion in FY23.

Petroleum Products were the next big contributor. And even within this, salaried individuals pay a chunk of the sales tax that is generated from these products. Petroleum products remained a significant contributor to federal taxes, generating a total revenue of Rs 1.195 trillion in the financial year that just closed, up 5% from Rs 1.138tr in the previous year. Within this sector, income tax collections rose 6% to Rs 413.48 billion, from Rs 388.75 billion in the previous year. The sales tax revenue generated from petroleum items was Rs 457.88 billion. Customs revenue from

POL also rose, reaching Rs 310.62 billion from Rs 289.89 billion in the previous year. In addition to the taxes on petroleum products, the government also collects a petroleum development levy on them.

All of this is bound to get worse.

The budget for the upcoming year has already increased the burden of taxation on the salaried classes further, it has also increased the petroleum levy and the general increase in indirect taxation has meant the proportion of income that salaried individuals spend on taxes has increased at a breakneck pace.

This is one example of how badly structured taxation is in Pakistan. Why is this the case? To put it quite simply, the wrong people are responsible for taxation in this country, they in turn focus on the wrong people to

squeeze more and more out of, and they do it on behalf of the wrong people.

What we mean by this is that the federal government is in charge of taxation. They tax those already documented because that is easier for them than casting a wider net. They do so on behalf of the provinces, which receive large portions of this taxation revenue through the NFC Award. Of course, the provinces themselves are actually supposed to collect these taxes. Our entire contention is that there is an answer for these woes within the constitution in the form of the 18th Amendment which enshrines a three tiered democracy and demands the devolution of powers, including taxation, to local governments.

It’s bad

The situation is quite bleak. The real problem is that Pakistanis are taxed unfairly and those that should be paying the lion’s share end up paying nothing. Just take a look at Pakistan’s tax structure. Tax structure refers to the share of each tax in total tax revenues. The highest share of tax revenues in Pakistan in 2020 was derived from value added taxes / goods and services tax (39.8%). The second-highest share of tax revenues in 2020 was derived from other taxes (33.3%).

In comparison to Pakistan, countries in the Asia-Pacific region only collect about 23% of their taxation from goods and services taxes — meaning Pakistan’s average is almost double. Why is this the case? The biggest reason of course is that taxation in the country is centralised. The FBR collects almost all taxes (even the ones that should be collected by provinces under the 18th amendment) and then those collections are then given to the provinces in the form of the NFC award leaving the federal government with very little spending money. In an earlier interview former Finance Minister Dr. Hafiz Pasha, while talking to Profit, lamented that, “We as a country have failed to implement the beautiful 18th amendment. The implementation has been slow and weak.”

Since the share of the provincial governments, under the NFC awards, over the last few years has been increased from 40% to around 57%, it has provided the provinces with very little incentive to develop their own revenue sources. Despite having access to the two biggest cash cows, services and agriculture, the share of provincial tax revenue is close to 1% of the GDP.

The solution of course is right in front of us: devolution. More than just being a third tier of democracy, having a local bodies system means having a new economic process. In essence, it is not just a new administrative stratification, but also involves the dispensa-

We as a country have failed to implement the beautiful 18th amendment. The implementation has been slow and weak

Dr Hafiz Pasha, former finance minister

tion and spending of money. Things such as education and health that people automatically look towards the provincial government for would now be handled by local representatives. Perhaps most crucially, the ability of local governments to collect taxes and release their own schedule of taxation allows them to make their own money and spend it on themselves rather than waiting for the benevolence of the provincial or federal government.

Local governments are the answer

The answer is clearly right in front of us. And there have been attempts to make it work. Before we begin with the examples, it is important to note that local governments make sense. We are not speaking here specifically of any local government acts that have been passed in Pakistan, but generally of a third tier of democracy as a concept. It is a more efficient administrative system and adds another tier to the democratic process, making accountability and access to said administrators a less arduous process than it currently is. It also allows communities to look out for and administer themselves in accordance with their own best interests, and leave legislators in the assemblies to the more important task of actually legislating instead of being caught up in gali mohalla riff raff.

But more than just being a third tier of

democracy, having a local bodies system means having a new economic process. In essence, it is not just a new administrative stratification, but also involves the dispensation and spending of money. Things such as education and health that people automatically look towards the provincial government for would now be handled by local representatives. Perhaps most crucially, the ability of local governments to collect taxes and release their own schedule of taxation allows them to make their own money and spend it on themselves rather than waiting for the benevolence of the provincial or federal government.

Currently in Pakistan, the system that operates rather than local body governments is a bloated, vain, and self-contradictory bureaucracy where rather than elected representatives controlling local issues, the district is in essence the fief of a government appointed district commissioner (DC). This not just centralises authority, but means locals with a better understanding of the area’s politics and requirements are not in charge of decision making. On the matter of taxation, since DCs do not collect this, it is all left up to the Federal Board of Revenue (FBR).

We’ve seen glimpses

When the history books are written, one of the turning points in Pakistan will be the 18th amendment. In 2010 after the long years of the Musharraf era, the

Around 26% of General Revenue Receipts (GRR) in the first two years and 28% of GRR from the third year onwards will be transferred directly to local governments (LGs) through the PFC. Approximately PKR 550 billion will be allocated to LGs

Ahmad Iqbal, member Punjab Assembly

country finally seemed to be on a democratic track. And while the 18th amendment will always first and foremost be remembered for limiting the powers of the President and bringing Pakistan into a purely parliamentary form of democracy, it will also be remembered for bringing about the dissolution of certain powers from the centre to the provinces.

The dissolution of powers, however, is not complete yet. Under the 18th amendment, when matters such as health and education were made provincial subjects the understanding was that in due time these powers would be further devolved to a third tier of government – locally elected city, district, and tehsil representatives. Before the 18th amendment, the only serious effort at forming this third tier of government had been made in the Musharraf era. After it, the first time was when the PML-N government in Punjab and the PTI government in KP tried to form local governments in their respective provinces after coming to power in 2013.

The PLGA 2013 enacted by the PML-N left much to be desired. It was a very basic form of local government to begin with, and there was not much control that the local functionaries would have. Under this system, larger issues such as health and education continued to be run by the provincial government through their DCs. More importantly, there was no guaranteed funding that these local governments received.

The PLGA 2019 that followed and

was brought in by the PTI improved on this significantly. Under this Act, a guaranteed 30 percent of the provincial budget would be given to the provinces through the Punjab Finance Commission. The PTI’s Act also introduced directly elected mayors (a measure that has been removed by the new 2022 Act), and gave more control of some subjects to the local governments but still retained major responsibilities such as health and education. Details of how the 2019 Act improved upon the 2013 Act.

Of course, the PLGA 2019 never got a shot at being applied. As Dr Cheema described it, the PTI’s draft was a radical one and never seen before in Pakistan, but it was set aside by the PTI itself in 2021. The details of these acts have been covered by Profit before. The point is that on both occasions the governments were never elected, and there was no chance for a third tier of democracy armed with taxation powers to come through.

Another attempt was made in 2022 by the short-lived Hamza Shehbaz government in Punjab. The structure of governance aside, on the finance side this new bill held that under the Punjab budget, Rs 528 billion is allocated to local governments. Of this, and any future budgets, 10 percent will go directly to the Union Councils through the Punjab Finance Commission – meaning around Rs 55 billion. “Around 26% of General Revenue Receipts (GRR) in the first two years and 28% of GRR from the third year onwards will be trans-

ferred directly to local governments (LGs) through the PFC. Approximately PKR 550 billion will be allocated to LGs,” explains Ahmad Iqbal, who worked on the bill back in 2022 and is currently a member of the Punjab Assembly.

This act was financially progressive. The last time elected local governments were around in 2017 under the 2013 PML-N Act, district councils would have to get funding approval from the local DC on a project to project basis. This time, they will be empowered to make their own budgets with auditing oversight but no oversight from the DC, which would be in the true letter and spirit of the constitution.

How it would work

Even though it makes very obvious sense, there is no shortage of opposition to this act and giving financial control to local governments. Just take a look at the 2022 Act we have just discussed. The last time elected local governments were around in 2017 under the 2013 PML-N Act, district councils would have to get funding approval from the local DC on a project to project basis. This time, they will be empowered to make their own budgets with auditing oversight but no oversight from the DC.

You see, land is one of the most important sources of revenue for local governments. Taxes on land transfers, taxes on immovable property, taxes on unused property, building taxes – all of these are major streams of revenue for local governments. Particularly in large cities where there is real estate development. In most of these cities, all of these streams of revenue are controlled by development authorities, like LDA and Faisalabad Development Authority (FDA) in Faisalabad and even by private housing societies like DHA.

Essentially, local governments would be entities within themselves. What we have described here are simply some examples of flawed legislation that has been passed in the past. With true devolution, there is very much the possibility of local governments making a difference in how our taxation works. n

Getting to the root of the subsidy addiction

By Ahtasam Ahmad

A closer look at the Pakistan’s subsidy structure makes it evident where the rot starts

In recent years, the term “subsidies” has become a flashpoint in Pakistani economic discourse, sparking heated debates and policy clashes. A prime example is the 2022 controversy when the outgoing PTI government extended petroleum subsidies against IMF advice, nearly derailing Pakistan’s extended fund facility.

Despite the frequent mentions of subsidies in public discussions, a detailed analysis of their scope and breakdown is often lacking. This article aims to move beyond media simplifications and dig deeper

into Pakistan’s subsidy system. Let’s map subsidy flows, scrutinize allocation methods, and explore more effective alternatives.

The Why and Where of Subsidies

Subsidies are a key mechanism governments employ to provide direct or indirect relief to their populace. In Pakistan, the allocation and distribution of subsidies reveal significant patterns and challenges that merit closer examination.

As per the budget for Fiscal Year (FY) 2025, from the total subsidy amount of around Rs. 1.36 trillion, a staggering 87% (Rs. 1.19 trillion) will flow to the power sector, with the remaining 13% divided between food, industries, utility stores, and others.

This is not an anomaly; historically, over 80 percent of recurrent subsidy spending between FY 2013 and FY 2022 benefited the power sector. Further, energy subsidies in FY 2024 are estimated at Rs. 894 billion (1% of GDP), the highest in South Asia, with twothirds allocated for electricity consumption.

The unfortunate reality is that even after allocating such massive amounts for subsidies, additional expenses during a fiscal year in the form of unbudgeted subsidies are still required.

For instance, in FY 2023, while the target for overall subsidies was set at Rs. 664 billion, with Rs. 463 billion allocated for the power sector (including circular debt settlement), the actual disbursement to the power sector reached Rs. 870 billion. This large deviation from the target was mainly due to higher accumulation of circular debt and payments made under a fiscal package.

Powering Through Subsidies

The power sector emerges as the central focus of Pakistan’s subsidy strategy, but it’s crucial to understand what exactly is being subsidized within this sector. A closer examination reveals that a significant portion of power subsidies, approximately 80% in FY 2023, is allocated to tariff differential subsidies (TDS). The concept of TDS stems from a fundamental mismatch between the costbased electricity tariff determined by the

power regulator and the government’s assessment of what the public can afford. To bridge this gap, the government introduces a lower tariff and uses TDS to cover the difference.

At the heart of this issue lies the high cost of power generation relative to the average household income in Pakistan. The total cost of electricity provision, encompassing generation, transmission, and distribution, amounts to around Rs 35.5 per unit.

This breaks down into energy cost (Rs 10.9), capacity cost (Rs 18.4), transmission costs (Rs 1.54), and distribution cost (Rs 4.6 per kWh).

Notably, a substantial portion of this cost is attributed to capacity payments, a topic that has been receiving considerable attention in recent news and policy discussions.

Is It Worth It?

It’s evident that high energy tariffs aren’t affordable for the most vulnerable segments of society. However, the problem with blanket subsidies like TDS is that a significant portion of resources is directed towards paying for inefficiencies or to those who don’t really need subsidizing. Around 60% of residential and all agricultural consumers are subsidized, but not all of them require this support.

A World Bank analysis revealed that in FY 2019, 77% of subsidy spending benefited households in the top 3 income quintiles, while the bottom 40% only received 23%

of total spending, making these subsidies highly regressive. While the situation has improved due to subsequent tariff hikes, significant inefficiencies persist.

One glaring example is the subsidy to electric tube wells, which continues to be regressive, primarily benefiting large and wealthy farmers. Moreover, inefficiencies in the power sector, such as the collection shortfall of Rs. 239 billion reported in FY 2023, add to the tariff and require additional subsidies to cover the gap.

The irony lies in the financing of these regressive subsidies: they’re primarily funded through indirect taxes, which are themselves regressive. This information can be a bit taxing, we know.

Doing it right

The argument isn’t that vulnerable populations should be left unprotected; rather, it’s that there are more effective ways to provide support. One promising alternative is through direct cash transfers, for which Pakistan has an ideal instrument in the Benazir Income Support Programme (BISP).

In FY 2023, the BISP spending amounted to Rs 408 billion (less than half of subsidies outlay). Under the program, Rs 70 billion were disbursed to 2.72 million flood-affected families (Rs 25,000 each). The program also covers Unconditional Cash Transfer (UCT) and Conditional Cash

Transfer (CCT) schemes. Under Benazir Kafalat (UCT), 7.7 million families initially received Rs 7,000, later increased to Rs 8,750

Source: Renewables First

with 25% inflation adjustment. UCT coverage expanded to 9 million families. The CCT ‘Benazir Taleemi Wazaif’ scheme disbursed Rs 23.4 billion to beneficiaries’ children.

The assistance through programs like BISP can be better targeted and has proven to have positive impacts on people’s lives, including improvements in child nutrition, food consumption, and women’s mobility.

A World Bank analysis found that between 2011-2019, the percentage of BISP beneficiaries below the poverty line fell from 90% to 72%, demonstrating the program’s effectiveness in reducing poverty.

Even globally, multilateral organizations such as the World Bank and IMF have thrown their support behind the policy of deploying assistance through direct cash transfers while phasing out subsidies. This approach isn’t unique to Pakistan but part of a broader international trend.

As the country stands at this economic crossroads, the shift from broad subsidies to targeted cash transfers represents more than a policy change—it’s an opportunity to redefine how the nation supports its most vulnerable citizens. By embracing this approach, Pakistan could not only alleviate immediate financial pressures but also lay the groundwork for a more sustainable and equitable economic future. n

A major multinational has been fined Rs 6 crore for deceptive marketing of their soap. They aren’t the only ones

Unilever Pakistan has been fined for deceptive marketing of its product Lifebuoy. This makes them the third FMCG charged with deceptive marketing in the antibacterial soaps segment

By Shahnawaz Ali

After almost three years of enquiry and legal proceedings, the Competition Commission of Pakistan (CCP) has passed an order imposing a fine of Rs 6 crores on Unilever Pakistan for airing deceptive claims through television commercials for its hygiene and cleansing products, ‘Lifebuoy (Care and Protect) Soap’ and ‘Lifebuoy Hand Wash’.

Based on a complaint submitted by Reckitt Benckiser (RB) a few years ago, about their Lifebuoy Soap and hand wash. The CCP conducted an inquiry into Unilever Pakistan Limited’s absolute claims regarding its products, such as “100% guaranteed protection from germs”, “World’s No. 1 germ protection soap”, and “99.9% germ protection in 10 seconds.”. As per the enquiries, the disclaimers

about these claims were printed in tiny fonts and were hardly noticeable.

While it seems as if Unilever got served for making tall claims about its product, there is more at play here than just marketing. It is to be noted that this is not the first time one of these companies have gone to the regulator against each other for deceptive marketing. Hence it becomes important to understand the dynamics of the anti-bacterial soap industry, the relationship between these companies and how impactful deceptive marketing is in the industry.

“How many germs can a soap kill?”

In recent years, the battle between multinational corporations over market share has escalated beyond product innovation and consumer satisfaction all across the

world. The reason could be market saturation, bad global economic indicators or something more. But there is a feud that predates all these plausible reasons, and that feud is between Pakistan’s anti-bacterial soaps.

According to NielsenIQ as of 2016, the antibacterial soap market of Pakistan comprised 48% market share of the overall soaps market. Which means that nearly half the soaps in the country claimed to be anti-bacterial. However, unlike the beauty soap category, one that has a low barrier to entry, the anti-bacterial soap market had low competition due to the preliminary research and development costs.

By design there are three giants that dominate this specialised soap and handwash market. Unsurprisingly, these giants are Unilever, Proctor and Gamble (P&G) and Reckitt Benckiser.

Over the years, the competition of these

soap makers has increasingly spilled into the regulatory domain, where companies pull each other’s leg for their marketing practices. As a consumer, it is often confusing what is the best antibacterial soap of Pakistan. Is it P&G’s Safeguard? Is it Unilever’s Lifebuoy? Or is it RB’s Dettol?

It doesn’t help that all three of them in their marketing practices claim to kill at least 99.9% of the germs if not the full 100%. It is interesting to note that these jaw dropping figures have been the very reason for regulatory action, yet to this day, these companies continue to use absolute and arbitrary numbers.

It all began when RB lodged a complaint against P&G for deceptive marketing at the CCP, back in January, 2016. The complaint was against the latter’s claim of Safeguard being Pakistan’s number one anti bacterial soap. It was determined that neither by value nor by volume was Safeguard, the number 1 antibacterial soap hence P&G was found in violation of the section 10 of the Competition Act. The CCP set a penalty of Rs 10 million to be paid for this violation. 8 years after P&G’s appeal against the CCP’s decision, the Competition Appellate Tribunal, in 2024, reduced this penalty to Rs 5 million (50 lakhs) due to P&G’s compliance oriented approach.

A similar conflict between Unilever and RB began when Unilever Pakistan lodged a formal complaint with the CCP against RB in November 2016. The complaint focused on RB’s flagship product, Dettol Soap, which had been advertised as providing “99.9% germ protection” and offering “24-hour protection against germs, cold, and flu.” These claims, according to Unilever, were misleading and lacked a scientific basis, thereby constituting deceptive marketing under Section 10 of the Competition Act, 2010.

The CCP initiated an inquiry, which concluded that RB’s marketing campaign was indeed deceptive. The claims were found to be unsubstantiated and capable of misleading consumers, as well as harming the business interests of other companies, particularly those competing in the hygiene and personal care sector. As a result, in December 2019, the CCP imposed a fine of PKR 30 million on RB for these violations. Five years later, the appellate tribunal did the same favour for RB, reducing the penalty by half, making it Rs 15 million (1.5 crore) in July 2024.

The most recent complaint against Unilever was lodged in February 2021 by RB. Even though Unilever is found in violation of the same section of the competition act, it was fined at least 4 times more.

According to the CCP, “Unilever’s deceptive practices varied by region, with different wording for the same product in countries such as Saudi Arabia, the UK, and

Bangladesh. The most severe deceptions were found in Pakistan, which the Commission deemed unacceptable.”

The company reserves the right to appeal against the decision just like the other two did.

Why is deceptive marketing dangerous?

Deceptive marketing is not merely a breach of consumer trust; it has far-reaching implications that affect various stakeholders, including consumers, competitors, and the broader market ecosystem. The cases involving Reckitt Benckiser, Procter & Gamble and Unilever serve as important examples of how deceptive marketing practices can actually distort market realities and harm consumer wellbeing.

One of the most direct consequences of deceptive marketing is the spread of misinformation among consumers. When companies make exaggerated or unsubstantiated claims, consumers are led to believe in the efficacy or superiority of a product that may not be as good. In the cases of Unilever and P&G, consumers were misled into believing that their products offered unparalleled protection against germs, which could have serious health implications if the products fail to perform as advertised.

These practices also distort the competition in the market by giving an unfair advantage to companies that engage in such tactics. This not only harms competitors but also undermines the integrity of the market. In both cases filed by RB, RB was placed at a disadvantage because its competitors were making inflated claims that could sway consumer preference. This creates an uneven playing field, where success is not based on product quality or innovation but on who can make the most compelling, albeit misleading, marketing claims. It is also important to acknowledge that while it may seem like it, the personal vendetta and market share politics, come after a brand image. Therefore it becomes mandatory for these companies to report on their competition, if the competition is found in violation.

Another important reason why the CCP cracks down on these practices is because deceptive marketing can also reduce the effectiveness of consumer choice. When consumers are bombarded with misleading claims, their ability to make informed decisions is compromised. This can lead to a situation where inferior products dominate the market simply because they are more aggressively marketed, rather than because they are better or more cost-effective.

Why Does Reckitt Benckiser Benefit from Action Against

Unilever and P&G?

There is of course no denying that these complaints against each other have now become a regular part of the Pakistani antibacterial soap market. Much like Unilever benefitted from the action against RB, Reckitt Benckiser also stands to gain significantly from regulatory action against its competitors.

By holding Unilever and P&G accountable, RB can reinforce its position as a brand that consumers can trust. This is especially important in the health and hygiene sector, where trust in a product’s efficacy is paramount. Regulatory action against deceptive practices also serves as a deterrent to other companies, encouraging a more honest and transparent marketing environment that benefits all players.

Another thing that RB benefits from is the market correction that occurs when deceptive practices are curbed. When competitors are penalised and forced to retract false claims, it opens up market share for RB to capture, particularly if its products are genuinely superior. While this correction has already occurred in the past, there is little to no data to show for it.

Conclusion

Even though there is a lot of gap between the times of the filings of these cases, their resolutions have all come within the last 5 months. This is because the Competition Appellate Tribunal had not been functioning for the last seven years. After the appointment of a full time chairman, the tribunal has made lots of headway into clearing its backlog of more than 200 cases.

These cases are a stark reminder of the importance of maintaining ethical standards in marketing. Deceptive practices can lead to regulatory penalties, reputational harm, and loss of consumer trust. For companies, the pursuit of short-term gains through unethical means often results in long-term consequences that far outweigh any immediate benefits. As consumers become more aware and regulatory bodies more vigilant, the importance of transparency and honesty in marketing cannot be overstated.

The Competition Commission of Pakistan’s actions in this case demonstrate the critical role that regulatory bodies play in safeguarding both consumers and businesses from the harms of deceptive marketing. That is one of the reasons why having a complete regulatory body with all designations performing their functions is important to maintain balance within a market. n

Could Patient Capital be the way out?

Blended finance is proving to be a catalyst of change for the Global South. Does Pakistan have what it takes to capitalize on the opportunity?

By Hamza Aurangzeb

In the world of finance, credit ratings are kind of like a character certificate for individuals, companies, and even entire countries.

Well, when it comes to Pakistan’s rating, we could probably come up with a whole bunch of puns, but as a serious publication, we’re going to hold back on that.

The good news is that Fitch, one of the most widely recognized credit rating agencies, has actually just upgraded Pakistan’s rating to CCC+. But don’t get too excited just yet – this rating still means the country has a substantial risk of defaulting on its debt. And that, in turn, means companies operating here would also be carrying similar levels of risk.

Now, put yourself in the shoes of an investor. How would you feel about that kind of news? Not great, I’m guessing. And that’s exactly what’s been happening – private investors have been apprehensive of wagering their money on Pakistan, especially after the economic crisis that unfolded in 2022.

This lack of investment has led to a scarcity of capital available for important projects, whether it’s building large-scale power plants or financing startups.

But you know what? There might be a solution to this problem, and it’s called “blended finance.” It’s a way to de-risk those kinds of risky investments, making them more attractive to private investors.

In this article, Profit takes a deep dive into the world of blended finance and assesses how it could be relevant for Pakistan.

What is blended finance?

Blended finance refers to the strategic use of development funds to catalyze additional capital towards sustainable development in developing economies through an amalgamation of capital provided at market and concessional rates. It directs private investment to projects aligned with sustainable development in conjunction to value creation

for investors. This ingenious method leverages a wide ranging pool of resources available to developing economies, complementing their domestic funding and Official Dvelopment Assistance (ODA) influx to plug in the financing gap for fulfilliment of Sustainable Development Goals (SDGs) and assisting the implementation of the Paris Agreement. It is essentially a scheme designed to mobilizle private investment in a project through de-risking. A diverse range of institutions are involved, such as development finance institutions etc., who serve as guarantors for these projects by electing the riskiest investment, creating a conducive environment for private investors to contribute towards the development of the project with optimiized risk.

Why is blended finance required?

According to estimates of the United Nations, the development financing gap currently stands at $4.2 trillion annually in comparison to $2.5 trillion before COVID-19. Although ODA is nowhere near capable of filling this gap as it reached only $223.7 billion in 2023, however, it is possible to fill this gap with the help of only 3.9% of global GDP, 14.7% of annual global savings, or 1.8% of the value of global markets,

estimated at $231 trillion.

There is a dearth of private sector investment in areas associated with SDGs, where a handful of worldwide assets of banks, pension funds, insurers, foundations and corporations are deployed in such domains. It is crucial that these assets are directed towards specific sectors related to SDGs, particularly, power, renewable energy, and transport, which have immense potential.

The international development community understands the significance of private capital in eradicating the funding gap for development goals. Hence they are utilizing approaches such as blended finance, where development finance complements private capital rather than serving as a substitute.

Blended finance has catalyzed around $231 billion through 6,800 deals towards achieving sustainable development goals in developing countries thus far.

Types of Instruments

Since now we have developed an adequate understanding of blended finance, let us explore the various kinds of instruments utilized in blended finance, which have been placed into four different clusters depending upon their nature.

Our new fund focuses on blended finance, which aims to turbocharge climate action in Pakistan. We need to source capital from various development institutions like the GCF to achieve this. The GCF is the largest contributor to climate action in Pakistan and has the capacity to tolerate high risks

Rabeel Warraich, Founder Sarmayacar

a. Grants and Technical Assistance

The first cluster encompasses tools like grants and technical assistance, which are usually provided by development and philanthropic institutions. These instruments play a significant role while entering a new market, grants assist in tracing investment opportunities and establishing curated networks, while technical assistance provides domain expertise, crucial for the project’s successful implementation. Institutions like USAID and GIC regularly issue grants and provide technical assistance to local partners for implementing programs effectively.

b. Outcome Funding, Impact Linked Finance, and Impact Bonds

This cluster involving instruments like outcome funding, impact linked finance, and impact bonds has been dubbed as the results-based financing category. The objective of these instruments is to maximize the impact created by a program or project as they interlink impact with financial rewards or funding. All stakeholders involved develop a consensus on predefined targets to be achieved while pursuing a development objective, which in turn unlocks funding or financial rewards. Pakistan Microfinance Investment Company (PMIC) offers instruments like impact bonds which interrelate impact with financing.

c. Market-rate, Subordinated, Concessional Debt & Equity

It entails a variety of equity and debt instruments, first one being market-rate equity and debt, which are provided at the prevailing market rates, while the second type is subordinate equity and debt, which occupy a lower position in the capital structure but offer higher returns. The third type is concessional equity and debt that are offered at below market rates and preferential terms to companies, as their primary objective is to create a positive impact on society. Hence, they are also called patient capital. Such capital is provided in Pakistan by institutions like Accelerate Prosperity.

d. First-loss, Guarantee

Lastly, instruments like first-loss and guarantees, are utilized to de-risk a project and crowd-in capital from the private sector for sustainable development. These instruments serve as a frontline of defence against losses for private investors. Examples of these instruments could be found in transactions of organizations like InfraZamin Pakistan. It is apparent in the chart given below that concessional capital is the most widely used instrument in blended finance, its use has increased significantly in recent years.

outcome-funding, impact-linked finance, and impact bonds, which directly relate impact with financial incentives. Investors who are particularly interested in impact creation are called impact investors. They are more risk tolerant and expect lower financial returns; however, they expect returns that meet a certain threshold so that their invested capital could be reprocessed. On the other hand, several institutions prefer blended finance transactions because they allow to crowd in capital from private investors through de-risking transactions. This process of crowding in capital involves various stakeholders and instruments. In this process, a devel-

Why is blended finance important?

Blended Finance has numerous advantages, which pave the way for sustainable development in emerging and frontier markets.

Blended Finance assists organizations that intend to create a direct positive impact on society through innovative approaches and instruments. It is one of the core objectives of blended finance because of which most parties enter such transactions. The instruments usually associated with creating an impact are

opment finance institution or a philanthropic foundation provides initial capital and support for a project targeting sustainable development. It de-risks the whole transaction through instruments like first-loss capital, guarantees, concessional equity and debt, etc, prompting private investors to contribute towards the mission with the expectation of higher returns. Furthermore, blended finance has introduced several ingenious structures that enable institutions to maximize their impact. Such structures developed through an eclectic set of instruments showcase the commercial viability

of nascent projects, their ability to create an impact, and scalability in other regions.

Blended finance also proves to be effective in market development for nebulous segments and emerging markets. This is where demonstration of operational efficiency of business models plays a pivotal role in market development. The establishment of markets is essential for fledgling sectors, particularly sectors which require scalability to become successful. The development community utilizes instruments such as grants, technical assistance, first-loss, and guarantees for making markets and corroborating commercial viabilities of business models, inducing private capital to enter the market that leads to self-sufficiency.

Blended Finance Market in Pakistan

Now for Pakistan, blended finance can be a game changer. As per the estimates of the IMF, Pakistan faces an annual financing gap of $3.72 billion for accomplishing its SDGs by 2030, while another $7 billion to $14 billion are required for climate action and adaptation as per the projections of NDC. Hence, Pakistan has developed policy interventions like the SDG Investments & Climate Financing Facility to identify commercial ventures aligned with SDGs and channelize private investment towards them. Such strategies fall under the overarching term of blended finance.

Although blended finance is incipient, it is gaining momentum in the region of South Asia. It can play a crucial role in eradicating these structural issues in developing economies like Pakistan through de-risking private capital investment. Such approaches are indispensable for economic growth and fulfilling SDG objectives in these countries.

India leads the pack in terms of blended finance transactions in South Asia as it attracted around 115 deals worth $13.9 billion. However, Pakistan secured second place as it captured 19 deals worth $7.1 billion, which represent 11% of the total transactions and 30% of the total funding.

Role of Development and Philanthropic Institutions

There are some prominent examples of blended finance transactions that have recently taken place in Pakistan. One such example is i2i ventures, an early-stage venture capital fund led by Kulsoom Lakhani and Misbah Naqvi. i2i ventures raised $3 million from the IFC under its Startup Catalyst Program, with $2 million contributed directly by the IFC and

an additional $1 million allocated through the Women Entrepreneurs Finance Initiative (We-Fi), which supports women-led startups and harnesses the entrepreneurial potential of women to build high-impact enterprises.

The objective of this funding is to provide capital to early-stage startups that leverage technology to address pressing developmental issues in Pakistan, such as climate change, access to education, healthcare, and financial inclusion. The fund’s support goes beyond just financing, as it also offers business expertise, networking with other investors, and comprehensive market research.

Pakistan is the eighth-most vulnerable country to climate change, a statistic that rings alarm bells. The country was also struck by cataclysmic floods in 2022, leading to an economic loss of $30 billion, almost 10% of the country’s GDP in 2021. Additionally, Pakistan is largely dependent on traditional fossil fuels, and its transition to renewable energy sources seems to be a strenuous task, despite some progress.

In response to these challenges, Sarmaycar, a venture capital fund led by Rabeel Warraich, is establishing a dedicated climate fund to tackle climate-related issues in Pakistan.

Sarmaycar’s climate fund is geared towards addressing the climate-related challenges that have adversely impacted Pakistan’s environment. The fund intends to explore new investment opportunities in this arena to create a substantial positive impact. Rabeel Warraich, the founder of Sarmaycar, emphasizes the significance of development finance institutions (DFIs) in this endeavor. He states that their new fund focuses on blended finance, which aims to “turbocharge climate action in Pakistan.”

Warraich believes that sourcing capital from various development institutions, such as the Green Climate Fund (GCF), is crucial to achieving this goal. The GCF, as the largest contributor to climate action in Pakistan, has

the capacity to tolerate high risks, and its investments can effectively catalyze private investment in geographies like Pakistan, where private investors might otherwise be reluctant.

Warraich further emphasizes that as more DFIs fund development objectives like the Sustainable Development Goals (SDGs) through blended finance, other DFIs and private investors will be more inclined to reorient themselves towards such transactions, where both impact and financial returns are considered.

On a similar mission, Acumen Pakistan has also launched a new $90 million Climate Fund targeting the agriculture sector in Pakistan. The GCF backed initiative is structured as an innovative blended finance facility, with $80 million in equity funding allocated for early and growth-stage local agribusinesses. An additional $10 million will be used for grant funding to offer targeted assistance in enhancing the business models of investee companies

Blended Finance has monumental potential in Pakistan and has been gaining increasing momentum over recent years. As a developing country, Pakistan offers potentially above average returns to private investors, however, its high-risk profile serves as a hindrance to private investment.

Therefore, blended finance is the perfect solution for achieving economic prosperity and development objectives of Pakistan as it de-risks financial transactions through initial capital provided by public and philanthropic institutions, making such transactions more lucrative for private investors.

Furthermore, all stakeholders such as development institutions, governments, and private investors have realized this phenomenon. Hence, they are collaborating to develop holistic schemes around blended finance to not just plug in the financing gap required for sustainable development but also play a pivotal role in economic revitalization of developing economies like Pakistan. n

It’s been a yeargreat for the stock market. Was it for real?

With the index reaching new highs, Profit determines the winners and losers.

By Zain Naeem

Pakistan’s stock market has been through a lot in the past couple of years.

In June last year, there was unabated optimism in the market as the country was nearing the last installment of its stand by agreement with the International Monetary Fund (IMF). Since then, the news cycle has seen sustained optimism. The market has gone from languishing at 41,000 points to touching the highs of 81,840. That means the market has nearly doubled from where it was a year ago.

A year which started with expectations of an IMF SBA coming through has ended with another deal seeming to be near completion. The positivity has been boosted by two facts that revolve around the federal budget that was presented and passed. The first was that many of the terms and conditions that had been stipulated by the IMF were agreed to and the budget presented was according to the wishes of the IMF. The second was that before the budget was announced, the market had been jittery as it felt that stock ownership would be taxed heavily with a particular interest being taken in the corporate sector taxation. Once the budget was presented, many of these fears were allayed as none of the nightmares materialized. Other than a few sectors being taxed, it was primarily status quo for the corporate sector. Coupled with similar taxation on dividend and capital gains meant that the party on the stock market could keep rolling on.

In terms of the macroeconomic conditions, positive sentiments have prevailed in the market. It might point towards some of the dissonance between the market and the economic uncertainty it was prevailing in. Interest rates had been increased in June of 2023 to 22% and there was widespread political and economic instability. In these circumstances, the market performance does lack logical rationale. However, it has to be kept in mind that the corporations were posting amazing results in these circumstances. The KSE-100 index is mostly weighted towards banks, fertilizer, oil and gas exploration with the top 10 companies making up 41.5% of the weightage and the top quarter companies making almost 71%. In terms of the performance of each of these sectors, it can be seen that the increase in index was due to these three sectors.

From a micro perspective, there were some companies that were part of the 100 index which saw better performance than the index itself. The KSE 100 index is a weighted average which means there would be some companies that would perform better than the index. Fauj Fertilizer Bin Qasim led the charge where it increased by more than 262% in the last year. Similarly, companies like Service industries, Pak Electron, Meezan Bank, Standard Chartered Bank Pakistan and Thal Limited saw an increase of 243%, 184%, 180% and 160% respectively.

Similarly, certain companies saw their returns fall in the last year which are part of the index. TRG Pakistan was the leading loser as it lost around 42% of its value in the last year. This was followed by Lotte Chemical, Rafhan Maize, Javedan Corporation and Engro Polymer which lost 38%, 11%, 2.4% and 1.9% respectively.

In terms of all the companies listed on the stock exchange, there were companies that saw mind boggling returns which add to the narrative to irrationality in the prices being quoted at the stock exchange. The company with the

highest returns were Bela Automotive and Chakwal Spinning which were both trading at Rs 1.4 last year. The companies have been listed as a defaulter company as they had become non-compliant to the PSX regulation. Since then, Bela Engineering has gone to Rs 97 which is an increase of 7362%. On the other hand, Chakwal has changed its symbol and has seen its price increase to Rs 50.31 per share. That is a return of 3231% meaning an investor was able to see his investment grow more than 32 times in the last year. The problem with these two cases is that there hasn’t been a fundamental change in the company or its earnings while their share price has increased by such magnitude. Even though these shares have no contribution in the increase seen in the index itself, still these can be seen as outliers in the bull market.

This does not mean that all share prices are being pumped without any economic rationale. Companies like Sazgar Engineering and Ghandhara Automobile are two such companies which have seen their share prices increase by 2100% and 900% respectively. These two have been seeing an increase in their revenues and sales in recent times. Sazgar has set up a plant in the country to assemble Haval cars and have expanded their product portfolio in the last year. Ghandhara Automobiles has also started assembling Chery, Dongfeng and JAC branded cars and trucks. Both these companies are seeing an interest from the market and it seems there is an appetite for the cars being produced.

In terms of companies that saw the biggest decrease in prices were TPL Insurance which saw a decrease of 50% while Mirpurkhas Sugar saw a decrease of 42%. The losses seen in the shares seem to be dwarfed by the increase that was seen in the market which do point towards the fact that the general sentiment in the market was positive. There was also a feeling of a negative overhang in the market last year which meant that even when companies were performing well, the investors were skeptical due to the general feeling in the market. Before this increase, the market had been stuck between a range of 20,000 and 40,000 points for the last 5 years. There was a feeling that the market was stuck in a rut. Once the index started to increase, it seemed like the storm clouds had dissipated and the sentiment on the trading floor changed seeing increase in price of many companies.

Going forward, it can be seen that the fundamentals are strong for the corporate sector of the country and, with interest rates finally being lowered, there is further potential for the market to keep breaking records in the near future. Due to international pressures in the international markets, the market has seen corrections in recent trading sessions. The market has lost around 4.500 points from the high it achieved on 18th of July of 81,840. However, even in that case, the growth in the corporate sector is robust and with earnings season round the corner, it can be expected that the market will be buoyed when their expectations are met and even surpassed in the coming month or so. With inflation numbers on the lower side and real interest rates registering in the positive region, there is also a high probability that the policy rate will decrease further which will push the rally on for longer.

The recent performance and the future outlook of the market does suggest that even though there is political and economic uncertainty reigning in the country, the growth in the corporate sector is strong and sustainable. The past year has shown that a string of positive developments have helped the index increase and it can be expected that the coming few months will prove to be more of the same.

Leveraging gig work for financial independence

Hassan Arshad, Director Policy & Communications, foodpanda

In today’s rapidly evolving job market, technology platforms have become a significant source of livelihood, offering unparalleled flexibility and opportunities for financial independence. As Pakistan navigates through various economic challenges, understanding the transformative potential of gig work is crucial, particularly for the youth and those balancing multiple responsibilities.

Globally, the gig economy has reshaped traditional employment paradigms, providing millions with flexible work opportunities. To truly leverage the economic upside offered by the gig economy and ensure it continues to contribute sustainably to the fabric of the economy, It is imperative that regulatory architecture and policymaking evolves along with technological innovation. In the United States, platforms like Uber and DoorDash classify their drivers and delivery personnel as independent contractors. California’s Proposition 22, passed in November 2020, confirmed app-based drivers as independent contractors while introducing enhanced benefits, thus maintaining flexibility while offering some social protections. The United Kingdom has seen similar developments. Although the UK Supreme Court ruled in 2021 that Uber drivers should be classified as workers, entitling them to minimum wage and holiday pay, the broader gig workforce remains classified as self-employed.

In Canada, frameworks like Ontario’s Employment Standards Act classify gig workers as independent contractors, while Australia’s Fair Work Commission supports the classification of delivery riders as freelancers. In Brazil, platforms like Uber and iFood classify gig workers as autonomous, and in India, the rapid growth of platforms like Swiggy and Zomato highlights the sector’s crucial role in supporting incomes. These models allow gig workers the freedom to choose their working hours and collaborate with multiple platforms simultaneously.

For Pakistan, the gig economy offers similar prospects. Delivery riders, a prominent segment of gig workers in the country, come from diverse backgrounds and are attracted to the flexibility and autonomy the gig economy provides. This flexibility is especially beneficial for students who need to balance

academic commitments with earning an income. The ability to choose working hours allows students to support their education and families while maintaining a manageable schedule. In particular, the rising cost of living in Pakistan has further highlighted the need for supplementary income sources. Many individuals with traditional jobs find it necessary to engage in gig work to make ends meet. This additional income helps counter rising inflation levels and provides financial stability during economically challenging times.

Besides offering financial independence, gig work also opens doors for career growth. Several tech companies, including foodpanda and Bykea have established training and development programs for their riders. These programs enable riders to advance to higher positions within the company and acquire new skills. Consequently, riders can transition to different departments such as marketing, operations, or human resources etc. thereby improving their career opportunities. Additionally, women have found the gig economy to be a great source of empowerment in Pakistan, with countless opportunities to earn an income and support their families. Cultural norms that might restrict women’s mobility and access to formal employment are less of a barrier in the gig economy, where flexible work arrangements are the norm. Women participating as delivery riders or home chefs have found financial independence and empowerment through online platforms such as foodpanda.

The gig economy also promotes entrepreneurship and innovation, thanks to the skill development, income stability, and flexibility that it offers. For many entrepreneurs, particularly small business owners, gig work provides an important safety net, allowing those individuals to cover expenses while building their businesses. Many gig workers use their skills to offer specialised services, contributing to a diverse marketplace. By creating an environment that supports gig work, the government can encourage the growth of small businesses and entrepreneurial ventures, driving economic growth and job creation. For example, with easy access to financial services, like affordable banking solutions, microloans, and insurance, tailored specifically to their needs, gig workers can be empowered to achieve success through sheer hard work and determination. While the gig economy presents significant opportunities, it is essential to highlight its true essence as an innovative alternative to traditional employment. Gig workers around the world are taking the opportunity to sustain their livelihoods during difficult times, thanks to the independent nature of platform work. Countries worldwide are exploring ways to grow their gig economies, and Pakistan can draw from their examples to develop a legislative framework that supports its independent workers.

The gig economy is not just a temporary solution, but a complete redefinition of the future of work. By embracing and supporting platform work, we can empower individuals, drive economic progress and create a more resilient workforce. The benefits of gig work extend beyond individual financial independence, contributing to a thriving and diverse economy where everyone has the opportunity to build a better life - it is imperative that the Government works with private sector and offers incentives to create a marketplace that nurtures the growth of this sector and internalise the huge upside it offers to global economies.

Leading up to the 14th of August, Profit set out to do a special series focusing on the potential of Pakistan. This four part series which ends with this special issue has looked at topics such as energy, population, education, and much more. The following are extracted from the first three parts of our series

Pakistan’s

electricity is now less import dependent. But this is why it is still not cheap

Cleaner, more domestic, but not (yet) cheaper: the state of Pakistani electricity

Ladies and gentlemen, the unexpected has happened. Against all odds, the government of Pakistan has solved an important problem facing the country. They did it in the most irresponsible way imaginable, and we will be paying far too high a price for it, but in exchange, we will have solved a very real and very big problem that had been staring at the country for the past 20 years: Pakistan’s electricity generation capacity will not become dependent on imported fuel after all.

We would also like to state up front that we as a publication, and this author in particular, got this very wrong: in August 2021, we wrote that Pakistan might soon reach a tipping point where the majority of the country’s electricity generation will come from imported primary fuel sources rather than domestic ones. Not only has that not happened so far, but it seems as though it may end up not happening at all. We could not be more delighted at being wrong.

So, what are we talking about?

Pakistan’s energy problems

Twenty years ago, in 2004, about 84.4% of the total electricity used in Pakistan came from domestic fuel sources, primarily hydroelectricity and natural gas-fired thermal power, with that natural gas coming from domestic gas fields, according to Profit’s analysis of data from the National Electric Power Regulatory Authority (NEPRA). That meant that even as the Iraq War of 2003 drove up global oil prices, Pakistani consumers of electricity remained largely unaffected.

Even back then, however, the government of Pakistan knew we had a problem. As early as 1995, the government of Pakistan had access to estimates that suggested that Pakistan’s natural gas production was predicted to peak in 2010 and precipitously fall thereafter. Reality ended up being only slightly better: production

peaked in 2012 and has since then been falling dramatically almost every single year.

That natural gas had to be replaced, but for almost 10 years, the government of Pakistan did nothing, despite the fact that in 2008, the problem got so bad that 8-12 of load shedding a day was the norm in most major Pakistani cities and electricity all but vanished in the smaller towns and villages.

It is not as though the Musharraf Administration did not know of the problem. And it is not as though they did not try something. The problem was that they were convinced that the only solution was hydroelectricity, and in 1999, when General Musharraf took power, the only dam the government of Pakistan had a feasibility study completed for was the politically controversial Kalabagh Dam. The Musharraf Administration tried hard to push through the political opposition to Kalabagh but was unsuccessful. They then initiated feasibility studies on other dams, notably the Diamer-Bhasha dam and the Dasu dam. But it takes 10 years to even finish the feasibility study for a dam and another 10 years at least to build one, so they would never have been able to begin construction on those dams, let alone have them completed.

That, however, was all they tried. The Geological Survey of Pakistan has known since at least 1991 that the Thar desert has substantial coal deposits, but the Musharraf Administration all but ignored Thar. They converted part of Pakistan’s thermal power generation to natural gas, but the bulk of it – particularly the private sector power generation capacity that was rapidly becoming the country’s base load capacity – remained fired by oil.

So when the 2008 rise in oil prices came, Pakistan was uniquely positioned for a lot of pain. The government of Pakistan spent down its dollar reserves on oil subsidies to prevent the prices of both petrol and electricity from rising, but of course, the money ran out faster than they could secure more, so we had a massive fiscal and currency crisis in one go and out went General Musharraf.

The incoming Zardari Administration in-

herited a massive mess, but moved at an alarmingly slow pace in trying to solve the problem, and pursued far too many of the wrong solutions (remember rental power plants, anyone?). They even created hurdles for private sector players that tried to provide solutions. For years after Engro decided to create a coalmine and mine-mouth coal-fired power plant in Thar, the Sindh government – led by Zardari’s Pakistan Peoples Party (PPP) – simply did not bother to build the road the company would need to transport equipment to and from the mine to the nearest highway.

It was the Nawaz Administration in 2013 that pursued a solution to part of the problem, and actively sought to commercialise power generation in Thar, replace the waning domestic natural gas with imported liquefied natural gas (LNG) from Qatar, and above all, incentivize the private sector to build lots and lots of thermal power plants, while simultaneously embarking on a massive government spending spree on increasing hydroelectric power generation.

Those policies are now bearing fruit, and after nearly a decade and a half of almost consistent decline, the domestic share of primary fuels for electricity generation in Pakistan rose substantially in fiscal year 2023, and may continue to rise in the coming few years.

What is going right: more domestic generation mix

Two things are going very right with Pakistan’s electricity sector: power generation is getting reliant on more domestic fuel sources and is getting cleaner.

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Pakistan no longer has a population problem

While the rest of the world struggles with low birth rates, Pakistan is entering the sweet spot of the double demographic dividend. We should abolish the Population Welfare Department to keep the demographic party going longer

Everything you know about Pakistan’s so-called population problem is based on a static picture of the data that is 30 years out of date. You probably think we have too many children and that our population is growing too fast. That is wrong.

Pakistan – the sixth largest nation in the world – is about to hit a quarter of a billion people in population some time later this year or early next year, and contrary to what you may remember from your Pakistan Studies curriculum, that population number is now an asset, not a liability.

We do not mean to suggest that Pakistan’s population was never a problem. It was. But things change, and we in Pakistan tend to not pause to notice when things have improved. We especially do not do so when noticing such a thing involves analysing slow-moving data, and there are few things slower-moving than demographic trends.

We shall start this discussion by defining some terms, and asking you to jettison the notion that “population” is a problem. More specifically, we want this to be a discussion of demographics: the characteristics of the population, rather than its size. As we will demonstrate, the mere size of a population is not in itself an indication of a problem, and indeed, all things being equal, a larger population is preferable to a smaller one.

No, Pakistan’s problem was two-fold: the composition of the population, and its growth rate, both of which would make it difficult for the nation as a whole to escape poverty. Simply put, it’s not that we had – at any point in our history – too many people. It is that too small a proportion of the population could earn a living, meaning each earner had too many dependents. And given the fact that we had too many dependents because the number of children was very high, that also meant that the population was growing faster than was possible for the government to cater to its needs.

This picture that we just described in the previous paragraph was likely what you mostly knew about both from learning about it in school, and through your lived experience. It was accurate as of about 1995. But sometime

around that year, things began to change. The change was very slow at first and was not really discernable until about the mid-2000s. But the change in course has been unmistakable since then.

Here’s the summary: the single factor that made Pakistan’s demographic composition a problem – its fertility rate, or the average number of children born per adult woman in the country – is now about to hit the sweet spot that will allow the country to reap what economists called the double demographic dividend. We used to think of our population as a liability. In reality, it was a long-term investment that is about to start paying dividends.

For this story, we looked at several variables that describe Pakistan’s demographics from 1950 through the present year and projections through to the year 2100. We understand scepticism about long term projections, but demographics is one area where long term projections are bit easier than other areas: it’s easy to tell how many 25-year-olds there will be 20 years from now because we know how many 5-year-olds there are today and have reasonable estimates of mortality and migration rates.

As we go through the data, the following three things will become evident.

Pakistan’s population was historically a problem because there was a period of about 75 years when we were having more children than needed, but this was entirely due to a decline in infant mortality that most people did not see coming.

Pakistani families are now having fewer children, so the “too many children” problem is basically over, and we will now see an increase in the labour force participation rate from now until some time in the 2090s, based on current trends. This means more income, more savings, and higher economic growth, which means that the party in Pakistan’s economy is about to get started some time in the next 5-7 years.

Pakistan’s fertility rate has not declined too fast yet, which means we may yet have the opportunity to make sure we do not follow the East Asian nations into demographic suicide. That means abandoning the notion that “too many kids” is a bad thing (it no longer is), and the Population Welfare Departments of every

provincial government should be redirected to focus purely on maternal and infant health. Contraception no longer needs to be a focus.

One quick note about the data utilized in this story: nearly all of it utilizes historical data and projections made available by the UN Population Prospects Report for 2024, which in turn takes historical data from sources such as the population census in Pakistan, and then applies calculations to project data between census years, estimate underlying trends, and then make long-term projections.

Can these projections be off? Yes, but usually not by much, since these are slow moving trends where the underlying data needed for the calculations tends to be easily available.

Why we had “too many” children to begin with

The past is another country, goes the old adage. We tend to think of the generations where 6 children were the norm as though that is simply what they must have wanted, or that they did not have contraception and so therefore did not know any better.

But take a look at the data for infant mortality, and you will begin to see a clearer picture of what happened. We gathered data on infant mortality in what is now Pakistan from the year 1800 through the present day to the year 2100 (yes, 300 years of data). For most of that time, the probability of a child dying before turning five years old was greater than 50%.

People in the 1930s through the 1980s did not have 6 children because that is how many they wanted. They had 6 children because they were taught that is how many you have by people who used to have 6 children because they knew that, in their day, only about 3 would survive.

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Education in Pakistan: Not good, but maybe good enough

Each successive generation is better educated than the one that came before it; democracy and the 18th Amendment help.

It is somewhat ironic that one of the best known political satire plays in Pakistan is called Taleem-e-Balighan, set at an adult literacy center in the 1950s. Such centers existed in many parts of Pakistan and were meant to increase the then-abysmal literacy levels in the country, but had almost no meaningful impact on the country’s literacy rate.

If one even tries to talk about Pakistan’s population as an asset, as this newspaper did two weeks ago, the first thing one gets hit with is: “yes, but the people aren’t educated, so they are still a liability.” That illiterate people are economically a liability is not quite accurate, but even leaving that quibble aside, Pakistanis view of just how much progress we have made in improving literacy and education levels in our population is at least partly outdated.

This article is the third in our “optimism about Pakistan’s future” series, and in this one, we will make it a point to concede to the pessimists: they are correct in noting that the state of education in Pakistan is not good, and it is not improving at a rapid enough pace for us as a nation to be satisfied with. What we will argue, however, is that what we have achieved thus far – and what we are on track to achieve over the next decade – might be “good enough” to achieve industrialization.

We can summarise the analysis of Pakistan’s education sector in the following way: Pakistan lags behind not just developed countries, and the East Asian tigers but also its own regional peers and is uniquely bad in terms of any educational metric across any grouping of countries that could reasonably be described as Pakistan’s peers.

Despite woefully inadequate management of the sector, the country has managed to make significant progress in improving literacy and numeracy: the literacy rate among children born in any given year has continued to rise almost uninterrupted over the past several decades.

While the government has made some progress in improving the quality of public education, the majority of the increase in Pakistan’s educational attainment levels has come from household incomes rising – and household sizes falling – to a point where private education became a more viable option for more families.

Overall educational attainment levels –measured in the number of years of schooling completed per student – are rising, but very slowly.

Economic research indicates that adult literacy rates exceeding 70% are required to begin industrializing (along with several other factors, which we have and will discuss in other articles); and while Pakistan is not quite there overall, it has already hit that level in its urban areas, and will likely hit that level nationally some time over the course of the next decade and a half.

For this story, the data we analysed was taken from the Pakistan Social and Living Standards Measurement Survey (PSLM), published by the Pakistan Bureau of Statistics, the latest of which was the one for the year 2020, and the Pakistan Education Statistics reports put out by the Pakistan Institute of Education.

In this article, we will not spend a lot of time explaining just how far behind Pakistan is relative to its regional peers. That story has been told better by others. Instead, we want to focus on a part of the story that rarely ever gets told: what is Pakistan’s rate of improvement, and are we doing enough to progress as a nation?

Patchy progress, but clear upward trajectory

First, the good news: every successive generation of children is better educated than the generations before them, and the progress is by and large steady enough that it is measurable from year to year: children born in 2006, for example, were more likely to grow up to become literate than children born in 2005, and so on. Across both urban and rural areas, Pakistan is now able to consistently educate at least 70% of its children to be literate and numerate.

This is a significant improvement over the past several decades. As recently as the 1990s, a literate person in Pakistan was not only part of the minority of the country, but so completely surrounded by illiterate people that it was hard to escape the fact that to be literate meant to be a fortunate minority in Pakistan. Now, it is pos-

sible to go several days without encountering an illiterate person under the age of 30 in urban areas in Pakistan.

The patterns for how this progress has happened have been reported elsewhere, but nonetheless bear repeating: men are much more likely to be literate than women (70% of men, and 49% of women, as of 2020); residents of urban areas much more than rural areas (74% urban literacy versus 52% rural literacy), and the young are more literate than older adults (72% for the youth between the ages of 15 and 24 compared to 57% for the overall adult population).

Young men in cities in Pakistan are approaching close to universal literacy and numeracy (85% across Pakistan). Optimistically, the gender gap is narrowest among young people in cities (urban female youth literacy is 82% across the country).

All of this points to a simple fact: anyone in Pakistan who can get educated chooses to do so. The lack of education appears largely a question of access, not willingness. For all the popular culture references to useless degrees, revealed preference indicates that Pakistanis firmly believe that education itself, and educational credentials in particular, carry value.

Implied in the above picture, however, is a bit of bad news, to which we alluded at the beginning of this article: adult literacy efforts in Pakistan are effectively non-existent. If a Pakistani reaches the age of 18 and has not learned to read or write, they probably never will.

Interestingly enough, however, there is a significant number of Pakistanis who never learned to read and write, but over the course of their adult lives learned to do just enough basic mathematics that, when asked by a surveyor, can correct perform basic arithmetic sums without a calculator. This is not a small population, either. By our estimates using PBS data, we think that as many as 25% of Pakistani adults can be characterized as illiterate, but sufficiently numerate.

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