Profit E-Magazine Issue 53 by Profit (by PT)

10 Weekly Roundup 14 NETSOL stock riding high after key wins in signing new clients

18 18 How well has the PTI performed on its 100-day agenda? 22 Karachi vs Lahore: Where is Pakistan’s Silicon Gali?

30 Under the wings of the great Jack Ma 36 Explainer: Pakistan’s twin deficits and how can they be contained? Kamil Shahid

Executive Editor: Babar Nizami l Managing Editor: Farooq Tirmizi l Joint Editor: Yousaf Nizami Reporters: Arshad Hussain l Muhammad Faran Bukhari l Taimoor Hassan l Ghulam Abbass l Ahmad Ahmadani Shehzad Paracha l Haniya Javed l Director Marketing: Zahid Ali l Regional Heads of Marketing: Muddasir Alam (Khi) l Zulﬁqar Butt (Lhr) l Mudassir Iqbal (Isl) l Layout: Rizwan Ahmad l Illustrator: ZEB l Photographers: Zubair Mehfooz & Imran Gillani l Publishing Editor: Arif Nizami l Business, Economic & Financial news by 'Pakistan Today' Contact: proﬁt@pakistantoday.com.pk

CONTENTS

welcome

FOR ONCE, IT’S NOT THEIR FAULT The rupee’s precipitous dive on Friday, November 30 has led to recriminations and accusations of incompetent economic management on the part of the Imran Khan Administration, but for once, this particular event was not their fault. The rupee had been kept artificially inflated by the Nawaz Administration, specifically because of an obsession of former Finance Minister Ishaq Dar, and a sudden collapse in its value had been rendered inevitable after years of being propped up by a debt-fueled binge of dollar selling by the government over a period of nearly four years. We are not, of course, arguing that the rupee depreciation will not have an inflationary effect that will disproportionately affect the poor. Of course, it will. And we are not arguing that the Imran Khan Administration is not making its fair share of mistakes with respect to the economy either. But if we are to have a rational conversation in Pakistan about what direction we want to take the economy, it helps nobody to score cheap political points against the current administration at the expense of acknowledging where the real fault lies. Asad Umar has already committed many errors of judgement, in our view, in his more than three months in office. Letting the value of the rupee depreciate is not one of them.

FROM THE MANAGING EDITOR

Where the government has erred is in thinking that rhetoric and emotional appeals are a substitute for hard-nosed analysis, and that the passion of their political supporters can somehow defy economic gravity. Why is the government, for instance, still not able to complete the negotiations for a bailout package from the International Monetary Fund (IMF)? Under much more distressed circumstances in 2008, former Finance Minister Shaukat Tarin was able to negotiate a highly favourable bailout for the government of Pakistan, in less than 60 days, no less. In their more than 100 days in office, the Imran Khan Administration has engaged in a whole series of publicity stunts, but have yet to move the needle on substantive economic reform. The rupee’s decline last month may not have been their fault. But everything that happens from here on out will be.

Farooq Tirmizi Managing Editor

Finance Minister Asad Umar

QUOTE

“An IMF bailout package is unavoidable as the country needs to tackle economic challenges”

“Rogun Dam has begun operations and we are ready to provide cheap and clean electricity to Pakistan for its energy needs” Tajikistan Ambassador Sherali Jononov

Rs146b

approved amount of net hydel profit as part of the power tariff has been decided that its full burden won’t be passed onto consumers by the government. Well-informed sources in the power division informed that the government has decided against immediately passing on the burden of power hike to the already overburdened power consumers of the country on account of net hydel profit, which was approved during the tenure of the previous government. They said the PTI government, instead of furthering the hike in power price, has advised the Water and Power Development Authority (WAPDA) to borrow Rs146 billion from banks and clear the amount. Sources also said that the National Electric Power Regulatory Authority (NEPRA) would later make this amount a part of the power tariff in a phased manner over the years. The power division in its motion has also advocated that section 31(4) of the NEPRA Act provides that the authority (NEPRA) shall determine a uniform tariff for distribution licensee, wholly-owned and controlled by a common shareholder, on the basis of consolidated accounts. However, the authority forwarded the consumer end tariff recommendations on an individual basis without consolidation of the respective revenue requirements leading to the uniform tariff.

50MW

wind power project tariff has been determined by the National Electric Power Regulatory Authority (Nepra). Following a tariff petition filed by Act 2 Wind (Pvt) Limited, NEPRA has determined and approved the generation tariff along with terms and conditions for Act 2 Wind (Pvt) Limited with regard to its 50MW wind power project for delivery of electricity to the power purchaser. According to NEPRA’s order, levelised tariff works out to be US Cents 4.7212 /kWh, while engineering, procurement and construction (EPC) cost of $57.039 million has been considered and planning, design and construction (PDC) cost of $2.500 million has been taken into account. Similarly, insurance during construction has been set at 0.5 per cent of the EPC cost, financing charges at the rate of 2.5 percent of the debt portion of the capital, and net annual plant capacity factor of 38 percent has been allowed. Likewise, operations and maintenance (O&M) cost of $23,000 per megawatt per year has been approved. Moreover, debt to equity of 80:20 has been used while debt repayment period of 10 years has been taken into account.

6.5m

tons is projected to be Pakistan’s sugar production in 2018-19, down 900,000 tons due to a reduced area as farmers shifted to other crops like cotton and corn. The shift to cotton and corn for the farmers was due to better prices and faster return on their investment. In its bi-annual report, the U.S. Department of Agriculture (USDA) said Pakistan’s consumption continues to grow modestly with a rising population and developing food processing sector. The USDA stated exports and stocks are forecast to fall due to the lower production, whilst final level would be contingent on government policies. It added that presently Pakistan’s export policies include an unsubsidized 1-million-ton export quota against 2 million tons exported and freight subsidies of up to $97 per ton in 2017-18. According to the report, global production for the year 2018-19 is projected down 9 million tons to 186 million, largely because of the 8-million drop in Brazil caused by unfavourable weather and more sugarcane being diverted towards ethanol production. Moreover, exports have fallen, fueled by the lower supplies in Brazil. USDA said record consumption is anticipated due to growth in markets such as India and Indonesia.

“Instead of raising water storage capacity, we have lost one-fourth the storage space of our dams” Wapda Chairman Muzammil Hussain

QUOTE

Rs100m

have to be deposited by D.G Khan Cement on the directives of the Supreme Court of Pakistan (SCP) on account of Katas Raj case. Hearing a suo motu case at the SC Lahore Registry, Chief Justice of Pakistan (CJP) Mian Saqib Nisar issued the directives that out of the total amount, Rs80 million would be paid for the water utilised by the factory while Rs20 million would be paid as a penalty for attempting to mislead the apex court. It is pertinent to mention that the case was initiated following media reports that the Katas Raj temple pond — considered sacred by Hindus — was drying out. During earlier hearings of the case, the bench had been told that nearby cement factories had sucked up large quantities of groundwater through a number of drill bores.

$200m

is looking to be raised by Careem, a ride-hailing service founded in Dubai from Chinese investors, a source with direct knowledge of the matter shared. Investment bank China International Capital Corporation (CICC) is advising Dubaibased Careem, but it was not immediately clear when or if a deal would be finalised, the source said, adding there was a lack of familiarity and interest among Chinese investors in Middle Eastern start-ups. It was reported on Monday that CICC and New York-based investment bank Jefferies were both advising Careem on potential investment options and capital raising, including a possible Middle East M&A deal with Uber. Careem, which counts German carmaker Daimler and China’s largest ride-hailing company DiDi Chuxing among its other backers, competes head-to-head with Uber in most of the major cities in the Middle East. Careem said in October it had secured $200 million in a new funding round from existing investors, and that it expected to raise more to finance expansion plans.

47paisa

per unit increase in tariff of all power distribution companies (DISCOs) on account of fuel cost adjustment for October 2018 has been approved by National Electric Power Regulatory Authority (Nepra). However, the tariff increase will not be charged from the lifeline, K-Electric and agricultural consumers. “The increase came after the cost of fuel went up in October while power consumers paid lower tariffs. The tariff revision would help recover the lost amount,” NEPRA stated in a notification. The decision was taken by NEPRA in a public hearing on a petition filed by the Central Power Purchasing Agency (CPPA). The increase in tariff will have a cumulative burden of around Rs3.8 billion on the consumers.

11.84pc

growth in mobile phone imports was recorded during October to $61.189 million. Mobile phone imports in the country have reached $260.412 million in the first four months of the current fiscal year (July-October) 2018-19 as compared to $245.208 million during the same period last year. Mobile phone imports in October 2018 which stood at $61.189 million, registered 11.84 percent growth as compared to $54.709 million imports in October 2017. Last month’s figure was down by 1.79 percent when compared to $62.306 million in September 2018, data released by the Pakistan Bureau of Statistics (PBS) revealed. Overall telecom imports saw a decline of 0.35 percent during July-October 2018 when compared to the same period last year. Total imports were recorded at $448.541 million during this period when compared to $450.113 million in July-October 2017. This figure stood at $119.989 million in October as compared to $112.837 million during September 2018.

$1b

have been received by Pakistan as part of the $3 billion financial assistance promised by Saudi Arabia, as balance of payment support, State Bank of Bank (SBP) spokesman Abid Qamar confirmed. The remaining $2 billion is expected to arrive in Pakistan in the next two months, he added. The funds from Saudi Arabia will be reflective on November 29 when SBP releases its weekly figures for foreign exchange reserves. The development came after Prime Minister Imran Khan visited Riyadh where he attended the Future Investment Initiative conference and met with King Salman bin Abdul Aziz and Saudi Crown Prince Mohammad bin Salman. A one-year deferred payment facility for import of oil, up to $3 billion would also be provided with this arrangement being in place for three years.

BRIEFING

“The Chinese govt will not disclose the amount of financial aid as experts of both sides are working out modalities” Chinese Embassy Deputy Chief of Mission Lijjian Zhao

18pc

QUOTE

34pc

month-on-month (MoM) is the figure by which the country’s current account deficit ballooned by in October, touching $1,218 million, according to data released by State Bank of Pakistan. During October, the uptick in current account deficit was recorded due to a 24.4% month-on-month rise in imports to $925 million, correspondingly exports also grew by 14.5% to $262 million. Additionally, primary income deficit rose by 40.8% to $151 million and a 37.6% MoM increase in remittances ($547 million) to $2,000 million wasn’t enough to reduce the current account deficit. In the first four months (July-October) of current FY19, current account deficit has fallen by 4.6% year-on-year (YoY) to $4,840 million.

82pc

of consumers having access to the internet in urban areas have made an online purchase, up by 6% from 2017 in Pakistan, said a report released by Nielsen “2018 Connected Commerce.” According to Nielsen, the growth of e-commerce in the last few years because of the rise in internet and smartphone penetration, especially in the country’s urban areas has contributed to the online sale of particular categories. Fashion accounted for the largest slice of online transactions of 40%, followed by travel 31% and IT 29% respectively. The report outlines consumers’ online purchasing habits and it disclosed categories which posted significant growth in e-commerce activity included restaurant deliveries 24%, 22% in beauty and personal care products, books and music 28% respectively. The report determined that consumers are more conducive to making online purchases when offered a couple of purchasing options and quality assurances. Furthermore, the report highlighted approximately 55% of the consumers stated that a money back guarantee for products not matching what was ordered would encourage them to buy online.

was suggested as the general sales tax rate, an increase of 1 percent by International Monetary Fund as part of comprehensive fiscal adjustment. The visiting IMF delegation is seeking tax efforts equivalent to 0.4% of gross domestic product (GDP) or Rs160 billion constituting part of a comprehensive fiscal adjustment under the programme, said sources in the Ministry of Finance. The IMF has told the Federal Board of Revenue (FBR) to develop a strategy for disbursement of tax refunds and submit it to them before the conclusion of policy talks. Aside from the Rs160 billion in new taxes, the IMF has recommended bolstering revenue collection at the import stage because of 26% depreciation of the rupee since January 2018 and imminent depreciation under its programme. And the authorities are determining the tax target on the basis of a minimum 12.5% nominal GDP growth rate. The overall effect of new taxes, administrative efforts and windfall gains from the currency depreciation is projected at about 0.9% of GDP, the sources said. But Pakistan has not yet yielded to the IMF demands, said the sources in the finance ministry. The Washington-based lender has demanded exorbitant fiscal adjustment since it wishes to see budget deficit at 3.5% of GDP by the conclusion of its programme. However, the authorities are dependent on majorly on tax efforts to slash the deficit since there is barely any room in the expenditures side, said sources. According to sources one of the major demands of the IMF is to raise the GST rate by at least 1% to 18% and this will retrieve a minimum of Rs75 to Rs80 billion in additional revenues yearly in the remaining period of FY19. As per officials, the 1% additional GST could retrieve around Rs40 billion. They share the IMF had even asked the authorities to raise GST to 19%. Currently, the FBR levies 3% additional tax than the standard 17% GST on unregistered individuals and if the government accepts the IMF demand this rate will rise to 21%.

1.4pc

of gross domestic product (GDP) was Pakistan’s fiscal deficit during the first quarter of Financial Year 2018-19 (FY19), as compared to the deficit of 1.2 per cent in the corresponding quarter of the last fiscal year. According to fiscal statistics released by the finance ministry on Friday, the total revenue for the quarter (July – September) stood at Rs1,102 billion as against a total expenditure of Rs1,643.77 billion. The GDP size for the fiscal year 2018-19 was estimated at Rs38,388 billion. In contrast, the total revenue during the first quarter of FY18 was recorded at Rs1,025 billion as against the total expenditure of Rs1, 465.9 billion. The GDP size for the same period of the last fiscal year was estimated at Rs35,919 billion.

“Pakistan is directing attention towards markets of China, Japan and Korea to uplift exports” Adviser on Commerce Abdul Razak Dawood

90pc

QUOTE

5.4pc

is projected to be Pakistan’s economic growth rate in FY19 compared to 5.8% in FY18, said Fitch Solutions in a report. It said, “We believe that further austerity measures will likely exacerbate the cyclical slowdown in the Pakistan economy. However, that is not to say that in the absence of the IMF-induced austerity, Pakistan will be able to sustain its current growth momentum. Pakistan has been living beyond its means for several years now as evident from the widening current account and trade deficit, which is unsustainable. While the surge in imports has been partly due to the CPEC investment, many of the projects have questionable commercial viability.”

46.4pc

plunge in foreign direct investment (FDI) during July-October 2018-19 and stood at $600.7 million, as compared to $1.119 billion during the same period last year. The total investments in the country during the first four months of Financial Year 2018-19 (FY19) stood at $331.3 million, registering a decline of 67.3 per cent when compared to the same period last year, the data released by the State Bank of Pakistan (SBP). In October 2018, the country received only $161.2 million in the head of direct investment as compared to $354.6 million during the same month last year. Investments from China were recorded at $334.9 million, which was almost half of the total investment the country received during the last four months. Total inflows of foreign direct investment of $844.8 million were received during the July-October period, while investors pulled back their $244.2 million. According to the SBP’s data, foreign private investment of the country stood at $331.1 million, down by 68.8 per cent during July-October as compared to $1.062 billion during the same period last year.

of development projects facing cost, time overruns, said the Planning Commission. A team of planning ministry headed by additional secretary Ali Reza informed a Senate panel that the commission had released only Rs94 billion for development projects during the first quarter (July-September) of FY19 against the stipulated 20%. Mr Reza informed the Senate Standing Committee on Planning and Development said the government’s decision to slash the public sector development programme (PSDP) had contributed to delay in the release of funds in the current year. The meeting was chaired by the Chairman of the Committee, Senator Agha Shahzaib Khan Durrani and the secretary apprised them the government had cut PDSP to Rs675 billion for FY19, including Rs531 billion of local funds and Rs144 billion of foreign exchange component instead of budget allotment of Rs1,001 billion. The overall release of funds during the 1st quarter amounted to Rs94.1 billion which included Rs63 billion of rupee component, Rs30.66 billion in foreign exchange and stood at 14 5 of the revised PSDP, said the secretary. However, the committee expressed anger over the continued absence of Minister for Planning and Development Makhdoom Khusro Bakhtiar and Secretary in-charge Zafar Hassan over missing 6-8 such successive meetings. The committee issued a stern warning saying they would take appropriate action against both ministry officials under Article 66 of the constitution. While discussing the Gwadar Master Plan, the committee was informed that the residents were having serious problems due to prolonged delay in the city master plan since they weren’t provided NOCs for construction of their houses. Mr Kauda Babar asked as to why Rs25 billion assigned for Gwadar hadn’t been released in last fifteen years from the planning ministry. In response, the planning ministry officials stated the federal government had to disburse funds to the Balochistan government to implement the devised projects under the ambit of Gwadar Business Plan.

$4b

are Pakistan’s net international reserves excluding IMF debt obligations, according to latest data released by the State Bank of Pakistan (SBP). The figures released by the central bank show up to one-year obligations of the central bank surpass its gross official foreign currency reserves by around $4 billion. Last week, the gross official reserves of SBP were recorded at $8.2 billion against its short-term liabilities which stand around $12.2 billion. SBP’s gross official reserves are mostly retained by contracting short-term loans from commercial banks and taking Chinese and Saudi deposits under currency swap arrangements. Till September 2018, SBP had obtained $7.22 billion from commercial banks in the aegis of forward and currency swap arrangements.

BRIEFING

NETSOL STOCK RIDING HIGH

AFTER KEY WINS IN SIGNING NEW CLIENTS

Pakistan’s only NASDAQ-listed company appears poised for faster growth after a recent spate of stagnation By Taimoor Hassan

n January 1996, NETSOL first opened for business in Pakistan. Today, the firm is 23 years in the making and is Pakistan’s biggest software production firm by revenue, due to the success of its acclaimed NETSOL Financial Suite (NFS). The company is listed on the NASDAQ as well as the Pakistan Stock Exchange (PSX) and its customers include automakers Mercedes-Benz, Toyota, Volkswagen, BMW, Nissan and Hyundai among others.

In 2004, the company opened its 50,000-square-foot facility in Lahore where most of the company’s information technology workers and software engineers are based. Besides Pakistan, its offices are located in the United States of America (USA), the United Kingdom (UK), Thailand, Indonesia, Australia and China.

Leap of faith

t was in Australia that Salim Ghauri, the founder and CEO of the company, first got the idea of setting up a Pakistani IT services company with a global outreach. Settled in Australia with a family, Ghauri was working as an IT consultant, doing reasonably well by the standards of that time, but always felt that something was missing. “I was settled abroad, making good money, had a good job, but I always felt incomplete. Money wasn’t an achievement for me. I did not feel a sense of achievement in what I was doing. It was coupled with the frustration of seeing Indians selling their IT products and services to firms in Australia, but there was no Pakistani doing that,” Ghauri told Profit. “That was the time I chose to return to Lahore and establish an IT services company that will have customers globally. I chose Pakistan because, first of all, it is my home country and secondly, it has a large population and could provide a bigger labor force,” he said. By definition, entrepreneurship demands making bold decisions and risk taking. But Salim Ghauri’s decision to move back was quite a daring one, even by entrepreneurial standards. And it was a notch above even that normal risk level given the fact that he did not even have his own money to invest. It was his brother, Shahab Ghauri, who agreed to invest in Salim’s idea.

“THERE IS A LOT OF ROOM FOR IMPROVEMENT IN WHAT WE ARE ALREADY DOING. IT IS WISE TO RATHER GET BETTER AT WHAT WE ARE ALREADY DOING THEN SPEND ANOTHER 10 YEARS AT SOMETHING COMPLETELY NEW AND JUST BE GOOD AT IT. WHAT WE ARE WORKING ON RIGHT NOW HAS A HUGE SCOPE. FROM INDIVIDUALS TO MULTINATIONAL COMPANIES, PEOPLE ARE LENDING MONEY EVERYWHERE. FOR INDIVIDUALS, WE CAN OFFER OUR PRODUCT AS A SERVICE WHILE TO MULTINATIONAL COMPANIES, WE CAN OFFER IT AS A LICENSE WORTH MILLIONS OF DOLLARS” Salim Ghauri, CEO of NETSOL “Moving back to Pakistan was not just daring, it was stupid. I was coming back to Lahore after 27 years, so I didn’t know many people. A lot could have gone wrong. And frankly I would say that it was my brother who took a leap of faith and decided to invest. If you look back, I am a software developer. My career goes back to 1979. When NETSOL was established, I had 17 years of experience in IT so I had the technical expertise and my brother had the resources.” “At the inception of the company, our focus was to create a product that could compete and be sold globally. Like the ones produced by Indians. So, we were very careful about the quality of our products and created only the best,” Ghauri said. “What we sell is an asset financing application which helps a lender manage their lending,” Salim Ghauri said, as he went on to explain what his firm produces. “There are some process-

NETSOL’S SOFTWARE ALSO WENT LIVE IN SOUTH AFRICA, A NEW MARKET, WITH A GERMAN AUTO MANUFACTURING GIANT AS PART OF THE ONGOING INTERNATIONAL DEPLOYMENT ASSOCIATED WITH PREVIOUSLY ANNOUNCED 12-COUNTRY $110 MILLION CONTRACT. THE COMPANY HAS ALSO ESTABLISHED A NEW SUBSIDIARY AND SET UP AN ADDITIONAL OFFICE IN LONDON TO SUPPORT FUTURE GROWTH IN THE EUROPEAN MARKET

es involved in the lending business. If somebody borrows $10,000 from an institution, let’s say to buy a car, there are certain processes involved to get the creditor’s approval. Our software manages those processes. There’s also a contract that defines the terms of lending and its repayment. Our software manages the life cycle of that contract. It is a complex piece of software because there is so much that happens to a loan. NETSOL is now among the very few vendors that provide this solution.”

‘We are better than others’

ETSOL has been able to win customers over established vendors selling lease management solutions in the market even before NETSOL was in existence. Ghauri describes that as a testament to the company’s technological achievements. Recently, the Pakistan-based firm signed a contract with a customer based in China after two years of rigorous assessment. There were initially five companies vying to get the contract among which one was NETSOL. “The customer is a blue-chip company in the German auto market. They visited our facility in Lahore and carried out their assessments on our capability to deliver, our people and our technical expertise. We finally won the contract against global competitors, strengthening our position. That is where we are different. We are providing solutions which others are not. We are ahead of

INFORMATION TECHNOLOGY

“MOVING BACK TO PAKISTAN WAS NOT JUST DARING, IT WAS STUPID. I WAS COMING BACK TO LAHORE AFTER 27 YEARS, SO I DIDN’T KNOW MANY PEOPLE. A LOT COULD HAVE GONE WRONG. AND FRANKLY I WOULD SAY THAT IT WAS MY BROTHER WHO TOOK A LEAP OF FAITH AND DECIDED TO INVEST. IF YOU LOOK BACK, I AM A SOFTWARE DEVELOPER. MY CAREER GOES BACK TO 1979. WHEN NETSOL WAS ESTABLISHED, I HAD 17 YEARS OF EXPERIENCE IN IT SO I HAD THE TECHNICAL EXPERTISE AND MY BROTHER HAD THE RESOURCES” Salim Ghauri, CEO of NETSOL our competitors in terms of quality and technical know-how. We have people better than others. In China, we are the largest provider of this solution. We have got 90% of Chinese companies running their lending portfolios through our software,” he explained.

Is NETSOL ready to grow faster?

he watershed moment for NETSOL was in 1996 when a German luxury car manufacturer signed a contract with the company, providing it a breathing space and allowing it to understand its customers. In 2000, the same firm signed a US$2 million contract to meet a larger suite of requirements. In 1999, NETSOL went on to list at NASDAQ but it did not turn out to be a pleasant experience at first. “It certainly benefited us. We got a bigger market, and we got recognition, but it had so many conditions attached to it that it hindered our abilities. Although we are stable now, but if I had to make that decision today, I would go against it,” he told Profit. In 2006, NETSOL was able to win the capability maturity model integration (CMMI) certificate, the highest a company can reach, catapulting it to an elite class and putting it at par with other titans in the global tech industry. The software manufacturing company’s earnings have strengthened after the launch of its new software solution. According to its financial statements, NETSOL posted an impressive year-over-year revenue growth of

27% to $16.4 million in Q1 2018 driven by major contract wins in China during the quarter, providing a catalyst for 2019. In August 2018, the company secured a five-year contract valued at roughly $30 million with a European tier-one global auto captive to implement its platforms in China, besides securing another multi-million-dollar contract with major American multinational automaker to implement its platform in China. NETSOL’s software also went live in South Africa, a new market, with a German auto manufacturing giant as part of the ongoing international deployment associated with previously announced 12-country $110 million contract. The company has also established a new subsidiary and set up an additional office in London to support future growth in the European market. According to the financials statements of the company, the total net revenues for the first quarter of fiscal 2019 were $16.4 million, compared with $12.8 million in the prior year period. Gross profit for the first quarter of fiscal year 2019 was $8.2 million, compared to $4.8 million in the first quarter of fiscal year 2018. The financial results for the year 2018 released to PSX and available online show that the company reported a net profit of Rs1.1 billion as compared to a net profit of just Rs320.3 million in the same period last year, affirming the company’s upward growth trajectory. The earnings per share of the company increased to Rs12.37 as compared with Rs 3.58 in the same period of the previous year. Moreover, NETSOL’s stock at PSX

has shown bullish trends, hovering between Rs54.94 and Rs128.85 during fiscal year 2018. Ghauri attributed it to the fact that the stock market now believes that NETSOL is on an upward growth trajectory. “We will ensure that we keep growing on the same trajectory. Now that we have completed our new solution and have started offering it, the market is responding positively.” About NETSOL’s plans of expansion, Ghauri elaborated that they want to be the largest providers of the lease management solution in the world. “Our focus now is on expansion into other geographical regions. We were very careful about our growth as the solution we sold previously required a long cycle of implementation. So, we had to wait. Our new software does not have that limitation and will not require a longer cycle of implementation. Now we believe that we have what it takes to be the largest. We have enough big names with us now and we are ready to pick our pace and grow at a faster rate. Today we sell our product as a license. Gradually, we will move on to the services model.” Profit also inquired if NETSOL was ready to try something new in the IT business. “There is a lot of room for improvement in what we are already doing. It is wise to rather get better at what we are already doing then spend another 10 years at something completely new and just be good at it. What we are working on right now has a huge scope. From individuals to multinational companies, people are lending money everywhere. For individuals, we can offer our product as a service while to multinational companies, we can offer it as a license worth millions of dollars,” Salim Ghauri responded.

INFORMATION TECHNOLOGY

Most macroeconomic indicators have worsened since the Imran Khan Administration took office, but the party appears set to initiate some key economic reforms

By Muhammad Faran Bukhari

hen the Pakistan Tehreek-e-insaf (PTI) claimed victory in the July 25 elections this year, Pakistanâ&#x20AC;&#x2122;s economy was on the verge of a balance of payment crisis that threatened the strength of its currency and its ability to pay for imports or repay debts. The total financial deficit that the government faced amounted to a whopping $12 billion and another bailout from the International Monetary Fund (IMF) was on the cards. Hence, handling the economic situation was the top priority for the government and a cornerstone of its performance barometer on the agenda for its first 100 days in power, a benchmark which the Imran Khan administration had

set for itself. November 29 marked exactly 100 days since the PTI assumed office, and almost all of the major economic indicators seem to have deteriorated during the timeframe. The Pakistani rupee compared to the United States Dollar stood at Rs 122.5 as of August 18 and by November 25 it depreciated to Rs135.2. Within this time frame, the price of petrol has increased from Rs95.24 per litre to Rs97.83, the Pakistan Stock Exchangeâ&#x20AC;&#x2122;s (PSX) benchmark KSE-100 index has lost almost 1,600 points (or approximately 4% of its value), inflation has increased from 5.84% to 7%, the trade deficit has increased from Rs$2.9 billion to $2.93 billion per month, foreign reserves have fallen to $14.7 billion from $16.72 billion, the current account deficit has increased to $950 million from $590 million, and

the State Bank of Pakistan’s benchmark interest rate has increased from 7.5% to 8.5% (and went up to 10% the next day). So has the government failed? Dr Salman Shah, former finance minister, disagrees. “The first 100 days are for making key political appointments and setting the direction of the government’s policies and PTI government seems to have achieved that,” he says while talking to Profit. Simply put, the first 100 days might be enough for setting policy directions, but when it comes to a result-oriented policy implementation, a longer time frame is needed.

To IMF or not to IMF?

s a rule of thumb, economies and financial markets can perform well despite bad news, but not under uncertain circumstances. When the Pakistan Muslim League- Nawaz (PML-N) government came to power in 2013, it was quick to knock on the IMF’s door and within the first 100 days, the former finance minister Ishaq Dar announced 19 priority actions in the budget and managed to sign a $6.4 billion bailout package on July 4, 2013, hence doing away with the uncertainty in the market. However, how PTI dealt with the situation is a different story. The economic environment the PTI government inherited was far from ideal. The country’s foreign exchange reserves at the start of its tenure stood at a four-year low, pressuring the domestic currency and triggering fears that the country

“THE FIRST 100 DAYS ARE FOR MAKING KEY POLITICAL APPOINTMENTS AND SETTING THE DIRECTION OF THE GOVERNMENT’S POLICIES AND PTI GOVERNMENT SEEMS TO HAVE ACHIEVED THAT” Salman Shah, former finance minister

“THE MACROECONOMIC FRAMEWORK IS STILL UNSTABLE AND FUNDAMENTAL QUESTIONS LIKE THAT OF THE IMF PROGRAMME HAVE NOT BEEN ANSWERED. EVEN IF THE GOVERNMENT DECIDES TO TAKE THE IMF PACKAGE, IT WILL HAPPEN BY MARCH 2019 AND UNTIL THEN UNCERTAINTY WILL PREVAIL IN THE COUNTRY” Waqar Masood Khan, former finance secretary might soon be caught up in a full-blown balance of payment crisis, making it unable to finance its monthly import bills and debt obligations. Uncertainty prevailed, with the Finance Minister Asad Umar refusing to rule out another bailout by the IMF and at the same time pledging to exhaust all other options before taking that route to fill the $12 billion financing gap. Now 100 days into the government, it is still unclear whether the government will be taking the IMF bailout, or keep looking for other funding avenues. Until last week the State Bank of

Pakistan (SBP) had received $1 billion from a total $3 billion direct support deposit promised by Saudi Arabia. Assurances have also come in from the neighbouring China of a financial package larger than the one offered by the Middle Eastern kingdom. However, the IMF package still hangs in the balance, with the finance minister putting it on hold for another two months. “The macroeconomic framework is still unstable and fundamental questions like that of the IMF programme have not been answered. Even if the government decides to take the IMF package, it will happen by March 2019 and until then uncertainty will prevail in the country,” says the former finance secretary Waqar Masood Khan. The effects of the uncertainity are visible at the PSX that went form 42,446 points on August 18 to 40,869 points on November 25, losing almost Rs607 billion in market capitalisation during the period. “There is no clarity on the issue of balance of payment which is dampening the stock market,” says Samiullah Tariq, the lead research analyst at Arif Habib Ltd, an investment bank.

SMEs and foreign investment

espite the macroeconomic uncertainty, the PTI government has been able to make substantial progress pertaining to small and medium enterprises and getting foreign corporate entities to invest in the country. An Economic Advisory Council (EAC) has been formed and the policy work that it has done has had a substantial impact on the Pakistani industry. Gas prices have been reduced to

ECONOMIC POLICY

“FDI FROM OTHER COUNTRIES EXCLUDING CHINA HAD BEEN FALLING FOR QUITE SOME TIME, SO THE RECENT INCREASE IN FDI IS A POSITIVE STEP. WHAT PAKISTAN NEEDS RIGHT NOW IS INFLOW OF FDI INTO EXPORT-ORIENTED INDUSTRIES. VOLKSWAGEN PLANS TO ASSEMBLE CARS IN PAKISTAN AND EXPORT THEM FROM HERE. AND IF EXXON MOBIL IS ABLE TO MAKE A SUBSTANTIAL DISCOVERY OF GAS RESERVES THEN PAKISTAN’S IMPORT BILL MIGHT FALL SUBSTANTIALLY” Samiullah Tariq, research analyst at Arif Habib Ltd $6.50 per million British thermal units (mmbtu) for five key export sectors that include textile, sports goods, leather, carpets, and surgical goods, leading to the reopening of almost 100 textile mills. On the investment front foreign corporate entities are not shying away from investing into the country. Pepsico AMENA CEO Mike Spanos in his meeting with the prime minister, pledged a $1 billion support over the

“THE DECISION MAKING OF THE STATE-OWNED ENTERPRISES IS IN THE HANDS OF BUREAUCRATS AND POLITICIANS, WHO HAVE NO BACKGROUND IN INDUSTRIAL AND COMMERCIAL ACTIVITY, WHO HAVE NO CLUE HOW BUSINESS IS RUN. SO WE WANT TO TURN THEM AROUND AND PUT THEM IN THE HANDS OF PROFESSIONALS WHO HAVE BEEN TRAINED TO MANAGE SUCH ENTERPRISES” Asad Umar, Finance Minister

next five years for socio-economic development in Pakistan. Similarly, Coca Cola will be investing an additional $200 million in addition to its existing $500 million in the country. Suzuki Motors has expressed interest to invest a $450 million and the world’s largest private sector energy company – Exxon Mobil – has reopened its office in Pakistan after a gap of 27 years. “FDI from other countries excluding China had been falling for quite some time, so the recent increase in FDI is a positive step,” says Samiullah Tariq. “What Pakistan needs right now is inflow of FDI into export-oriented industries. Volkswagen plans to assemble cars in Pakistan and export them from here. And if Exxon Mobil is able to make a substantial discovery of gas reserves then Pakistan’s import bill might fall substantially.”

State-owned Enterprises

he PTI government plans to begin the turnaround of key Stateowned Enterprises (SOEs) by creating a sovereign wealth fund

and taking SOEs out of the purview of cabinet ministries. “The decision making of the stateowned enterprises is in the hands of bureaucrats and politicians, who have no background in industrial and commercial activity, who have no clue how business is run. So we want to turn them around and put them in the hands of professionals who have been trained to manage such enterprises,” said Asad Umar, in a pre-election interview with Profit. For this purpose, a holding company for the SOEs has been created and the process of shifting ownership of the SOEs to the wealth fund has been initiated. According to government officials, the aim behind creating the wealth fund is to make the loss-making public sector enterprises operational and profitable through funding from the fund. Once this is done, the entities with the exception of Pakistan Steel Mills, Pakistan International Airlines (PIA), Pakistan Railways, Utility Stores Corporation, National Highway Authority and the Civil Aviation Authority (CAA) will be sold off to the private sector at a higher rate compared to what they would have fetched otherwise. However, the former finance secretary Waqar Masood Khan disagrees with the notion of taking these SOE’s out of the purview of line ministries. “What is the purpose of having line ministries if you are going to take their relevant enterprises away from them,” he asks. The government might be moving in the right direction, but such fundamental questions still remain unanswered.

ECONOMIC POLICY

TECHNOLOGY

By Farooq Tirmizi

omething different is afoot in Pakistan, and if you know where to look and where to be, you can feel it. While much of the country continues to muddle on as though nothing much has changed, a few bold dreamers dare to envision a country that is different: more optimistic, more future-oriented, more technology-friendly, more connected. It is no secret that Pakistan’s technology startup ecosystem leaves much to be desired. The country got its very first venture capital fund last month. The number of startup incubators can be counted on the fingers of one hand, and the number of coworking spaces and service providers to startups is very limited. And this is before we even get into things like an enabling legal and accounting infrastructure, effective networking and mentorship opportunities, and other avenues of the kind of collaborative competition that defines the startup culture in Silicon Valley. Talk to any Pakistani entrepreneur or venture capitalist attending 021Disrupt, and you will hear that litany of complaints about what Pakistan lacks and what Silicon Valley has. But here is what those people complaining to you won’t notice: five years ago, they would not even have thought about complaining about any of these things. Because five years ago, Pakistan’s startup scene were the beggars who did not dare dream of palaces, but were grateful for any crumbs from the rich man’s table. The complaints, in other words, are a sign of progress. They represent elevated expectations. But whereas once the phrase Silicon Gali was only occasionally – and usually not seriously – used, there is now no doubt that Pakistan has a vibrant enough startup scene that needs a name, much like Silicon Valley in the United States. But where exactly is Silicon Gali? The heart of the US tech industry is unquestionably in the corridor of erstwhile sleep California towns between San Francisco and San Jose. Is there a similar clustering effect in Pakistan? The answer to that question is yes, though with a few caveats.

KARACHI’S LARGEST STARTUP IS DARAZ.PK, WHILE LAHORE’S IS ZAMEEN.COM. THE LARGEST STARTUP OPERATING IN KARACHI IS ACTUALLY ONE THAT IS HEADQUARTERED IN DUBAI: CAREEM’S PAKISTAN OFFICES ARE HEADQUARTERED IN KARACHI. THEIR SAN FRANCISCO-HEADQUARTERED RIVAL UBER IS THE LARGEST STARTUP OPERATING OUT OF LAHORE, GIVEN THE FACT THAT UBER PAKISTAN IS HEADQUARTERED THERE Silicon Valley: what is it and why clustering matters

o understand why having a tech startup cluster even matters, it helps to look at the original cluster and how it came to be so dominant. Silicon Valley began in part through a combination of historical accident and purposeful decisions on the part of both private entities and the United States government. The San Francisco Bay Area originally became populated as a result of the Gold Rush of 1849, when people from all over the United States rushed to the area after an initial discover of gold in the area in 1848. Hence, the area always had an appeal to people who were willing to risk tremendous odds for the chance at monumental wealth. Somewhat by coincidence, in the early 20th century, the area also became a hub for research and development by the United States Navy, particularly when it came to communications technology. Some of the world’s first radio companies were created in San Jose and Palo Alto, cities that are now more commonly known as the headquarters of software and internet companies. It also helped that nearby Stanford University always had a strong engineering program that encouraged its graduates not only to become innovators and stay in the area to build out their businesses. Two of the earliest such graduates were named William Hewlett and David Packard, after whom the now gigantic computer manufacturer Hewlett-Packard is named.

And sometimes luck was involved. The only reason Shockley Semiconductor Laboratory moved to Mountain View, Californian (also where Google has its headquarters) is because William Shockley moved there to be close to his ailing mother, who lived in nearby Palo Alto. By the late 1950s, the nascent semiconductor industry was headquartered in Silicon Valley, through a combination of government policy and private individuals making their own decisions. And then came the venture capital, when men like Arthur Rock and Tom Perkins moved from New York to California to begin offering financing to the new companies being created in this entirely new industry. Once the venture capitalists moved in, the virtuous circle started running and has not stopped since. Venture capital moved in originally because an interesting group of entrepreneurs were there. Once the venture capitalists moved there, more entrepreneurs moved to Silicon Valley to be closer to the venture capitalists. That higher number of entrepreneurs attracted yet more venture capital, and so on the circle goes. Today, Silicon Valley is the dominant center of global technology and is reshaping human life at a scale and speed never before seen in history. Here are just a few numbers that show just how dominant Silicon Valley is: the region attracted more than $140 billion in the six years between 2012 and 2017 inclusive; the next highest region was Beijing with just $72 billion during that same period. That money was spread across 12,337 deals; the next highest region was the New York City metropolitan area, with 5,252 deals. Of the 298 tech startups valued at more than $1 billion – also known as

unicorns – 57 are located in Silicon Valley; the next highest region is Beijing, with 29 unicorns, according to data compiled by CBInsights. The companies spawned by Silicon Valley are names the whole world knows and uses: Google, Facebook, Apple, Netflix, Intel, Oracle, Visa, etc. China may now have massive technology companies, but hardly any of them are well-known brands outside China. The cluster that Silicon Valley has created now has a virtuous circle that includes not just entrepreneurs and venture capitalists, but also research universities, mature corporations, service providers, and above all, a culture that lives and breathes disruptive change and generates massive wealth and economic growth as a result.

In short, it pays for an economy to have a tech startup cluster, and while Pakistan does not have a fully developed one yet, it should actively seek to create one. The only question at this point is which part of the country has the strongest claim to play host to such a cluster.

So where is Silicon Gali?

n Pakistan, there are two top contenders for the prize: Karachi and Lahore. We will not keep you in suspense much longer: if there is a single place that can be described as Pakistan’s Silicon Gali, it is Lahore. Karachi has a lot of strong attributes going for it, but ultimately Lahore wins out. How? Here are some of the numbers, which we have compiled using data

HERE ARE JUST A FEW NUMBERS THAT SHOW JUST HOW DOMINANT SILICON VALLEY IS: THE REGION ATTRACTED MORE THAN $140 BILLION IN THE SIX YEARS BETWEEN 2012 AND 2017 INCLUSIVE; THE NEXT HIGHEST REGION WAS BEIJING WITH JUST $72 BILLION DURING THAT SAME PERIOD. THAT MONEY WAS SPREAD ACROSS 12,337 DEALS; THE NEXT HIGHEST REGION WAS THE NEW YORK CITY METROPOLITAN AREA, WITH 5,252 DEALS. OF THE 298 TECH STARTUPS VALUED AT MORE THAN $1 BILLION – ALSO KNOWN AS UNICORNS – 57 ARE LOCATED IN SILICON VALLEY; THE NEXT HIGHEST REGION IS BEIJING, WITH 29 UNICORNS

from Crunchbase, a global database of tech startups and venture capital. Our evaluation is based on the following five metrics: the total number of startup headquarters in any given city, the amount of venture capital funding attracted by startups headquartered in a city, the number of venture capital deals attracted by startups headquartered in the city, the number of venture capital funds headquartered in the city, and the number of successful startup exits by companies headquartered in the city. Lahore wins on four of these five metrics, though Karachi wins the fifth, and is not too far behind on one of the first four.

NUMBER OF STARTUPS: On this metric, the numbers are not even close. Profit was able to compile data on 762 startups using Crunchbase data, of which 311 are in Lahore, meaning nearly 41% of Pakistan’s startups are in the Lahore metropolitan area alone. Karachi was the next highest, but the number is not close: 228 startups, or about 30% of the country’s total. When it comes to the types of startups in each city, both Karachi and Lahore have a considerable diversity, with each having a mix of web portals, e-commerce companies, and other tech or tech-enabled startups as part of their ecosystem. This does not appear to be a situation where one city has a comparative advantage over the other in a specific type of startup. Neither city has a startup ecosystem large enough to allow for that kind of specialization. TECHNOLOGY

Arfa Karim Tower, Lahore

NONETHELESS, THERE ARE SOME INTERESTING THEMES: Karachi’s

largest startup is Daraz.pk, while Lahore’s is Zameen.com. The largest startup operating in Karachi is actually one that is headquartered in Dubai: Careem’s Pakistan offices are headquartered in Karachi. Their San Francisco-headquartered rival Uber is the largest startup operating out of Lahore, given the fact that Uber Pakistan is headquartered there. And some of the trends are the ones that do not emerge from the data: given Karachi’s status as the financial capital of the country, one would expect to see most of the FinTech startups located in that city, but a majority of those startups are in fact located in Lahore.

AMOUNT OF VENTURE CAPITAL FUNDING: Over the past 15 years,

Pakistani startups have attracted a total of $162 million in venture capital funding, mostly from funds around the world. Lahore has the lead in this category, with $69.3 million in funding going to startups based in that city, or

about 42.9% of all venture funding to Pakistani startups. Karachi, however, is a close second, with $67.3 million in funding going to startups headquartered in the country’s financial capital, or about 41.6% of the total. A few notes about the data here: we excluded from our list the $184.5 million investment by Ant Financial into Telenor Microfinance Bank. Our reasoning: that investment represents more of a private equity investment than a venture capital investment, and Telenor Microfinance Bank is not really a startup so much as a subsidiary of a mature company. The count for Karachi also includes some unannounced transactions that the Profit team is aware of and expects will be announced by the end of this month. Karachi’s largest startup – Darak. pk – accounts for the bulk of the count for startups in that city: $55.6 million. By comparison, Lahore’s biggest startup – Zameen.com – also accounts for a plurality of the funding attracted by startups in that city, but not quite a majority. Zameen.com has thus far raised $31.1 million in disclosed rounds

of funding. Of the 15 startups that have raised at least $1 million in disclosed rounds of funding, nine are headquartered in Lahore, and only four in Karachi. Of the seven startups that have raised $5 million or more in disclosed rounds of funding, four are headquartered in Lahore and two in Karachi.

NUMBER OF VENTURE CAPITAL DEALS: Once again, the data on this

is not even close. Since 2006, there have been 111 venture capital transactions involving Pakistani companies that have been disclosed. Of those, 52 involved companies headquartered in Lahore, and only 28 involved companies headquartered in Karachi. Lahore’s advantage on this has largely been consistent over the past decade and a half, with the number of transactions in Lahore outstripping those in Karachi in all but one of the years for which data is available. The one exception: 2018, when there have been nine deals in Karachi so far this year, and four in Lahore, though it is unclear if that recent shift portends a change in trend.

Given the fact that Karachi has a small number of deals and a smaller number of startups, that implies that the average investment size – and thus the average valuations – for startups in Karachi is higher than that of startups headquartered in Lahore. This could be a harbinger of change in the future: if Karachi startups are consistently able to command higher valuations and absorb larger amounts of capital, ultimately, more venture capital will seek to fund startups in Karachi and Lahore might lose some of its edge.

NUMBER OF VENTURE CAPITAL FUNDS: There is only one dedicated

venture capital fund in Pakistan – Sarmayacar Ventures – which is headquartered in Lahore. This is not even a close contest. Karachi may get a venture capital fund some day, but it simply

does not have one there now.

NUMBER OF SUCCESSFUL STARTUP EXITS: Again, there has only been

one major startup exit in Pakistan’s tech industry and this is one where Karachi wins out over Lahore: Daraz. pk’s $150 million sale to China’s Alibaba is the only recorded exist thus far for Pakistani startups and Daraz is headquartered in Karachi. Why are exits important? The answer to that question can be summed up in a quote from Lou Kerner, a partner at CryptoOracle.io, a New Yorkbased venture capital fund: “Without big exits, the ecosystem is like a roach motel, money can come in, but it doesn’t get out. And that’s not a good thing for anyone.” While some of Pakistan’s leading startups have been around for a long

OVER THE PAST 15 YEARS, PAKISTANI STARTUPS HAVE ATTRACTED A TOTAL OF $162 MILLION IN VENTURE CAPITAL FUNDING, MOSTLY FROM FUNDS AROUND THE WORLD. LAHORE HAS THE LEAD IN THIS CATEGORY, WITH $69.3 MILLION IN FUNDING GOING TO STARTUPS BASED IN THAT CITY, OR ABOUT 42.9% OF ALL VENTURE FUNDING TO PAKISTANI STARTUPS. KARACHI, HOWEVER, IS A CLOSE SECOND, WITH $67.3 MILLION IN FUNDING GOING TO STARTUPS HEADQUARTERED IN THE COUNTRY’S FINANCIAL CAPITAL, OR ABOUT 41.6% OF THE TOTAL

time (Zameen.com was founded in 2006), the broader culture of entrepreneurship in Pakistan did not take off until 2012 or so, largely in anticipation of the boom on mobile internet connectivity that would come with the auctions of 3G and 4G spectrum to the cellular telecommunications companies. It as not until April 2014, when those licences were actually auctioned off, that Pakistan’s entrepreneurial cycle began to take off. Hence it has not been long enough for most of Pakistan’s tech startups to begin offering exits to their initial venture capital investors.

Why is Lahore ahead?

he answer to that question is completely straightforward: the Lahore University of Management Sciences (LUMS), and the Punjab government, specifically the Punjab Information Technology Board and the incubator it runs called Plan 9.

THE LUMS FACTOR: In addition to being indisputably the best university in Pakistan, LUMS also has the best computer science department in the country (and it is not even close – sorry GIKI). The university has by far some of the best faculty in the country, and it is able to continue attracting highly qualified professionals to teach there by institutionalizing its faculty recruitment, which actively seeks to hire quality professionals, as opposed to most other universities in the country, which tend to fill their teaching slots with the best available candidates rather than TECHNOLOGY

actively recruiting for the most qualified ones. LUMS also tends to attract some of the best talent in the country, both in terms of students seeking to pursue careers in business and management as well as those who are pursuing careers in the hard sciences and engineering. In theory, the Ghulam Ishaq Khan Institute of Engineering Sciences and Technology (GIKI) as a specialized engineering institution should have a better quality of science education, and perhaps in some areas it does. But when choosing between two universities that both have an active campus life centered around dorms, where do you think the most talented student – who can choose either of the two – will want to go: Swabi, or Lahore? (Although given the recent trend of unbreathable air in Lahore in the winter as a result of smog, maybe Swabi is not so bad.) By comparison, the vast majority of Karachi’s higher educational institutions are public universities, with only one high-quality private institution with a long history: the Agha Khan University, which is a medical college. (Perhaps that is why there are slightly more health-related startups in Karachi than in any other part of the country.) Of course, the public universities in both Karachi and Lahore produce a few high quality engineers and computer scientists every year, but it is not definitively possible to say that UET Lahore is better than NED University Karachi or vice versa. The difference

for Lahore really does seem to be the existence of LUMS, and a lack of any serious competitor in Karachi. (Habib University has potential, but is too new to have any impact yet.)

PITB AND PLAN 9: The high quality

of the LUMS education is then supplemented by the PITB and Plan 9, the Punjab government’s incubator, which offers high quality infrastructure to its incubates, in addition to providing them access to a high caliber of venture capital funding that the government has been able to attract by virtue of its own investment in the incubator itself. A sizeable proportion of Lahore-based startups that have received funding are ones that were first incubated in at Plan 9, which gives the city an enormous advantage over its rivals in terms of an enabling startup ecosystem. Karachi does have startup incubators, including the Nest I/O, which has a strong track record of helping its incubates attract venture capital. And perhaps Karachi’s incubators have a slightly better long-term prospect, given the fact that they are all private sector initiatives and thus not dependent on government largesse or subject to the whims of a new chief minister. But a lack of government support does appear to be at least somewhat of a handicap for Karachi thus far. It is unclear if the PITB will continue to perform as well as it did under Dr Umar Saif, who was widely regarded as a ca-

pable head of the department. However, the advantage the PITB has built up for Lahore is likely to last for at least a few years into the future.

Honourable mentions in the race for Silicon Gali

nsurprisingly, the third largest area for startups in Pakistan is the Islamabad metropolitan area, with the twin cities accounting for 140 startups, or 18.4% of Pakistan’s total. Unfortunately, most of the transactions involving Islamabad / Rawalpindi startups did not have disclosed amounts so it is not easy to determine exactly how much of the country’s total venture capital inflows were captured by startups located close to the federal capital. One surprise in the data is Sialkot, which had 18 startups, including one that had nearly $22 million in venture capital funding. That startup is Bag Tech, a company that makes all sorts of bags and attracted four separate rounds of venture capital funding from Auriga Partners, a Paris-based venture capital fund. Peshawar, Faisalabad, and Hyderabad each have more than 10 startups for which data is available on Crunchbase, though unfortunately none of these three cities has significant data available about the amounts of funding raised by those startups. The rest of Pakistan accounts for less than 3.5% of the total number of startups in the country.

TECHNOLOGY

Bykea Founder and Daraz Co-Founder Muneeb Maayrâ&#x20AC;&#x2122;s memoir of his time with AliBaba Group Founder and CEO Jack Ma

By Muneeb Maayr

hen Alibaba and the United Nations Conference on Trade and Development announced that it was seeking founders of startups from Asia for a two week program at Alibaba’s headquarters in Hangzhou, I pounced at the opportunity. Like many, I had been following Alibaba in the news and had been the Chief Executive Officer (CEO) of a company that they acquired, but knew little about the company in any way. In fact, I had never been to China before my visit this November. “Why do you think you are here? This costs a lot of time and money” asked Jack Ma. “You are here because it’s part of our mission”, he said. What I learnt over the next 20 days in China was that every employee at Alibaba is on a mission, to make business easier for all and to train, mentor and encourage a new set of leaders for this dream to perpetuate. Our trip started in Shanghai, on the eve of double 11 (singles day) in what ends up being, almost every year in the past five years, the largest shopping day in terms of gross merchandise sales globally, overshadowing Black Friday by many multiples. Thirty nine founders of startups, both early stage and those that have raised a few million dollars make it out chaperoned by organizers speaking perfect English who help navigate the labyrinth that is Alibaba. We round up at the Mercedes Benz Arena, adjacent to the Shanghai Import Expo, that was kicking off one of the most magnificent shows I have seen put together by an eCommerce platform. For four hours, leading up to double 11, a series of star singers and actors, pop star performers from Asia, magicians, KOLs (Key Opinion Leaders, or influencers who promote a product online), a Victoria’s Secret model and even Mariah Carey show up to entertain shoppers while they wait for the countdown to midnight. In between entertainment there are game shows, TV channels stream stars that pose QVC style questions to audiences, the performers make TV viewers vote on their smartphones for a chance to win coupons, all for the event kicking off at midnight, double 11. Fan club members

Alibaba Group sold $30 billion of products off a myriad of internet based platforms, breaking the global sales record of the largest singles day sale globally, a record that they had set last year

of KOLs are cheering at the area in the hundreds, screaming, chanting slogans in a stadium style packed arena. Every other minute, there is silence from the audience as it clicks away on smartphones, scoring more points in games embedded in Alibaba’s application for a chance to win yet again, more coupons for double11. In a spectacular mix of performance, gamification and shopping, Cirque Du Soleil acrobats mesmerize the audience, but some in the audience are still too busy, trying to accumulate more points on their Ant Forest, another accumulation of loyalty points users have sown using Alibaba’s payment application Alipay the past one year. We are then escorted to a media room where a live ticker plays on a cinema sized screen as journalists from around the world see the magnificence unfold. In the next 48 hours, Alibaba Group sold $30 billion of products off a myriad of internet based platforms, breaking the global sales record of the largest single day sale globally, a record that they had already set last year. All the organizers wore red fleeces that read ‘this is just the beginning’ and as we discover over the next 2 weeks, people who work at Alibaba actually believe their performance is just the beginning of their destiny in a globally relevant Alibaba, the company that helps businesses trade worldwide. Alibaba and its associated companies have nearly 70,000 employees. Its business started off with their business-to-business (B2B) portal, Alibaba. com, which connects Chinese, and now

global manufacturers with sales leads against an annual subscription, Taobao, a customer-to-customer (C2C) platform charges no listing fees or commissions and constitutes the biggest proportion of its sales and dominates ecommerce in China, and Cainaio, a SaaS product for logistics companies tracks airway bills and offers warehouse management software and services. Then there is TMall, basically a business-to-consumer (B2C) platform for brands to sell in China, against a shop management fee. TMall Mart allows fast moving consumer goods brands and grocers to sell to Chinese customers, while Ling Shou Tong (LST), helps distribute FMCG products across one million mom and pop grocery stores in China. Xian Yu, a used product marketplace prods Taobao customers to upgrade by selling their used merchandise on its app, and unlike eBay, charges no fees and allows customers to voice or video chat with sellers. Hellobike allows you to scan your phone to unlock bicycles sprawling across pavements in major cities in China, allowing you to ride a bicycle for short distances. Dingtalk is a chat service that allows companies to offer chat, calls, cloud storage drives, email and attendance management. Fliggy is an online travel portal for Chinese travelers to book packages, hotels, cars or flights anywhere in the world. Hema is an offline supermarket with an application that enables you to order anything for free delivery within a 3

OPINION

kilometer radius. Interestingly it does not charge sellers at each aisle rent, but shares a profit with each vendor, hence you see each vendor pushing a sale, unlike vendors you see at most supermarkets who are salaried clerks. Ele.me is another application for food delivery while InTime is an offline electronics retail store that is simultaneously sells online and offline, and can be spotted all over major Chinese cities. Then there is Alimama, the holy grail of advertising revenue for the group that solicits fees for placements on Taobao and contributes nearly half of Alibaba’s bottom line. Content promotion is at Alimama’s core, be it on the ecommerce platforms or the likes of Youku, Alibaba’s answer to YouTube and Tencent Video. The advertising business, which is a core contributor to Alibaba’s bottom line, was inspired from learnings from the Yahoo China acquisition, which on the face of it with it’s write offs looked like a failure but built the foundation for the advertising business. The entire infrastructure works on Alicloud, a cloud server structure that the business had to build on it’s own to save cost and ensure reliability during peak loads such as double 11 when IBM infrastructure couldn’t hold anymore. Today this cloud infrastructure is a backbone for not just Alibaba but private and state enterprises in China ranging from Louis Vuitton to the 170 million cameras in China that capture license plates and face recognition, similar to how Facebook recognizes you amid a crowd of 50 in someone else’s photo upload. Then there is Alipay, which runs as the rails of payments in China. Think of Alipay as your Visa/MasterCard on your smartphone, but with a take rate of 0.5 per cent and not two to three per cent that Visa and MasterCard charge. There are nearly seven bank accounts for every person in China and what Ali-

AUTHOR BIO Muneeb Maayr is Founder at Bykea, an on-demand application serving rides, deliveries, food and payments on motorbikes in Pakistan. Muneeb graduated from the University of Virginia and worked in investment banking at Bear Stearns in New York City before returning to Islamabad to set up a back office for the United States based SNL Financial, a financial content collection company. From 2004 to 2012, Muneeb helped build a 600 person back office for SNL, operating 24/7, collecting data on public companies in the United States. In 2012, Muneeb joined Rocket Internet and served as Co-Founder and CEO of Daraz.pk for 4 years, before starting Bykea. Muneeb believes in platforms and hopes to enable millions in Pakistan to use technology for utility. pay has allowed people in China is the ability to pull, with a password prompt, money from their bank account to pay at a store, online or to a friend. All you do is scan the recipient’s QR code or have them scan yours (also on your application). Since Ant Financial, Alipay’s parent company holds a parallel deposit account with banks, pulling money from a customer’s account is really only putting money back into the banking ecosystem with their deposit account. Ant Financial also has a product called Zhima Credit which acts as the defacto credit system for most Chinese in a country where credit scoring was near missing for most citizens as banks seldom offered uncollateralized credit like they do via credit cards in the US. When Ant introduced Zhima, it tracked financial transactions mostly for small sellers on Taobao and as more vendors used their SaaS products, they got

ALIBABA GIVES A PIN ON AN EMPLOYEE’S 1ST YEAR ANNIVERSARY, A JADE PENDENT ON 3 YEARS, AN ENGRAVED MISSION RING ON 5 YEARS AND ENCOURAGES ALL EMPLOYEES TO HAVE A FICTIONAL MARTIAL ARTS CHARACTER NAME PRINTED ON THEIR EMPLOYEE ACCESS CARDS WITH EMPLOYEES MOSTLY KNOWN WITHIN THE ORGANIZATION WITH THEIR FICTIONAL CHARACTER NAMES

better scoring for using this platform, which enambled microcredit to these SMEs to improve their working capital from 3rd party banks. The micro credit is at first something small like 500 RMB and then up to 10,000 RMB, never really exceeding to start offering very large lending amounts, almost always deferring that out to banks again. What the engineers at Alibaba knew was that they despite attaining a banking license due to regulatory requirements would never have the capital to help every small business in China. But if they used their technology capabilities to help financial institutions gain access to more customers, they would win trust of the ecosystem. Even when they prodded Alipay users to hold money in their wallet, it was in lieu of offering them daily earnings on money market funds from third party financial institutions versus keeping money in either their current account or the Alipay wallet. And this sums up Alibaba’s strategy. If you help the small businesses with free software, and you help them grow, they will take incremental earnings and share more with you for marketing and the more data you collect on this customer, the more leads you can generate for 3rd parties whose core business it is to offer that product. Chinese businesses love Alibaba, a company whose story is captivating. Jack Ma was an English teacher who collated one of the first yellow pages for factories in China and sold this directory to the state. He then, invested all that money to create a platform with 18 other co-founders, that helped list large scale businesses in China be discovered online for overseas buyers. Listen to Jack for 5 minutes in person and you’ll start trusting him. He has a knack for inspiring, motivating and believing in and relaying a mission. And the mission and vision for Alibaba is ingrained in every employee at the company. It seems everyone at the firm believes that they are building a greater good. They are helping businesses and in that, since most of them have some level of employee stock ownership, there is a sense of ownership unlike I’ve seen at any organization. At the Taobao campus in Hangzhou, the cafeteria is packed at 7PM over dinner. I ask around if the few thousand around me are here because the food is cheaper at the cafeteria. “Yes, perhaps, but most wanna finish up

some work first” is what I’m told. The day starts anywhere between 8 am and 9 am but when I walk out of training at 8pm, there are still thousands cranking away at work. I’d seen this culture from my days in investment banking in New York City but the motivation in financial services sector is typically greed or fear. I know of engineering teams and startups working 7 days a week, but at Alibaba, it seems, the inspiration comes from something larger. Over half of Alibaba’s employees are engineers. The most senior people in their logistics wing was a former professor at a leading United States (US) university. I don’t recall ever seeing what I would think of operational wings of a company lead by professors, PHDs and engineers. At some point Jack Ma instilled in his workforce to always hire for skills they didn’t have, or people smarter than them, and his 70,000 army has taken that as a standard. The 20 senior leadership personnel who taught us over the 2 week course included billionaires and many worth a few hundred million dollars. Yet, I was astounded by the humbleness. Leadership at Alibaba, unlike anywhere I have seen is down to earth. The patience to listen to stupid questions, the maturity to think deeply before responding, the kindness to take time out to help, train and mentor is unlike anything I’ve seen or experienced at a major corporation. My professional career has been with European and American financial services and consulting professionals, really, the cream of what are perceived in society as successful professionals. There is always, a sly cockiness, an arrogance of pedigree in education or career. What I saw and felt in China was a completely different culture. One where success does not translate into arrogance and impatience, where capitalism is constantly

Muneeb Maayr attending a training session with Jack Ma

deputed as a responsibility for giving back. Ying and Yang. There is belief in karma. In many ways, Alibaba has taken the best of the east and the west. In performance management, their weekly employee self review and monthly manager assessment in the 3,6,1 formula (30% exceeds, 60% meets, 10% does not meet expectations) is taken right out of the playbook of the best multinationals in the US. So is in giving all employees, stock options, to get everyone skin in the game and treat the business as their own. But in upholding employees to a values assessment, to ensure they are in line with Alibaba’s mission, vision and values, they have an Eastern touch to their organization. Employees are mandated to document out-of-office hours social work, carve out time to teach a training class to mentor. Alibaba gives a pin on an employee’s 1st year anniversary, a Jade pendent on 3 years, an engraved mission ring on 5 years and encourages all employees to have a fictional martial arts character name printed on their

PAKISTAN EXPORTS $23 BILLION EACH YEAR, VIETNAM $214 BILLION, INDIA $290 BILLION AND CHINA $2.2 TRILLION. GLOBAL ECOMMERCE SALES IN 2016 WERE ESTIMATED TO BE $25 TRILLION BY UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT. IN AIMING AT $1 TRILLION OF THE GLOBAL PIE, ALIBABA’S VISION IS TO HAVE A MONUMENTAL IMPACT AT A GLOBAL STAGE

employee access cards with employees mostly known within the organization with their fictional character names. Employees choose a character that they are inspired by, and tout it around proudly. Alibaba management speak of competitors with respect, signaling much to learn from them too. People outside of China assume Alibaba owns ecommerce in China. It sort of does, but there are strong competitors as well in a multitude of categories. There is the Tencent group, itself a universe of platforms including Wechat, Meituan, Dianping, Mobike, JD.com and gaming and digital content platforms that own China. My last day of training, an Alibaba employee recommended I read up on the Tencent group and I am beginning to discover that in China, well funded copycats are more common than in the West, competition is intense and this has driven product teams to work on user interfaces and experiences that are today perhaps, much better than their western counterparts. Take maps as an example. Amap, or Baidu’s Du map are far more superior than Bing or Google Maps in UI and functionalities (traffic lights, cameras, 3D imaging of cities as an example). The same holds for Taobao vs eBay or Amazon. Image search, QR or barcode search, the ability to watch live streaming showcasing a product you are interested in reviewed by a key opinion leader on Taobao makes the user experience and stickiness leaps and bounds ahead of its Western counterparts. Vending machines in China allow you to scan a QR code off your phone

OPINION

to buy a Coke, a pack of cigarettes, hot coffee, rent a power bank or slot a time in a booth for some karaoke or a massage chair. Bus stops have LEDs with minutes to the next bus, elevators have projections on the glass doors that make you watch a video ad while you wait. There are QR code triggered rental bikes everywhere with a growing number of electric bicycles and cars, and almost all scooters are electric. Every document, parcel or pallet moving in the country can be tracked live on a smartphone because the state mandated that all trucks have trackers whose tracking is available via a live API from a state run website. Villages and factories, once remote now identify their unique selling points, hire key opinion leaders to create content for them and sell not only on Alibaba’s platforms in China but also through Lazada to countries in South East Asia, Jumia in Africa and Paytm in India. Alibaba’s goal is to deliver anything in China in 24 hours and anything anywhere in the world in three days. Small items can be shipped across geographies with automated customs duty levied with integration of their Cainaio SaaS with country level customs databases and bulky items that are frequently purchased via bonded warehouses in the terminal country, with duty paid when the product is sold. A network of local eCommerce stores, warehouses, logistics companies, all leveraging Alibaba’s tech platforms would allow fulfillment to be seamless and everyone would be accountable for their SLA. So think not only a portable speaker moving from China to Kenya but also a leather jacket moving from Pakistan to South Korea. Alibaba aims to be the network used for commerce globally, not just in

China. It’s a matter of when all this will happen, not if it will happen. Today, China’s affluent middle class makes the country the second largest importer of goods in the world. Chinese cities are flooded with German and American cars, Western fashion labels and loads and loads of imported food, from Africa to Asia. Imported milk, post a scare of Chinese milk tainted with melamine in 2014 was the single biggest revenue driver in Shanghai over double 11. The Chinese are getting rich and Alibaba is gearing up to help global brands sell into China through bonded warehouses in China. But Chinese consumers are more sophisticated in their research before an online or offline purchase, so global brands would need more sophisticated content, that too in Chinese to win trust in a society that is getting used to scanning a QR code or searching the product photo off an aisle before buying it. Plus Chinese consumers sway when a KOL they follow evangelizes a product, making now thousands of online content celebrities pretty rich in China. This company founded in 1999 has a vision to be around across three centuries, a lifespan of a 102 years, with 10 million profitable SMEs selling to 2 billion customers. It may have started with an army of direct salesman going factory to factory selling a platform subscription, but today many of its platforms are near free, enabling sellers and couriers to use its tools to grow their business, and hopefully, at some point, pay for some value added services. It’s partners, now in the millions, buy into this relationship and migrate most commerce, even offline commerce, through Alibaba’s platforms. Take Alipay as an example. Since the

CONTENT PROMOTION IS AT ALIMAMA’S CORE, BE IT ON THE ECOMMERCE PLATFORMS OR THE LIKES OF YOUKU, ALIBABA’S ANSWER TO YOUTUBE AND TENCENT VIDEO. THE ADVERTISING BUSINESS, WHICH IS A CORE CONTRIBUTOR TO ALIBABA’S BOTTOM LINE, WAS INSPIRED FROM LEARNINGS FROM THE YAHOO CHINA ACQUISITION, WHICH ON THE FACE OF IT WITH IT’S WRITE OFFS LOOKED LIKE A FAILURE BUT BUILT THE FOUNDATION FOR THE ADVERTISING BUSINESS 34

take rate is so low, almost every small mom and pop shop, interpreter or taxi driver, will rather accept payment via Alipay or Tencent pay. The question is why? Because it’s convenient and it doesn’t cost anything really. I pull out my phone, and either click scan to scan the other party’s QR code or give them mine on my smartphone that their store POS barcode scanner or POS machines can scan to run through middleware to offer a seamless experience. As a seller, it’s convenient as a one stop shop that will allow me to publish content, advertise, sell, print an airway bill that any courier can scan and receive money after a week of escrow from any customer’s mobile phone account number directly. This software was not built by industry veterans. The eCommerce portals were build by engineers not retailers. The payment platforms were built by engineers not bankers or telecom personnel. The logistics platforms are built and managed by engineers not couriers. Alibaba tasked disruption to those who knew little but had the grit to build a new future, an inclusive one, build open and collaborative platforms that would ultimately have a network effect once users found utility. In abandoning possession of the platform and micromanagement and fixed positioning, Alibaba set a new era in China of inclusiveness, not cut throat copycat competition. This was the harbinger of change in China’s economy. Alibaba’s growth from $5.7 million annual sales, 4 years after it was founded, to a $500 billion revenue enterprise in 2016, now aiming to be $1 trillion by 2020, is a story of luck, timing, but mostly a mission of resilience and grit to build a product that drove seller utility. Pakistan exports $23 billion each year, Vietnam $214 billion, India $290 billion and China $2.2 trillion. Global eCommerce sales in 2016 were estimated to be $25 trillion by United Nations Conference on Trade and Development. In aiming at $1 trillion of the global pie, Alibaba’s vision is to have a monumental impact at a global stage. To accomplish this goal, Alibaba needs to ensure that businesses around the world discover the value offered by Alibaba’s technology, just like they did in China. In Alibaba’s philosophy, when businesses win, Alibaba wins and this is how it aims to live in 3 centuries since its inception in 1999 – or 102 years.

OPINION

Kamil Shahid

economies have nosedived into catastrophe due to the mere existence of the twins. But who exactly are these twins and why are we taking so much time out to discuss them? What are the reasons for their existence in Pakistan and what can be done to alleviate us from their presence? In economic theory, a “twin deficit” occurs due to an existing causal relationship between two leading economic indicators that define money movement: the “budget account deficit” and “current A vicious cycle leads to these “twin account deficit”. In Latin, the word deficit means “lacking”. To deficits” which is an increase in consimply put it, when the budget account and current sumption of imports, reduction in savaccount lack in conjunction, “twin deficits” becomes a ings and an increase in foreign capital reality. The theory goes to say that a lack of the forinjection single-handedly deteriorates mer leads to lacking the latter. the current account balance In laymen terms, the budget account itself measures the difference between government spending and revenue collection. The government collects akistani media has a knack for churning out money via numerous taxing methods and other noncomplex and technical terminology in order tax items such as receipts of domestic and internato manufacture narratives. It seems the aim tional investments. is to shape public opinion on a given subThe government spending is predominately on ject matter to the innocent bystander that infrastructure, development projects and day-to-day even TV anchors can easily appear as Ivy operations of its institutions. And in some cases, in League PhD graduates in Economics. Perhaps a part Pakistan, spending could also mean pocketing some within us readily accepts the great illusion of knowlof that cash for goodwill (i.e. corruption). edge presented by anchors – but that’s a topic of disWhat’s interesting is when one breaks down the cussion for another time. budget account into two further measures: the revGetting down to business – the “twin deficits” is a enue account and the fiscal account. Both measures term you’ve probably heard repeatedly in the media in touch upon different sides of the government’s earnthe past few months. Economists tend to panic when ing and spending habits. they see the twins and they rightly do so; historically, In basic terms, a deficit in the revenue account alludes to a shortfall in cash to cover day-to-day expenses, whilst a deficit in the fiscal account alludes to the additional shortfall from non-day-to-day expenses such as investments (example Metro Bus Project – the money invested vs the return on investment). Kamil Shahid Hence the fiscal deficit is a true indicator of the “financing gap” and the difference is a Finance professional between fiscal and revenue deficit indicates the proportion of deficit from sloppy incurrently working at vestments. Deutsche Bank in London. Pakistan has naturally been a victim of a revenue deficit for decades. This is priHe is an aspiring writer of marily due to tax evasion, ease of corruption, money laundering and poorly managed economics and finance. He state institutions. tweets @kamilshahid1 Our tax base is heavily distorted as low and narrow, and the policies of the government tend to give a discriminatory preference to certain sectors (i.e. agriculture). There is an imbalance in direct vs indirect taxes in the economy. In 2017, indirect taxes accounted for 80% of the total revenue share, mostly coming from skyrocketed

Explainer: Pakistan’s twin deficits and how can they be contained?

custom duties and excise duties. The tax system is regressive as best described, overly burdening some sectors/income bands and distributed unequally. Adding to this, corruption and money laundering literally lead to a withdrawal of money from the domestic economy into dark investment pools around the globe. Naturally, that has led to distrust by the general population and has resulted in only 1% of the population paying taxes. State institutions are another financial catastrophe in Pakistan – for these institutions, what you put in, you never get back. As of March, the major public sector enterprises reported an accumulative loss of Rs. 1.2 trillion. Likely corruption has played a vital role in this performance as well. On top of this, leading up to the elections in 2018, Pakistan has suffered from out-of-proportion spending on infrastructure projects initiated for none other than a political hatch. Albeit the investments were a small portion of the total budget deficit, but projects such as the Lahore Metro Bus was almost 50% of Punjab’s development budget (Rs30b vs Rs62b). Avoiding such shenanigans could have led to building seven hospitals using the same amount of cash (Shaukat Khanum Cancer Hospital in Lahore was built for Rs4b). And let’s not forget the more than Rs. 1 billion of yearly subsidies required to run this state-owned bleeding juggernaut. However, how does all this lead to a deficit in the current account? Well, the current account is a trade-related economic indicator measuring the difference between the value of goods, capital and services imported vs exported. Generally, the current account deficit occurs from imports (goods and services) exceeding exports, and foreign capital injection (foreign investments) exceeding savings by local residents. Hence the theory goes to say that when the budget account exhibits a deficit (say from tax cuts or overspending on projects), the result is an increase in overall consumption of domestic and imported goods in the country. The increase in consumption results in a reduction in the national savings, hence requiring the government to borrow more from abroad to continue

to finance the internal demand. When additional foreign capital injection is obtained, it is pumped back into the economy to push consumption further. A vicious cycle leads to these “twin deficits” which is an increase in consumption of imports, reduction in savings and an increase in foreign capital injection single-handedly deteriorates the current account balance. At this point, the financing gap becomes so large that the government has no option but to adhere to austerity measures, increase the tax net or let the currency depreciate to curb international investments. Worse comes worst, the country starts borrowing from abroad from the likes of “friendly neighbours” or last resort institutions like the IMF to fill the financing gap. Historically, Pakistan has been heavily reliant on the latter. On an interesting note, Pakistan has run a current account deficit for

years in conjunction with a budget account deficit. This is natural for an oil importing country with a high consumption of the commodity. However, in recent years, Pakistani exports have also taken a beating on the back of an artificially inflated PKR valuation and due to a labyrinth of infrastructural issues challenging the exports industries. With the budget being directed to shoddy investments with little to no return on investment, and a high PKR valuation requirement to finance the external debt, Pakistan has taken a path down to loss of competitiveness. Interestingly, the United States has run a budget and current account deficit for decades. The country has even been on the verge of default (a need to increase the debt ceiling) a number of times in the recent past. However, the difference between

Pakistan and the U.S. is quite significant and boils down to four words: trust in the system. China, as an example, will continue to invest trillions of dollars in U.S. Treasury Bonds (a government financial instrument) if there is trust that the system will pay back. Whether that is through the U.S. Government generating enough revenue or by the Fed printing more money – it helps when your debt is denominated in your local currency. A trade deficit really does not impact a high consumption economy with a solid standing in the international debt markets because the money outflow from importing eventually finds its way back as capital. And finally, a key difference worth mentioning is that the financing gap in the U.S. is bridged with domestic and international borrowing, almost a 50% split, making it less reliant on arbitrary terms posed by international lenders. At the end of the day though, it’s not all doom and gloom for us in Pakistan. The current economic state was inevitable and is nothing new – it is history repeating itself. Circumstances may be dire, but the core problems remain the same today as they did in previous generations. The Khan government needs to reform the tax system and dismantle asymmetric policies that burden certain industries and tax bands. His cabinet needs to establish a larger tax net, as it continues to promise, and at the end of the day build trust in the system that the retained earnings will be reinvested to the betterment of the society. The full swing operation on bagging corruption needs to continue to bring purity to the system, with continued efforts on curbing money laundering. The focus on scrutinizing the processes of public sector enterprises may help bring some efficiencies and perhaps even profitability at some point in the coming years. With all the above, the king of all policies will be the austerity measures. Not only will such policies allow us to get our finances back on track but will bring self-discipline in an already eroded system. The PM has a long way to go, but it is quite evident that the policies are a step in the right direction.

ECONOMY