CONTENTS
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10 Perks of being an expat and taxing the rich - this week in Pakistan’s business and economics twittervers 12 Tractor collusion
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14 Breaking the habit: will the government let the rupee go? 19 The Karachi sea view ship saga 22 Cement companies join heads as coal prices threaten recent success 25 Oversubscription at Octopus tells a tale of too much regulation
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27 Why are advertisers in Pakistan ignoring the 2023 Cricket World Cup? 31 BankIslami’s North Korean entanglement featuring Seth Rogen and the English Premier League
Profit
32 Injection or not - the rupee slide explained
Executive Editor: Babar Nizami l Managing Editor: Farooq Tirmizi l Joint Editor: Yousaf Nizami Reporters: Ariba Shahid l Babar Khan Javed l Taimoor Hassan Abdullah Niazi l Meiryum Ali l Shahab Omer Chief of Staff & Product Manager: Muhammad Faran Bukhari Regional Heads of Marketing: Muddasir Alam (Khi) l Zulfiqar Butt (Lhr) l Mudassir Iqbal (Isl) Layout: Ahmad Salahuddin l Photographers: Zubair Mehfooz & Imran Gillani l Business, Economic & Financial news by 'Pakistan Today' Contact: profit@pakistantoday.com.pk
Readers Say The power utility has since reportedly invested heavily in its network and has undertaken a number of tech-based, future-centric initiatives to support the continued growth of Pakistan’s largest city. Apropos; Moonis Alvi: The Architect of Karachi’s Energy Future @sabena_siddiqi, Twitter How does one get him to pose on site during a power outage? Or does he only do outdoor morning shoots? Apropos; Moonis Alvi: The Architect of Karachi’s Energy Future @faizansiddiqi, Twitter What about the impact of KE major shareholder debacle on its future and on Karachi energy? Who will invest the equity if required for capex? What about the KE monopolistic position and style of management? Apropos; Moonis Alvi: The Architect of Karachi’s Energy Future @muddassar45, Twitter
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HOW TO CONTACT
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This was a much needed and generally well written piece. I do, however, have a few observations and questions. Though it was mentioned in the article, it should have been conspicuously highlighted in the article that there is a major difference between an IPO by the company and an IPO (offer for sale) made by sponsors. Investors need to look at the issue accordingly. As per current practice, underwriting is inbuilt in the book building, meaning the book is made for 100% shares offered after which comes the public portion of 25%. The final allocation of BB investors depends upon subscription in the public portion. It will go down by 25% in a fully subscribed issue. Now to the questions. It is not clear whether it is a PSX requirement or in the SECP regulations. Then comes the stabilization period. This is when the underwriter is able to create a market for the issued stock. They can even purchase shares at the offering price or below it to stabilize the market. This is a short span of time when the underwriter has freedom to trade and influence the price of the issue given that price manipulation prohibitions are temporarily suspended. (Nothing in the law to suspend price manipulation...crime is a crime). The quiet period ends in 25 days and then the shares are listed on the stock market. No longer do investors rely on the prospectus. (There is a concept of close period for insiders of listed because, where is a quiet period provided?). There is ongoing debate on social media about recent IPOs particularly about price both at book building stage and post listing. One point that is overlooked by individual investors during an IPO is
the flow and usage of the IPO funds. Meaning are IPO proceeds going to the company or to existing shareholders. In the case of the former, how will the company use these funds, retire existing debt or go for expansion and how will it impact future performance? In the case of the latter, basically it is a change in shareholding with negligible or no impact on performance. Should both be reviewed similarly by the interested investors? I think this approach is not desirable, particularly when an investment bank does an independent initial valuation followed by BB with participation by institutional investors and HNWI. More important is investor education and awareness, they need to have a basic understanding of capital markets so as to ask the right questions and not fall prey to rumours. In any case all investors need to be aware of "caveat emptor" - buyer beware. Average Joe does basic due diligence when it comes to daily shopping, why not in case of investments. However, this does not absolve a brokerage house from its fiduciary duties. Apropos: The how, what, and whys of Initial Public Offerings (IPOs) @akifsaeed65, Twitter I don't like the big three but the analysis is quite poor. You should have discussed the segments in more detail. The Sportage is winning the crossover SUV segment right now, while the Yaris is winning the sedan segment and Alto is winning the hatchback segment. It is the car models that are winning their respective segments, not the companies. And that's how it has always been in Pakistan and India. Apropos: Can KIA be King, or do the Big 3 have another trick up their sleeve? Ehsan Satti, Facebook FAW just rolled up their assembly line and started producing the Proton as well, and this is after 12 years of successfully running in the country. So unless automobile manufacturing companies come to Pakistan by themselves, this model is not going to work. KIA is not a new entrant in the market either. They had already had a run here, and they failed that time. Now they are trying again after learning from their mistakes. It seems like they are winning right now but only time will tell whether they stay or not. Apropos: Can KIA be King, or do the Big 3 have another trick up their sleeve? Jameel ur Rasheed Ansari, Facebook The only good thing to happen in the government of the PTI is the break up of the Big Three. Apropos: Can KIA be King, or do the Big 3 have another trick up their sleeve? Yasir Javaid, Facebook
COMMENTS
IN BRIEF The State Bank of Pakistan (SBP) has devised Customers’ Digital Onboarding Framework, which will facilitate banks to conveniently and remotely open bank accounts of resident Pakistanis by using digital channels.
“Due to prudent fiscal policies and strict financial discipline, Pakistan’s economy is shifting from consolidation to growth phase. The government’s objective is to steer the economy towards an inclusive and sustainable economic growth,” Shaukat Tarin, Minister for Finance
Prime Minister Imran Khan has said that the country will provide all means of help to foreign investors to create ease in doing business within the country. The PM reached Tajikistan on a two-day visit, wherein he will attend the 20th Shanghai Cooperation Organisation’s Heads of State Summit in Dushanbe. The rupee broke its downward slide against the dollar late in the week, gaining 94 paisas but still finishing at Rs 168.18 to the greenback. The sligh appreciation comes quick on the heels of record breaking instability in the rupee which took it to an unprecedented Rs 170 to the dollar. Factory owners in Khyber Pakhtunkhwa (KP) have announced to launch an agitation campaign along with employees and workers if the provincial government does not stop “illegal” actions against businesses and meet their demands till September 28.
$130 million:
The Economic Coordination Committee (ECC) of the Cabinet on Wednesday approved US$130 million cash support for Pakistan International Airlines (PIAC). The ECC was informed that the airline has experienced a significant decline in revenues and cash flows due to pandemic and unprecedented travel bans/lockdowns imposed by various countries. Petrol prices soared by Rs 5 to Rs 123.3 per liter according to a notification by the Finance Division. Oil prices will be revised by the government every two weeks instead of the monthly calculations that were previously being followed.
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Perks of being an expat and taxing the rich this week in Pakistan’s business and economics twitterverse
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his week we once again find ourselves talking about overseas Pakistanis and just how good they have it because boy do they have it good. And while we dream of getting to send remittances while the rupee is at an all time low, there are other questions regarding taxing the rich and what is appropriate to put on a CV anymore making the rounds on the internet this week. Ariba Shahid brings you all this and more in this week’s social media roundup.
CV honesty
Expensive education
Schools are outrageously expensive. Like when we say expensive we mean it. Sometimes it makes one feel like you need generational wealth just to be a highschool graduate considering school fees and tuition fees. School owners are probably rolling around in cash.
But did you think-
The fact that the HBL app crashes every Monday and has become a running joke on twitter is funny. We wonder if it’s the case with all applications and not just HBL, but HBL gets more traction because it has more users?
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Does one really need to mention MS office as a skill in their resume anymore? We assume everyone needs it to pass their undergraduate degree. Then again, if you don’t mention it will employers think you don’t know how to use it? Perhaps we should only mention very specific abilities, like making charts or being an Excel wizard, or knowing how to move images in Word without ruining the formatting of the entire text. What to do, what to do?
Benefits of being the favourite
God bless the humble calculator
Do Marlay ka Mou is spot on. Everyone should strive to be an overseas Pakistani because that is how you’re going to get the love you desire from the government. If you’re already an OP and not taking advantage of the love you’re showered with, you’re ungrateful and ofcourse stupid.
Tax the rich
All you need is a good calculator and calculation skills. Do the math yourself. Does it add up? Go for it. Finance apps are great but nothing beats the confidence one gets by doing their own math. {Editor’s note: For the mathematically challenged, a calculator app is not just a finance app. It is an essential tool for life. From calculating hours between meetings to figuring out bills in a grocery store - you need it in your life}
For not the last time, no the PSX is no…
A dress worth Rs 4 million and you’re not expected to pay withholding tax when buying it, but are expected to pay withholding tax while paying your university and school fee. What a world we live in. On the flip side, we’re sure designers don’t pay their taxes accurately or at all to begin with. Tax the rich! We say it out loud! But don’t think this means those of us here at Profit are about to start sporting “Tax the Rich” in bold red font on our clothes just yet. At least invite us to the Met Gala first. Then we might consider it.
I wish we got money everytime someone told me the PSX is an indicator of the economy. I relate to this energy Faisal. May the universe find a way to compensate us for dealing with stupidity.
SOCIAL MEDIA ROUNDUP
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o, it’s not just you. Several Pakistanis last year thought exactly the same. Perhaps in another era they would have protested, written to a newspaper, or even (why not) tweeted their thoughts. Not these days - apparently a bunch of people complained about tractors to the Pakistan Citizen Portal, a government owned and operated app designed as a grievance redressal system. And the volume of messages was enough that the one institution definitely noticed: the Competition Commission of Pakistan. They began an inquiry on April 21, 2021 (after preliminary investigation in 2020), and just published their report on September 13. Based on their findings, the Commission wants to fine two tractor manufacturers: Millat Tractor and Al-Ghazi Tractor, under Section 30 of the Competition Act. The alleged crime? Colluding to intentionally raise prices of tractors for more profit. To understand how we got here, it helps to have some context on the tractor
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industry in Pakistan. Tractors account for 7% of large-scale manufacturing in Pakistan. Tractor sales jumped 55% in fiscal year 2021 - and around 96% of that is manufactured in Pakistan. The actual structure of the tractor market, accounting to the Commissions, is oligopolistic. Millat Tractors has a 70% market share, while Al Ghazi Tractors have a 29% market share. The former has a production capacity of 40,000, while the latter has a production capacity of 30,000. The complaints on the Pakistan Citizen Portal mentioned a drastic increase in the prices of tractors at different points in time - despite subsidy relief given by the government on sales tax. So the commission first asked for price increase information. Turns
out the two companies had in fact increased their prices at various intervals: Millat Tractors had increased prices in October 2018 (1 – 5%), July 2019 (7 – 13%), March 2020 (2 – 3%) and July 2020 (5 – 7%); while Al Ghazi had increase prices in October-November 2018 (3 – 5%), July- August 2019 (5 – 10%), March 2020 (1 – 4%) and July 2020 (5 – 7%). When asked about the prices, the two companies cited increases in the price of steel, prices of gas, mounting inflation, increase in import duties on certain raw materials, and the devaluation of the rupee against the dollar. There was only one problem: some of that information did not hold up. For instance, the whole increased costs of good
Will the fine prove anything? Let’s see. But it is nonetheless disheartening. Competition is what allows innovation to happen, but the lack of quality tractors at affordable prices to farmers affects the rate of mechanization in Pakistan
because of the rupee devaluation. The enquiry found that in fact, local procurement accounted for more than 60% of the total procurement of parts for tractors i the last three years for tractors, It was even more stark for Al Ghazi, at 92% The magnitude for localization for both companies stood at 92%. The enquiry also found other evidence: that before ploughing and after harvesting season, the demand for tractors shoots up. An artificial shortage is created by the tractors manufacturers, and the average delivery time is three months despite a 100% advance paid to them. Thai was confirmed form randomly selected dealers in Rawalpindi. The dealers also mentioned that the tractors would be transferred in the name of the buyer after three months. “Given the extent of localization in the tractors industry i.e. more than 90% and the absence of any technological advancements made by the tractor manufacturers, a price increase move made by the market leader (MTL) followed by the second biggest market player (AGTL) indicated the likelihood of collusion in the tractors industry. A news item dated June 19, 2021 published in the Dawn News reported “Tractor assemblers have increased prices by Rs.92,000-196,000 in the last one year despite high level of localisation.””, noted the report.
The complaints on the Pakistan Citizen Portal mentioned a drastic increase in the prices of tractors at different points in time - despite subsidy relief given by the government on sales tax. So the commission first asked for price increase information. The commission then authorized two teams of officers on August 31 for an enter in search of the premises of both companies. Apart from such valuable computer documents, files, and other data, the teams also got access to private whatsapp conversations of certain company individuals. These conversations showed a clear collusion. For example one from June 2019 reads like this: Official Al Ghazi “Sir Jee when you are increasing…?” Official Millat “May be in July,” Official Al Ghazi “OK sir” And when the price was finally increased in an official notice, another message for Al Ghazi to Millat: “Bohat deyr kardi mehr ban atay atay,” (Collusion, desi style).
As the report notes: “It is surprising to note that the officials of two competitors have developed such a cordial business relationship that business suggestions for controlling and limiting the quantity supply of tractors in order to realize gains in terms of price and bookings are candidly being discussed...the sharing of future intent to increase prices with competitor reduces the uncertainty of the competitor’s conduct and helps to predict each other’s future behaviour as well as promote coordinated behaviour which consequently distorts the competition in the relevant market.” Will the fine prove anything? Let’s see. But it is nonetheless disheartening. Competition is what allows innovation to happen, but the lack of quality tractors at affordable prices to farmers affects the rate of mechanization in Pakistan. And that’s a shame for our supposedly agrarian economy. n
TRACTORS
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COVER STORY
By Farooq Tirmizi
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hen faced with the two bad options, the temptation for decision makers is always to pursue the one option that involves taking action, even if the option involving inaction causes less damage. That is the situation the government of Pakistan finds itself in right now (and generally every three to five years) with respect to the value of the rupee. The situation is this: the government can either let the rupee fall – and not spend any money trying to prop up the value of the currency relative to the US dollar – and accept an uptick in inflation, or it can try to spend borrowed money to prop up the rupee for as long as possible, keep inflation temporarily low, but indebting the country for the long run, and ultimately causing a sharp spike in inflation when it runs out of money. Historically, with one major exception, the government of Pakistan has always picked the latter option. Yet that one exception started under then, and now again, Finance Minister Shaukat Tarin, when he first assumed office in late 2008, and continued under his successor Abdul Hafeez Shaikh. This time, Tarin has succeeded Shaikh, but the result may be the same: an unwillingness of the finance ministry to expend scarce resources to try to prop up the value of the rupee. We say this despite reporting from Shahbaz Rana at The Express Tribune that the government has already spent $1.2 billion in trying to prop up the value of the rupee. Rana is one of the most credible reporters on the finance ministry in Islamabad (disclosure: he is a former colleague of this author), but for reasons that we will outline later, we find that number difficult to ascertain. In this story, we will lay out just how deep the roots of the “control the exchange rate” idea go in Islamabad, why the government tries to do this, the costs of doing so, and why this time the government may finally be willing to let the rupee go. If we are correct in our hypothesis that the government is truly willing to let the rupee become a freely traded currency – and we will provide considerable evidence to suggest that this is the case – then this represents a clean break from a series of terrible decisions in the past, and would mean that the Imran Khan Administration would become that rare instance of a government in Pakistan that explicitly put the long term economic interests of the country ahead of short-term political pressures. Of course, that probably means we are wrong.
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A brief history of a terrible idea
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n September 18, 1949, the Bank of England made a monumental decision that set off a series of events that has permanently reshaped the Pakistani economy. On that day, the British government announced that it would be devaluing the pound sterling by 30%. In those days, while the US dollar had already taken over as the default currency of global commerce, most former British colonies still pegged their currencies to the British pound. As a result, when the British government decided to devalue the pound relative to the US dollar, the government of India decided to follow suit. Crucially, however, (and this, in hindsight, was a blunder of monumental proportions), Pakistan did not follow suit. The government of Pakistan at the time felt that it did not want to devalue the rupee because it felt that Pakistan’s own macroeconomic indicators did not justify such a move. That decision, however, had a serious negative impact on the Pakistani economy. At the time of Partition, well over 60% of Pakistan’s foreign trade was with India. This makes intuitive sense: until August 13, 1947, all of that trade had just been intra-country trade. After Partition, those economic linkages did not disappear overnight, and all that intra-country trade became international trade. However, in 1949, when Indian devalued its currency and Pakistan did not, suddenly Pakistani goods became more expensive to produce relative to their Indian competitors, by a factor of 30% (both currencies had a pegged exchange rate of 1:1 at Partition, which continued for the next two years). This made Pakistani goods and services relatively uncompetitive, and Pakistan’s share of the Indian market started to fade over time. This is important to remember: Pakistan lost its biggest export market not as the result of the 1965 war – which did result in more legal restrictions on trade between the two countries – but as the result of the much earlier decision not to maintain exchange rate parity with India. Given the fact that the two countries had been managed by the same central bank, and had effectively the same currency until just two years prior, it was not at all unjustifiable for Pakistan to keep the exchange rate parity. By choosing to prioritise the absolute level of the exchange rate over the consequences for the rest of the economy, specifically the country’s nascent export industries, the government permanently altered Pakistan’s economic trajectory. Instead of integrated
regional supply chains (which, by the way, survived the 1948 war just fine, suggesting that Pakistan and India can go to war and continue to trade at the same time), Pakistan is now mostly cut off from its regional markets and has set back the development of its export industries by decades. Here is where things get interesting: the government of Pakistan did ultimately have to devalue the Pakistani rupee. In August 1955, the rupee declined by 44.2% relative to the US dollar in just one day, more than it would have, had the government decided to retain its parity with the Indian rupee and maintain its exchange rates with its main trading partners. The government was not able to “save” the value of the rupee and it lost out on economic competitiveness anyway. All the pain, and nothing to gain. By that point, however, it was too late. The economic linkages that had existed before Partition were now permanently broken, and India and Pakistan went their separate ways with respect to global trade. The Pakistani rupee remained part of the Bretton Woods system of fixed exchange rates until that system broke down in August 1971 (largely due to imbalances that the United States had allowed to grow within its own economy, a story that is not directly relevant to that of Pakistan). However, it took Pakistan more than a decade to fully convert over to the system of a “managed” floating exchange rate, a system which began on January 1, 1982 and has largely remained in place since then. The State Bank of Pakistan lets the rupee trade within a certain range, and intervenes by buying or selling dollars to keep it within the range the government of the day wants it to be.
Trying to control inflation through the exchange rate
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ince 1982, almost every single government (with only one exception) has tried to artificially control the price of the rupee as a means of keeping inflation lower than it naturally would be if the exchange rates were left alone. Every time, the cycle is exactly the same: the government raises foreign debt as a means of securing more dollars, which is slowly sells over time so that it can create an artificially high supply of dollars in the economy and artificially high buying of the Pakistani rupee. This is obviously unsustainable, largely because the government is using borrowed money not to finance investment into future income opportunities for the economy but present consumption. Eventually, foreign lenders want their money back and are not willing to refinance, and hence the govern-
ment’s ability to prop up the rupee ends, causing the currency to suddenly crash. What makes this worse is that Pakistan ends up with more foreign debt and nothing to show for it. Instead of financing investments into future income – in the form of infrastructure that ultimately increases the productive economic activity of the country – the government is effectively financing the monthly electricity bills and automobile petrol costs for the urban middle class by using borrowed money to artificially deflate the cost of imported energy. A significant portion of Pakistan’s electricity generation relies on imported fuels. The critical thing to remember is that this debt and inflation cycle is not something that is imposed on the government of Pakistan by an external lender. It is a policy choice made by the government itself, one that many international lenders – including the International Monetary Fund (IMF) – would like Pakistan to get out of. But a look at the history of the country’s inflation and exchange rates reveals that this exercise only has the effect of creating unnecessary shocks. It does absolutely nothing to arrest inflation, or the exchange rate. A substantial proportion of the variation in exchange rates and inflation – including the size of the subsequent economic shocks – can be explained by just how much effort previous governments have put into trying to control both. Since August 1947, the Pakistani rupee has depreciated at an average rate of 5.38% per year, according to data from the State Bank of Pakistan (SBP). The Pakistan Bureau of Statistics (PBS) does not make inflation data available for that same period of time, but since January 1958, the country’s inflation rate has averaged at around 7.55% per year.
Those averages hide significant variations. However, we are able to surmise at least one significant inference from the historical data: the longer the government uses artificial means to keep inflation below 5%, the worse the subsequent increase in inflation. Reversion to the mean, in the case of the Pakistani economy, is a mean, chaotic, highly disruptive process.
Could Pakistan break the cycle?
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n finance, one should generally be wary of those who say: “this time is different”. So we will not suggest that the government of Pakistan will actually stop doing what it has done since almost all the way back to Partition. We will, however, lay out three reasons why we think the government appears to be trying to make a break from the pattern of the past, and how it might succeed if it kept trying. The three reasons are: 1. Shaukat Tarin is the finance minister. 2. The government has entered into an IMF bailout program before an election. 3. The State Bank is actively changing policies to make the Pakistani rupee into a fully convertible currency. Let us take a look at each of these three factors, what they mean, and how together they might help the government break the cycle.
Tarin as finance minister
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s we stated earlier, there is one exception to the pattern of pumping borrowed dollars into the currency market, and that is the
period between 2008 and 2013, during the Zardari Administration, led by the Pakistan Peoples Party (PPP). The finance ministers then were Shaukat Tarin and Abdul Hafeez Shaikh, who made the active decision to not intervene in the currency markets. And they both did so for a reason: they both managed to convince the rest of their cabinet colleagues that it was not worth spending those resources on pumping up the value of the rupee when it could be used on different, more productive uses. Tarin is still that same person and there is no reason to believe that he has fundamentally changed his world view on what the government’s exchange rate policy should be. At the very least, we can be assured that the pressure to flood the currency market with borrowed dollars will not come from the finance minister himself. Of course, this is a different cabinet than the one led by the PPP. The PPP’s constituency is far more rural and working class, and thus less attached to cheap petrol and electricity prices than the urban middle and upper middle class that are a large portion of the current ruling Pakistan Tehrik-e-Insaf’s (PTI) voter base. So Tarin may face pressure from his cabinet colleagues who want to have their neighbours in Lahore Cantt be able to continue buying Audi e-Trons. Tarin, however, is known specifically for being more able to withstand pressure than any other person who has held the office of finance minister in Pakistani history. Indeed, he was brought in specifically because he is more impervious to pressure than the other candidates for the job. So, there is at least the possibility – admittedly far from certainty – that the Prime Minister will back Tarin in his decision.
COVER STORY
Entering the IMF program before an election
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or most of Pakistan’s relationship with the IMF, the government tends to enter into an IMF bailout program almost immediately after coming into office, uses the IMF money to drive down the price of the dollar, goes off on a populist pre-election spending spree right before the IMF bailout expires, and then promptly loses the next election, following which repaying the IMF is the next government’s problem. The next government then comes into office and uses a new IMF bailout to repay the old IMF bailout, plus any private sector foreign borrowing the government did, and the cycle restarts. What is interesting this time around is that Pakistan is entering an IMF program before an election, which implies two things: 1. Tarin wants to bind the government into not behaving recklessly before the 2023 election, by using the IMF’s money as the carrot and its opprobrium as a stick. 2. The prime minister wants to plan for the possibility that he will win the next election, and thus is willing to at least go along with this risky new approach. Of course, there are other possibilities, and it could just be that the government’s finances are more dire than they appear at first glance, but nevertheless, having the IMF have a big say in what the government can spend its dollar reserves on at least reduces the likelihood of them being used to prop up an artificially strong value of the rupee.
The State Bank is making the rupee fully convertible
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his is perhaps the least noticed, but possibly the most significant policy initiative that the government of Pakistan is undertaking with
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respect to the country’s long-term economic stability: making rupee deposits much more flexible than they have ever been in the country’s history. The Roshan Digital Accounts (RDA) have gotten a lot of coverage, but in reality, they are the most meaningless part of this policy. (Seriously, which Pakistani expat sends lots of money home but left without having a personal bank account in Pakistan of their own?) But nonetheless, the government has established a principle: they want to make it extremely easy for both resident and non-resident Pakistanis to bring money into Pakistan (and buy rupees) as well as send money out (selling rupees in the process). On that latter part, the policy that has not gotten a lot of news coverage is that every resident of Pakistan can now convert up to $25,000 worth of Pakistani rupees into foreign currencies to send abroad for the purpose of investing that money without requiring prior State Bank of Pakistan approval. The only condition is that the transfers can only take place from one designated bank account per individual, so the transaction limit in this rule cannot be evaded by sending money from multiple bank accounts. This is big news, and represents a very important tectonic shift in the government’s policies. It means that they want to attract money into Pakistan in the long run, not just through short term tricks. By opening up Pakistani bank accounts to be able to send money out of the country, they are signaling to the population: “if you bring your money parked abroad back home, you will be able to take it out again.” By rendering the rupee convertible, they have decided to trust the market and bear the short term volatility (assuming they do not back out of this policy) that will likely come with that. If you give people the assurance that they will be able to take their money out any time, they are more likely to bring it in. And the fact that the government
has done this not just for expat Pakistanis but also resident Pakistanis indicates that it is aware that wealthy and upper middle class Pakistanis like to park a substantial portion of their wealth abroad, even while continuing to live within the country.
Is the change here to stay?
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ll the signs from the above three developments seem to indicate that the government will manage its resources more sensibly this time around, the noise around “currency speculators” notwithstanding. However, none of this will matter if the government loses its nerve and decides to backtrack on all of these changes – particularly the commitment to free-floating rupee and a convertible currency – at the last minute. For any of these changes to mean anything, they have to survive not just one or two administrations, but also through times of economic duress. People have to have the assurance that the government will not simply go back on its word when the times get tough, which means sticking with these policies especially through a time like right now, when the rupee is losing value rapidly. If we had to guess, we would reckon that the government will not be able to sustain these liberal economic policies. Because ultimately, the person who needs to know how to withstand political pressure is not Shaukat Tarin or Reza Baqir: it is Imran Khan. And the prime minister has demonstrated a penchant for giving in to pressure from a narrow section of his base of supporters, even when there was no obvious direct benefit to his electoral or political prospects from doing so. Will we break the habit? Tarin and Baqir have gotten us to dare to dream. But we suspect this dream is about to rudely interrupted by political reality. n
COVER STORY
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By Ariba Shahid
t was more than two months ago on the 22nd of July when crowds thronged to Karachi sea view to take in the scenery. Except on this occasion, most of the gawkers were not there to enjoy the sea breeze or marvel at the beauty of the ocean. No, they were there to see Heng Tong 77 - a container ship bound for Turkey that found itself adrift without an anchor and stranded at a very public part of the Karachi beach. What followed was a long drawn out process watched closely by the general public as the Pakistan Navy and the Karachi Port Trust teamed up with other coastal organizations to dislodge the ship from where it found itself stuck. This turned out to be a long and arduous process. Stalled by bad weather and rough sea, the ship refused to budge and it
TRANSPORT
took around seven serious attempts over the course of 48 days to finally refloat the ship. In the middle of those attempts were conspiracy theories, environmental concerns, and a host of other problems that came with a 36,000 tonne ship being in a place where it was absolutely not supposed to be. Here is how it went down. The ship was never supposed to enter Pakistan in the first place. The Heng Tong 77, owned by a Hong Kong based cargo company, had set sail from Shanghai and was on its way to Istanbul. After reaching close to Pakistani waters, the ship was supposed to wait for a crew change. However, since this was supposed to be a short and efficient process, it did not actually come all the way up to Karachi harbour and instead dropped its anchor close to the harbour in Pakistani waters. Here, allegedly, choppy waters resulted in the anchor breaking and the ship’s engine turned out to be too weak to withstand the
rough sea. Rudderless and at the mercy of the winds, the enormous 321 feet long and 65 feet wide ship began floating towards sea view. In a very anticlimactic manner, the ship eventually found itself gently embedding itself ashore. People arrived at the spot to see it despite the fact that the beach was closed under Section 144 of the criminal procedure code, banning people from getting into the rough monsoon sea. Still, the public could access the beach from the McDonald’s parking lot to take many pictures and videos of the ship. It was possible to get quite close to it during low tide. But after the sharing of those pictures and videos on social media, the beach was properly closed from that side as well. Somehow authorities found themselves unusually concerned about equipment being stolen from the ship by people. This concern was more than fair enough, but what they were not considering in this situation yet was the possible hazard that the ship got pose
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both environmentally if there was an oil spill and to human life if it had dangerous materials on board. It also became imperative to work fast because no inspection had been done of what could be on board the ship and it was up until then a very mysterious occurrence. The owners of the ship were contacted to bring in salvage teams to see what could be done about it while experts assessed the situation to decide whether the ship would have to be broken up. What made matters more interesting was the fact that even though the ship was clearly headed towards the beach, it did not call for help. From what little we know of the sea and ships, I think a mayday call would have been okay. Ali Zaidi however thinks there is more than meets the eye. “This is Imran Khan’s government. I have been indicating from day one that we will not allow anyone to take illegal advantage of our ports,” he said in a tweet. He also says he is adamant to find out who the person responsible behind the incident is. The government made it very clear that the ship’s owner was responsible for the cost of dislodging the ship, but the Pakistan Navy and its coast guard service, the Pakistan Maritime Security Agency, offered their full assistance in getting the ship out. By July 26, the government said that its plans were to refloat the ship instead of breaking it down. Thankfully, the ship was not carrying oil, however, it was very clear that its hull had been damaged. This meant that the ship could still cause a massive oil spill right at sea view which would become an environmental disaster. On the 28th of July, the National Assembly’s Standing Committee on Maritime Affairs Chairman Mir Amir Ali Khan Magsi and members expressed concern over reports that oil could spill from the ship and cause a disaster in the surroundings of Karachi Port. As it dragged anchor due to rough weather and got stuck in shallow waters at Karachi’s Sea View, the authorities raised fears that the oil being transported in the cargo vessel could spill, and potentially damage the environment. Suddenly all eyes were on the Heng Tong 77 - a ship that was never even supposed to enter Pakistani waters in the first place which is why it was still flying a Panama flag instead of the Pakistani flag, as is international nautical procedure. It was not carrying a Pakistani flag because it did not expect to stop here. The first thing that was done was defueling the ship, since refloating it was going to be difficult because of rough low tides caused by the monsoons. On July 29th, a week after the ship first floated up to shore, the Pakistan Navy and other maritime stakeholders successfully defueled the ship. The officials of Karachi Port Trust (KPT), the
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The good thing was that the original threat was successfully kept at bay - there was no oil spill and no environmental damage. When ships break down, you have spills. That didn’t happen here. As per the DG Sindh Environmental Protection Agency, no fuel of any kind was spilling from the ship Pakistan Navy and Maritime Security Agency (MSA) had jointly carried out the operation which started earlier in the morning. The ship was carrying 118 tonnes of bunker fuel. The de-bunkering operation took two days, in which there was a lot of hustle and bustle around the area. There were fire tenders, ambulances and visits by Navy personnel as more barriers were put in place at all the entry points to Abdul Sattar Edhi Avenue to block access to the beach where a de-bunkering or defueling operation was under way. The defueling of the ship, which had commenced on Wednesday, could not be completed within a day as had been thought earlier due to high tide hindering the work. But on Thursday the high tide was to be at 1.48pm and keeping this in mind, work started at 5am. The good thing was that the original threat was successfully kept at bay - there was no oil spill and no environmental damage. When ships break down, you have spills. That didn’t happen here. As per the DG Sindh Environmental Protection Agency, no fuel of any kind was spilling from the ship. In fact on July 27 it was decided that 95 tonnes of the total 117 tonnes of low sulphur fuel in the ship would be safely removed leaving just enough for the ship to continue functioning. Fire tenders and ambulances were deployed during the de-bunkering or defueling. In order to prevent damage to the environment KPT Marine Pollution Control and port security personnel were deployed on site to avoid oil spillage. On August 2nd, two more days after the defueling, the government said that work to withdraw the stranded Heng Tong 77 off Karachi’s shore would be started on August 15. With the fuel out of the ship, now the concern was just to get it back afloat since it wasn’t doing anyone any good stuck at the beach. However there was still another twist left in the tale, and one that had the ship’s owners sweating. On 11 August 2021, before it had been freed, the ship was declared unseaworthy and a threat to human life on ship and property. The Ministry of Maritime Affairs commandeered the vessel, issuing a notification of detention telling its owners that the Heng Tong 77 was being detained under the power conferred by section 394 of the Pakistan Merchant Ordinance 2001 due to defective condition of
the hull, navigation equipment, and machinery. This meant, of course, that even if the ship magically found itself floating away from the beach, it could not simply just return to its owners. It has to pass through a check and get a satisfactory report from the surveyor. On the 14th August, Independence Day, citizens showed up at the beach to not only enjoy the cool breeze but to also look at the ship stuck. Some equipment of the rescue company was also stolen. Thousands of people approached the ship. Some even climbed it. Three failed attempts and 48 days later, however, the vessel finally started moving. Tug vessels took control of the ship and it drifted away from seaview at a steady pace of three nautical miles. The ship was taken to the harbor because its anchors were broken and also because Pakistan took the ship into its custody. The ship is likely to stay in Pakistani waters until the owners do not fix the issues pointed out by authorities.The ship was saved on the fourth attempt primarily because there is no dedicated salvage company in Pakistan. Interestingly enough, this ship was also the first functional ship in the world that had the company flag of a shipbreaking company hoisted on it. That itself was quite a lot of drama considering the ship’s owners hited Seamax in Pakistan through Dubai based C-Crest to save money while saving the ship. Seamax then hired a local company called Ayan Shipbreaking to pull the stranded ship out. Officials in Pakistan were not too happy with this and raised objections citing that SeaMax was not registered as a salvage company with the KPT. While the Abdullah Shah Ghazi Mazaar keeps storms away, it may not be effective against ships. On August 14, an LPG Gas Tanker named Yodla registered in Panama was stranded 52 nautical miles from Karachi Port. The reason was engine failure and both anchors lost. The ship made a distress call that it could not be controlled to take to breakwaters and was drifting towards shallow waters. With situations like this being oddly recurrent, it might be worth looking into both why Pakistan does not have a quicker response to this, and what the possible dangers could be if we are not quicker about dealing with it. n
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Cement companies join heads
as coal prices threaten recent success
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ame any random object in Pakistan and chances are, someone has organized a conference on it. Our national love for conferences - day long, two day long, weekend long seminars that go on and on - is endless. Sometimes neither participant nor organizer at the end of a conference can figure out exactly what the need for this conference was. Not so the latest conference organized by AKD Securities: this being the Pakistan Cement Conference, with Lucky Cement, DG Cement, Attock Cement, and Gharibwal Cement. This was necessary: as a note sent to clients on September 16 by Shahrukh Saleem showed, that while cement companies were optimistic about the future, rising coal prices threatened to cause some worry in the years ahead.
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So first, on the demand side: all companies showed an overwhelming sense of optimism, with an estimate of growth of 8-10% year-on-year in fiscal year 2022. Most of this is because the private sector is expected to continue providing support . The 20% year-on-year increase in local demand for fiscal year 2021 was a mix of pent-up demand and initiation of work on private sector projects. According to Saleem, more private sector projects are expected to be initiated in the shape of housing schemes and high rises, helped by the construction of dams as well When it comes to exports, cement sent to Afghanistan seems uncertain, while perhaps they might increase in the months to come as a rebuilding effort begins. There were additional concerns about Iran cement players that might dominate the region. Perhaps the
biggest concern was how international prices might be disrupted because of coal prices: for instance, sea based clinker exports would become infeasible with the increasing coal costs, while the margins on cement exports is expected to reduce. This brings us to the main problem: coal prices. The average cost of the coal inventory is $100-110/ton - but recent shipments have been arriving at much higher rates of $140150/ton. Since December 2020, coal prices have risen by an astonishing 77%. Worse,at least Rs60-70/bag has still not been passed on to customers, affecting coal players. The federal government has tried to control the increase in the price of commodities, and also tried to stop local players from increasing prices, which means a decline in margins from the second quarter of fiscal year 2022. The companies present at the con-
So first, on the demand side: all companies showed an overwhelming sense of optimism, with an estimate of growth of 8-10% year-on-year in fiscal year 2022. Most of this is because the private sector is expected to continue providing support . The 20% year-on-year increase in local demand for fiscal year ference did not expect coal prices to drop before the end of 2021, at best. What about local coal? The use of Thar coal for instance has many limitations: high freight costs and high sulfur content. No one is also willing to take up the risk of innovating Thar coal to be usable, uncless coal prices continue to rise. It doesn’t help that during this period fuel and power costs have also been rising, along with the prices of furnace oil. So where does that leave the individual companies? Lucky Cement, for its part is doing fine. Its most recent expansion was going to become operational in December 2022, of which the total capital expenditure will be Rs23 billion, and of which 505% will be financed through debt. The current coal inventory has an average cost of around $100/ ton , but cash flows can decrease if prices are not increased soon.
Meanwhile over at DG Cement, their expansion was delayed over land-marking issues and a ‘law and order’ situation. Their project is estimated to cost $250 million and will be financed using a mix of debt and equity. Despite the gloomy mood, their management seemed upbeat about coal demand and was even pursuing cement export contracts which if materialized will significantly increase cement exports. Attock Cement wanted to expand its company by 1.3 million tons, which was expected to start in January 2024. Attock Cement got concessionary financing for the capital expenditure of about Rs4.7 billion under TERF, and Rs5 billion under LTFF. More excitedly, its solar power project is almost complete and expected to be operational in October 2021. Finally, Gharibwal Cement. Unlike
the companies it did not expand in the last expansion cycle, but is currently at least in the process of contemplating one. Should it be given the green-light, it would become operational in two years. The capital expenditure of this project would be about 20-25% lower than other projects of similar size. As for Saleem, he seemed more cautious about managing expectations. “We expect the cement sector to remain under pressure in near term given the aforementioned reasons with margins expected to take a hit in the second quarter of fiscal year2021,” he said. However, he also added that once coal prices retreated, the sector would be back in the limelight. He also looked favourably on Lucky Cement as the one company that was a low cost producer and which had a diversified portfolio with exposure to the automobile sector. n
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Oversubscription at Octopus tells a tale of too much regulation
To avoid ridiculous levels of oversubscription, the free market must be allowed to do its job
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By Ariba Shahid
ast week, Profit discussed the ins and outs of how Initial Public Offers (IPOs) work, and more specifically how they work in Pakistan. Essentially, a company makes an IPO whenever they feel they need to raise capital and are comfortable with the idea of going from a private company to a public company. Because these companies set their own share prices for these IPOs, as discussed last week, we can have one of three possibilities - under subscription, full subscription, and over subscription. The names are quite telling. Under subscription is when not enough people show interest in the shares being offered and the prices of the shares come crashing down. Full subscription is when the exact number of shares match the exact number of shares people are willing to buy. Over subscription means that there are not enough shares to go around because of high demand, and they then have to be allotted via a lucky draw. We are here to talk about the last one of these possibilities. Now, immediately one might think that oversubscription is the ideal scenario. However, what it means is that the company set a price lower than what the mar-
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ket would have naturally determined. Meaning if there was no ceiling price and price set by the companies, as there currently is in Pakistan, the free market would do its job right. This is exactly what has happened recently to Octopus Digital - an up and coming IT services management company that has found its IPO has been oversubscribed. So what happened exactly, and is it cause to celebrate or rue what could have been? Profit explains.
What happened to Octopus?
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akistani companies generally shy away from IPOs. Even massive behemoths like Tapal and Shan Foods shy away from going public because of the business culture in Pakistan of keeping things in the family and not opening up to the public. However, an influx of new kinds of companies have meant that more executives have been considering IPOs and some have gone through with it - from industries ranging from meat production to IT service management. This has been the case with Octopus. A subsidiary company of Avanceon, Octopus Digital helps businesses digitize their manufacturing, supply chain and financial workflows backed by strategic and operational maintenance support services - business in-
telligence essentially. It is a tech company that trades in products of automation and control equipment. It provides other related technical services too. Now, to recap, IPOs are new issues brought out by companies to list on the Stock Exchange. In case of an oversubscribed IPO, the demand for the IPO was more than the supply of shares. Let’s say the issue was for 1 million shares and there was demand for 10 million share s – one could say the IPO was oversubscribed by 10 times. Greater oversubscription is a greater sign of investor interest and does have an impact on the listing price of the stock. However, there is no established relationship between oversubscription and IPO listing price. While oversubscription could have an impact on the listing price, the market conditions, market sentiments, and macroeconomic environment at the time of listing play an important role too. It is also about being in the right space at the right time when it comes to listing. In the case of Octopus, a strike price of Rs 40.6 per share was determined through the Dutch Book building process. This has been explained by us in more detail here. In short, a strike price is the fixed price that a company determines itself at which the owner of a share option can buy, or sell, the underlying security or commodity.
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The price ceiling for an IPO is essential because the given demand for a company’s shares does not mean the company is valuable. Also, not all investors who participate in IPOs are aware of a company’s actual worth Naushad Chamdia, CEO of Standard Capital
This meant retail investors could buy Octopus Digital shares at a maximum price of Rs 40.6, essentially a ceiling. Sounds fairly simple, right? Well, the IPO was oversubscribed 27 times by the end of the two day process. The company received offers of over 745.6 million shares against its offer of 27.35 million at the initial price of Rs 29 per share. To put this in perspective, the IPO was fully subscribed within the first half hour on the first day
Isn’t that good?
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ruth be told, this is a classic example of mispricing. The investment bank in question, BMA Capital, didn’t do its job right. Consider this - let’s say you are a farmer and have apples to sell but need an advisor to get to the market and also to determine the price for your apples. Let’s say the advisor tells you to sell your apples for Rs 5/ kg and you comply. Would you not be annoyed when upon entering the market you find out there is more demand for your apples than what your advisor told you and that you may have been able to sell all your apples at as high as Rs 13/kg? I’m sure you’d be annoyed. While all of your apples get sold really quickly, you could have made a lot more money from them because people were willing to pay
significantly more for them. Underpricing in this case is great for investors but not fair to the sponsor. However, it wasn’t always like this. The SECP put an upper circuit when companies like AlSheer and Roshan Packages turned out to be disastrous for investors upon listing. Profit asked the SECP about the rationale behind a price ceiling to which Sajid Gondal, spokesperson at the SECP, said, that keeping a price ceiling of 40% above the floor price is imposed by the Commission through SRO dated January 5, 2018. “Moreover, an additional restriction has been placed on the bidders, whereby they cannot place bids directly at the upper limit of the price ceiling; they are only allowed to place bids with price variation of 10% of the prevailing indicative strike price,” he explained. “The purpose is to ensure fair price discovery and protect retail investors and the general public from the negative impact of herd behaviour.” Essentially, the argument being made here is that investors and the public do not know what is best for them, and when they see a company being subscribed like crazy, they simply go along with what everyone else is doing and are willing to pay a lot more than they should be paying for stock options. While this has happened in the past, the question is
The purpose is to ensure fair price discovery and protect retail investors and the general public from the negative impact of herd behaviour Sajid Gondal, spokesperson at SECP
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whether the SECP should be coddling the public like this or allowing them to make their own decisions.
Should there be a ceiling?
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et’s get this straight, Profit is the last place you’ll find pushing for or encouraging price ceilings or more regulations. Let the market forces do their job. If there is ample demand for a share, then the price should reflect that instead of oversubscriptions by absurd amounts. In the current price determining process, the price is capped at the strike price. This is a rule put forward by the regulator that wasn’t always in place. The price cap is a ceiling which is the maximum price someone can pay for that particular share. Regardless of whether they’re willing to pay more. This isn’t a true reflection of market forces. Using the Dutch action process for book building is often criticized for this reason. The reason is simple, the strike price is the price at which the last share being offered can be sold at. This isn’t always fair as this further encourages rigging in the form of higher bids to push up the final price. On the other hand, some brokers are of the opinion that a ceiling is justified. Naushad Chamdia, CEO of Standard Capital says, “The price ceiling for an IPO is essential because the given demand for a company’s shares does not mean the company is valuable. Also, not all investors who participate in IPOs are aware of a company’s actual worth. Sometimes actual fundamentals of a business can be overshadowed by book runners, which is why it is so important to have a ceiling at a specific fair value price. In the case of Octopus, the challenge of investing in an IPO was calculating the actual worth of cloud and artificial intelligence financial vagaries without the company’s little experience in that business. Hence here the ceiling safeguarded the risk of investing.” n
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ith the 2023 Cricket World Cup qualification process underway, advertisers and agencies across the country prepare themselves with campaigns that align directly or indirectly with the tournament at large. Speaking with Profit under the condition of anonymity, seasoned brand marketers have expressed apprehension about over-investing in the ICC games, citing mixed feelings based on the performance of the Pakistan cricket and Kantar-MediaLogic data pertaining to viewership fluctuations whenever the Pakistan cricket team loses and is no longer a contender. “Cricket audiences in Pakistan are really interested when Pakistani players are playing in any match or tournament,” said Ahmed Hanif, CEO of Cricwick & Cricingif. “If we compare the numbers of digital viewers in ODI World Cup 2019 and PSL 2020, which were just six months apart, we see a huge difference of interest. In World Cup 2019 we got around 200K unique viewers, while during PSL 2020, around 569K unique visitors came to our platform to
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watch the live stream and for cricket updates.” According to data from MediaLogic, the 2016 ICC World Twenty20 had an average rating of 1.5 on Ten Sports and 3.3 on PTV Sports. Meanwhile, the 2019 ICC Cricket World Cup has an average rating of 2.3 on Ten Sports and 3.2 on PTV Sports. The cumulative rating between the games was 4.8 to 5.5 respectively. Across Ten Sports, PTV Sports, and Geo Super, the first Pakistan Super League (PSL) games had an average rating of 0.7, 3.4, and 0.7, while the second PSL games had an average rating of 1.0, 5.2, and 1.8, and the third PSL games had an average rating of 1.7, 4.7, and 2.0 - with the cumulative ratings between the first and third PSL doubling across three channels. “The culture of local cricket viewership makes an interesting case study as it informs us from where does the fan drive stems,” said Rubab Hasan, the marketing and communications director for The IPG Group. “We believe that the passion to watch cricket—local or international—is demonstrated best when teams represent a community or a city to which the viewer relates his or her identity.” Even without Ten Sports airing the
“Under [Ehsan Mani], the Pakistan cricket team lost five of the ten test matches from 2018 to 2019, lost seven of the ten one-day series during the same period. Even with [Ramiz] Raja in charge and nepotismbased team selection abundantly clear, no chance I am risking precious budgets on a losing team” A brand marketer with a prominent beverage company
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fourth, fifth, and sixth PSL games, MediaLogic data shows that the cumulative ratings generated by PSL Sports and Geo Super were 8.9 for PSL 4 and 8.6 for PSL 5. Amid the COVID-19 pandemic delaying PSL 6, including the issues created by former Pakistan Cricket Board (PCB) chairman Ehsan Mani, the cumulative rating for PSL 6 was 3.6, the lowest in the recorded history of the league, an outlier. “Even if we momentarily ignore the Kantar-MediaLogic data which shows that investing sponsorship dollars into the PSL makes much more sense than doing so with the ICC games, what is irrefutably clear is that our national team has a very slim chance of looking good during the qualifiers,” said a brand marketer with a prominent beverages brand. “Under [Ehsan Mani], the Pakistan cricket team lost five of the ten test matches from 2018 to 2019, lost seven of the ten one-day series during the same period. Even with [Ramiz] Raja in charge and nepotism-based team selection abundantly clear, no chance I am risking precious budgets on a losing team.” This perhaps matters most to TRP chasing brand marketers, given that Kantar-MediaLogic data also shows that during the 2016 ICC World Twenty20, the cumulative ratings across Ten Sports and PTV Sports between matches where the Pakistan cricket team were playing verses was 13.8 whereas the ratings fell to 3.6 when the Pakistan cricket team are not playing. Of the 35 total matches of the 2016 ICC World Twenty20, Pakistan only played in four of them. During the 2019 ICC Cricket World Cup, the cumulative ratings tabulated by Kantar-MediaLogic across Ten Sports and PTV Sports between matches where the Pakistan cricket team were playing verses was 11.1 whereas the ratings fell to 4.0 when the Pakistan cricket team are not playing. Of the 42 total matches of the 2016 ICC World Twenty20, Pakistan only
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We believe that the passion to watch cricket— local or international—is demonstrated best when teams represent a community or a city to which the viewer relates his or her identity Rubab Hasan, the marketing and communications director for The IPG Group
played in eight of them. Projections using a Cricket Fantasy League app suggest that the current and revised team roster under newly elected PCB chairman Ramiz Raja also has a poor chance of performing well in future games. Meanwhile, the furor over the Kashmir Premier League reaches unprecedented new heights on the Cricingif Cricket Fantasy League. “On evaluating and studying our numbers, it emerged as a revelation that the following in Khyber Pakhtunkhwa topped all other geographical regions in the Pakistani market,” said Hasan. “[Shahid Afridi’s] devoted fans from across the KP—including those from remote mountainous areas—have been supporting and engaging with the [KPL], despite our positioning as essentially an urban property. To us, this is indicative of the growing trends of the community following in cricket.” All in all, a blend of historical weak ratings for the ICC games coupled with an undeniably poor athletic track record by the
Pakistan cricket teams has data-driven brand marketers worried about sinking their budgets in a ship that refuses to float.
What is data, if not faith eroding?
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he data from Kantar-MediaLogic has not halted the bid for the media rights of the upcoming ICC games, however, with PTV floating an expression of interest (EOI) seeking a commercial media partner. With a 9th September deadline set by Star Middle East, which was co-awarded the audio-visual rights for the ICC events for the period between 2015 and 2023, PTV chose both ARY and GroupM as its commercial partner, with Ten Sports promised by the consortium as the satellite sports channel that will air the matches while PTV Sports is the terrestrial broadcaster for the games. In response to the news that ARY had chosen to partner with GroupM, several media agency leaders considered severing their ties with ARY based on concerns that the Pakistani pay television network would help GroupM steal its clients with undercutting rates. Amid industry pressure, this did not come to pass. The deal with PTV no doubt strengthens GroupM’s chances of winning the $20 million Nestle media review, amid the replacement of a senior executive. The state-owned broadcaster approved the bid by the ARY and GroupM consortium, which guaranteed up to Rs. 1.1 billion to the PTV Network outside PTV Sports, up to Rs. 1.8 billion to PTV Sports, and up to Rs. 300 million for an infrastructural upgrade. Given that the EOI was focused on finding a commercial media partner around the ICC and PTV Sports, the offer to guarantee revenue for channels outside of sports is outside the scope of the EOI.
The total value of the deal is worth Rs. 3.2 billion ($19 million) for PTV, which comes with a variety of caveats that no executive employed at the state-owned broadcaster appeared to have questioned. With the understanding that profit means revenue minus cost of acquisition, the ARY and GroupM consortium proposed to share costs with PTV on a 60:40 basis while the profit share would be a 40:60 basis. There was no additional clarification sought by the PTV to determine how it would safeguard itself from low profit created by exaggerated costs which benefit the consortium. According to PEMRA, currently, ARY does not have a license for a sports channel, nor can it convert its existing channels to that of sports given that the deal structure struck with PTV dictates that Ten Sports will be the satellite sports channel that will exclusively air the matches. However, this deal may be sidelined at the last minute given that Ten Sports, whose landing rights are owned by Indian-backed Tower Sports under Sony Corporation, does not have a license in Pakistan and is pending clearance due to security concerns. It is unclear why the ARY and GroupM consortium failed to inform the PTV about the Ten Sports license expiring. As seen from the Kantar-MediaLogic data cited above, from the first to the third season of the PSL, Geo Super produced better ratings than Ten Sports, which makes the suggestion of the ARY and GroupM consortium for Ten Sports - coupled with its lack of a license nor security clearance - all the more perplexing. That the director of sports and syndication for PTV, Dr. Nauman Riaz, was unaware that Ten Sports does not have a license nor questioned the consortium for suggesting it, is also baffling. It’s almost as if the “ok, boomer” meme has merit.
One man’s ignorance is another man’s profit
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erhaps to mitigate the reputational damage and hoard potential revenues for itself, ARY is testing out its own sports channel - after first announc-
Cricket audiences in Pakistan are really interested when Pakistani players are playing in any match or tournament Ahmed Hanif, CEO of Cricwick & Cricingif
ing one in 2016 - called A Sports, as found on AsiaSat 7 and has redirected formidable resources towards its ARY Sports website and app. It has also invested heavily in a mixed martial arts tournament called ARY Warriors, with its own channels - ARY Digital, ARY
“If you see A Sports at the top of the Kantar-MediaLogic ratings, you know that either ARY found out which homes have PeopleMeters and/or the rumors that the industry is rigged are true” A research executive
News, and ARY Zindagi - as media partners. The company also appears to be pushing a narrative around the Pakistan Football Federation partnering with Global Soccer Ventures (GSV) to kick off a franchise league called the
Pakistan Football League (PFL). “Even if ARY can convince its establishment friends to move along permissions and approvals for the launch of A Sports, it will have to prove its worth in the meritocracy of Kantar-MediaLogic ratings, which cannot be manipulated regardless of what some media groups think can happen from knowing the location of PTCL boxes and testing zones,” said a research executive. “If you see A Sports at the top of the Kantar-MediaLogic ratings, you know that either ARY found out which homes have PeopleMeters and/or the rumors that the industry is rigged are true.” With the EOI floated by the PTV stipulating that the media partner has a digital live streaming platform with considerable reach, ARY may hope to push the YouTube channel for ARY Sports for consideration, which boasts nearly 260 thousand subscribers, of which an average of 0.003% are actually watching the videos based on data provided by HypeAuditor. “The paltry ratings of the ARY Sports app, its inexcusably poor value proposition, the clearly planted positive reviews, and the clear lack of live streaming means that there is no way that the ICC would ever allow either the ARY Sports app nor the ARY Sports YouTube channel to be a live stream partner for the ICC games,” said a media executive. “The best choice is by far bSports.pk which has been a digital streaming partner for the PSL across its own app, a YouTube channel, and Facebook live.” It is this strange combination of confusion between hard data and a qualitative cloud of secrecy around which satellite sports channel will eventually stream the games including the legal repercussions of breaking pre-set arrangements - that that is holding seasoned brand marketers back from making a decision that they may soon regret. n
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BankIslami’s North Korean entanglement featuring Seth Rogen and the English Premier League Yes, you read that right, and you’re going to want to keep reading on
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hat does the American actor Seth Rogen have to do with BankIslami Pakistan? Probably like yourself, we here at Profit never thought that Seth Rogen and BankIslami would be two words uttered in the same sentence, and yet, here we are. Somehow, a small Pakistani bank that is middling even in relation to other small Islamic banks in the country, is now part of an absurd money laundering case, which involves one Canadian embezzler, three North Korean hackers, a Nigerian Instagram star, and the English Premier League. And it all started with the American 2014 film ‘The Interview’. James Franco and Seth Rogen play journalists recruited by the CIA to interview and then assassinate the North Korean dictator Kim Jong Un. At the time, there was a bit of a fuss as North Korea threatened to take action against the United States if the film was released (nothing happened). But we don’t think anyone at the time thought - “somehow down the line, because of this film, BankIslami Pakistan will lose $6.2 million in a cyberattack”. No, that would happen much later. First, North Koreans did not take kindly to the movie (and we thought Pakistanis have thin skin when it comes to national image). In fact, Sony Entertainment Pictures, which released the film, was hacked in 2014 by a group called the ‘Guardian of Peace’. One of the people thought to have been behind it is a man called Park Jin Hyuk. He and two other North Koreans, Jon Chang Hyok and Kim Il were charged by the US in early 2021 over a scheme to extort $1.3 billion. And that is not all. They alo attempted to steal $1 billion from Bangladesh’s central bank in 2016. To do this, they often enlisted the help of their friend ‘Hushpuppi’, also known as Ramon Olorunwa Abbas, a Nigerian celebrity with 2.5 million followers on Instagram. When not
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posing in front of luxury cars or private planes, he was helping scam other people around the world. Notable moments include scamming a U.S. law firm into wiring him almost $923,000 in October 2019, and allegedly plotting to steal $125 million from an unnamed soccer club in the English Premier League. While that club managed to keep their name undisclosed, Nigerian newspapers reported that perhaps Hushpuppi also stole $2.5 million from Italian football club Lazio. To pull this off, one needs extra help. And this is where 36-year-old Ghaleb Alaumary of Mississauga, Ontario, comes in. On September 7, the US Department of Justice sentenced him to 12 years in prison and ordered him to pay $30 million back to victims for money laundering. According to court proceedings, Alaumary used business email compromise schemes, ATM cash-outs, and bank cyber-heists to steal money from victims and then launder the money through bank accounts and digital currency. Just some examples: Alaumary got a Canadian university to wire $9.4 million, by posing as construction Alaumary also arranged for a co-conspirator in the United States to make several trips to Texas to impersonate wealthy bank customers in a scheme to steal hundreds of thousands of dollars from victims’ accounts. Critically, according to the US Department of Justice, Alaumary would also recruit and organize individuals to withdraw stolen cash from ATMs; provide bank accounts that received funds from bank cyber-heists and fraud schemes; and then further launder thode funds, or exchange them for crypto currency. This would include a cyber heist in 2019 of a bank based in Malta. And those funds would also include money stolen from BankIslami in Pakistan. In a notification to the Pakistan Stock Exchange (PSX) in 2018, BankIslami stated that it detected certain abnormal transactions valuing Rs2.6 million on one of its international
payment card schemes on the morning of October 27, 2018. This was despite Visa insisting that the amount was in fact $6 million. At the time, the SBP temporarily banned the use of cards for overseas transactions. BankIslami was extremely annoyed: it filed a case against Visa in the High Court of Sindh, trying to stop them from deducting the $6.1 million. In 2020, Visa sued BankIslami in the District Court of California, demanding $7.3 million over the incident plus costs and fees. The bank then filed a counterclaim against Visa. Eventually , the two parties came to a settlement, the terms of which have been undisclosed. The bank also hired a forensic investigator to ‘identify any malicious software’ related to the cybercrime incident. But this wasn’t something that BankIslami would just solve by itself - let’s face it, no Pakistani bank compliance sector is going to figure out how to stop someone like Alaumary or Hushpuppi or North Korea. Instead, it took Alaumary to start cooperating with U.S. authorities in October 2019 and secretly sign a plea agreement in November 2020. Bank Islami also later joined the criminal case conducted by the US Department of Justice against Aluamany, at the District Court of Southern District of Georgia. According to the FBI: “This case is an example of our relentless determination to hold criminals accountable no matter how sophisticated their crimes may seem.The arrest and sentencing of cyber criminals like Alaumary, who feel safe hiding behind a computer screen, are only possible through persistent investigative efforts of the FBI and our close collaboration with our U.S. and international partners.” While there is a certain neatness to the American justice system, for BankIslami, there are still a couple of loss threads to handle. The bank has no idea about whether it will receive the restitution amount of the guilty party, and it has yet to receive a detailed judgement of the case. n
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Injection or not - the rupee slide explained
By Ariba Shahid
T
here is a lot of buzz surrounding the rupee’s slide against the dollar and more importantly of an injection by the SBP into the forex market. In a scoop, Shehbaz Rana in the Express Tribune claims that the SBP pumped $1.2 billion into the interbank market in three months to defend the weakening rupee. The Pakistani rupee on Wednesday continued its slide against the greenback, touching a new all-time low for the second straight day at 169.5 in the interbank market at the onset of trading session. The local currency had closed at an all-time low value of Rs168.94 a day earlier, on Tuesday. The rupee depreciated by 45 paisa against the greenback and was being quoted at 169.10 to 169.50 while trades were reported at 169.50. The rupee, which has been termed the
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“Usually, during volatility, the SBP used to issue statements explaining the reasons. However, they have gone into sleep mode. As per the last policy statement SBP stated that depreciation witnessed in the rupee is due to higher commodities prices and depreciation of regional currencies against the USD” Waqas Hussain, head of sales at Tresmark worst-performing currency in Asia, seems to have opened the field for the bullish US dollar to move forward unchecked and erode the remaining value of the local currency, maintaining downturn since it touched a 22-month high of Rs152.27 in May 2021, losing a cumulative Rs17.36 in the past four months. So is there any way to actually confirm
an injection? If we’re being candid, there is no way to know for sure unless the SBP confirms it. Sources inside the SBP can hint towards it, but one can never be too sure. “SBP does not comment on speculations about market interventions,” said Qamar. That means that official confirmation is not a possibility. However, they have also made
“The SBP also stated that the interventions will be temporary and they will maintain a net zero position at the end of each quarter. so whatever they sell to the market, they will purchase back at a later date” Sayem Z Ali, division head at Bank of Punjab
no effort at all to try and deny the incriminating numbers being presented. While some suggest that weekly changes in the SBP reserve positions may help determine whether this is true or not, it’s not that simple. Because if one
“Under this system, the role of SBP’s interventions in the FX market is limited to prevent disorderly market conditions, while not suppressing an underlying trend” Abid Qamar, spokesperson for the SBP
is looking for a $1.2 billion withdrawal from reserves, it is not that simple considering there are also additions made to the reserves. Thus, this is itself not an accurate means. “People are not clear on the interventions, as SBP does not make details public. So data and timing of these interventions are unknown,” says Sayem Z. Ali, Division Head at Bank of Punjab. “It is also very important to note that in the situation where an injection is made, it will be temporary. The SBP also stated that the interventions will be temporary and they will maintain a net zero position at the end of each quarter. so whatever they sell to the market, they will purchase back at a later date,” he explains. Profit reached out to the SBP for a comment on the intervention and its nature. Abid Qamar, spokesperson at SBP said that since June 2019, Pakistan has adopted a market based flexible exchange rate system, where the exchange rate is determined by market demand and supply conditions. “Under this system, the role of SBP’s interventions in the FX market is limited to prevent disorderly market conditions, while not suppressing an underlying trend. When the exchange rate does not reflect realistic market conditions it can contribute to unsustainable current account deficits and repeated balance of payments problems.”
So what in the world has been going on exactly? What is up, or should we say what is down, with the rupee? There are a number of factors at play. “Usually, during volatility, the SBP used to issue statements explaining the reasons. However, they have gone into sleep mode. As per the last policy statement SBP stated that depreciation witnessed in the rupee is due to higher commodities prices and depreciation of regional currencies against the USD,” says Waqas Hussain, Head of Sales at Tresmark. With no such statement or comment currently, Profit has asked experts what they believe are the reasons behind the rupee’s behavior. “The sharp rise in trade deficits and CAD over the last 3 months is showing a significant increase in demand for dollars (imports, freight charges, debt repayments etc) whereas supply (export, remittances etc) have not kept pace. so despite record high SBP reserves the demand supply equation necessitated a correction on the PKR,” says Ali. “Moreover, the $2.8 billion IMF SDR cannot be used for meeting import payments,” he reminds us. On the trade front, commodities are adding pressure to the rupee. Rising international prices for commodities have not been kind to Pakistan. This means more dollars are spent to buy the same quantity Pakistan was buying. “We are short of major commodities such as wheat and sugar and have been importing them for some time. International commodity prices have also gone up, including oil. In addition, the government is making payments for the vaccines which is also putting pressure on the import bill,” says Hussain. The TERF scheme by the SBP also means greater imports of machinery. Considering that it is expiring in December, there may be a greater rush for imports before that. Moreover, there has been an upswing in car sales which adds to the import bill considering Pakistan imports parts. All this means more outflows with exports not increasing by the same proportion. “On the CAD side, it is only a month or two that have been going out of control. These have had a disturbing impact on the market sentiments,” says Hussain. However, international pressure on the rupee can also not be ignored. “We now have a serious situation in Afghanistan, which is further fueling demand for dollars. There is now greater demand from Afghanistan as people are dumping the local currency in exchange for the dollar,” says Ali. Hussain further adds how news outlets said that China has also asked for repayment for $3 billion. “Because Afghan reserves are frozen by the US federal bank, a lot of flows from the open market are going to Afghanistan, technically one could say Pakistan is unofficially bearing the burden of their trade.” n
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SATIRE