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CONTENTS

11 Fizz-Shizza at the PSX and saving Babar Azam - this week in Pakistan’s business and economics twitterverse 13 Honda’s big gamble 16 IMF – Back to square 1

21 21 Pakistan is pretty connected for air travel 25 The challenge of inflation Uzair Younas 26 The lopsided market structure of the automobile industry Ammar H Khan

27 27 Could gaming emerge as Pakistan’s underdog industry? 39 So you want to have a credit card in Pakistan? Here’s all you need to know

Profit

34 What is Pakistan’s telecommunications future?

Publishing Editor: Babar Nizami l Editor: Khurram Husain lJoint Editor: Yousaf Nizami l Assistant Editor: Abdullah Niazi Reporters: Ariba Shahid l Babar Khan Javed l Taimoor Hassan 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 Malik Israr (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 You mentioned the following in your article “measures were taken by the FBR to curb the culture of rampant tax avoidance within the retail industry.” I would urge you to look at the definition of avoidance and evasion. Avoidance is legal and evasion is illegal. The retailers of Pakistan are engaged in tax evasion. Not only are they not paying taxes honestly on their profits, they are collecting GST on behalf of the government and keeping it. This is illegal in every part of the world but some people think it’s perfectly acceptable. These retailers should be threatened with closure if they don’t comply. They should in an ideal world pay the stolen taxes from previous years. Apropos: Will the FBR be able to tame the retail sector? Riaz, Website

are we? More than one month’s salary a year gets taken by the government in the name of taxes. Which other industry gives one month’s profit/income as tax to the government? Apropos: Will the FBR be able to tame the retail sector? Nurulain, Website

Why should anyone pay any tax? The hard earned private tax money collected by FBR is used to line the pockets of elites, politicians, establishment, corruption, graft and waste to an extreme level. Leave the funds in the pockets of private citizens who have earned them. Apropos: Will the FBR be able to tame the retail sector? Anonymous, Website

Profit knows where to start its paywall from. Apropos: Where there’s a rule, there’s a juggar, and currency is no different Gareeb Insaan, Website

Do away with Rs 5,000 and 1,000 denomination notes. Let people carry tons of paper currency to pay in cash. There will be multiple measures in the domain of education, facilitation and enforcement that the tax net can be extended. This is a simple and elegant solution but no government is applying it. Apropos: Will the FBR be able to tame the retail sector? Shahid, Website

facebook.com/Profitpk twitter.com/Profitpk linkedin.com/showcase/13251020 profit.com.pk profit@pakistantoday.com.pk

HOW TO CONTACT

I want to draw your attention on an issue. That Teir-1 retailers’ category defined by FBR is a big question mark. They considered large retail stores, fine. But why ordinary retail shop qual to or above 1000 sq. Ft size is equivalent to a large retail chain store like Imtiaz and tehzeeb? An ordinary retailer cannot arrange sales tax invoices from the suppliers in the open market. Infact, there are large wholesalers and retailers having smaller shops in the rushy markets making millions of profit every day supplying to retailers. And retail showrooms are just selling on a limited basis. 1000 SQ ft size option is not a thing to fit in this category. Some of the retailers are not even able to manage their expenses. But FBR thinks they are Teir-1. Apropos: Will the FBR be able to tame the retail sector? Sikandar, Website We salaried individuals are taxed at the source and have no other options. We are not nawabs,

Even though the FBR has been able to net a significant amount of retailer’s into the new POS system, most retailers have either cited technical difficulties or have simply continued to operate mostly on cash to try and go under the radar on transactions. The question is, will the FBR manage to wrangle the market or will it eventually submit to their resistance? Apropos: Will the FBR be able to tame the retail sector? Zee Raja, Website

I came here for the jugaad. The crux of the matter is that the government and state bank should educate people on how to invest other than just hoarding dollars. It’s time our people do something productive rather than buying real estate which is not a smart way to invest. Apropos: Where there’s a rule, there’s a juggar, and currency is no different Mukhtiar Ali, Website Everyone was entering a building and the security guard was not stopping anyone at all. One person asked the guard for permission to enter. The guard refused. When he asked why stop him when everyone else is entering freely, the guard replied “they are not asking for my permission!” Apropos: Where there’s a rule, there’s a juggar, and currency is no different Asad, Website Is there any juggar to the paywall? Just when the fun part starts it says subscribe! Apropos: Where there’s a rule, there’s a juggar, and currency is no different @AHBPK, Twitter {Note from editorial staff: The juggar is to pay for the subscription and to get used to the idea of paying for quality journalism} These culprits should be punished. Apropos: Has the FIA sealed Hascol’s fate? Sania, Website Well written Babar. Loved your choice of expressions. Apropos: Has the FIA sealed Hascol’s fate? Amer Maqbool, Twitter

COMMENTS

IN BRIEF Prime Minister Imran Khan has embarked on a trip to China where he was due to meet Chinese President Xi Jinping with a list of measures aimed at seeking China’s support in stabilisation of Pakistan’s ailing economy.

“The government is looking into setting up its own import facility by converting a portion of a state-owned liquefied petroleum gas terminal. We have two terminals already in operation and we hope to have the third one operational by next year” Hammad Azhar, Minister for Energy

$1.2 billion:

Pakistan and Saudi Arabia have agreed to operationalise the $1.2 billion Saudi oil facility at the earliest. As per the financing agreement, the SFD will extend financing facilities up to $100 million per month for one year for purchase of petroleum products on deferred payment basis. The SBP announced that it has received $1.05 billion from the IMF after the successful conclusion of the sixth review. The programme aims to support Pakistan’s policies to help the economic recovery from the Covid-19 pandemic, ensure macroeconomic and debt sustainability, and advance structural reforms. The trade deficit in January shrunk by 30.19 per cent to $3.36 billion as compared to $4.8 billion recorded in December 2021. Imports during January 2022 was recorded $5.9 billion as compared to the $7.6 billion registered in December 2021 which was a decline of 22 per cent.

$8 billion:

Khyber Pakhtunkhwa (KP) province has signed more than $8 billion MoUs at Dubai Expo; these mainly consist of investments in tourism, hydro power projects, economic zones, mines and minerals sector. Finance Minister Shaukat Tarin has asked China to invest in Pakistan’s Special Economic Zones (SEZs). He said that Prime Minister Imran Khan’s visit to China is important both politically and economically.

Fizz-Shizza at the PSX and saving Babar Azam this week in Pakistan’s business and economics twitterverse

izz-Shizza memes were everywhere as the great Pakistani meme-factory chugged along in response to the incredible drama, even as the economy and businesses maintained their regular chaos. At the same time, our editorial staff got a little bit distracted and used a very thin pretense to make a case for somehow shifting Babar Azam to Lahore Qalandars and releasing him from the evil clutches of Karachi Kings. Ariba Shahid brings you all this and more in this week’s social media roundup.

Shameless plug

PSX in a Fizz-Shizza fix

While all of you were focused on Fizza and Shizza, the PSX probably found themselves confused too. On that note, please look at The Dependent’s coverage on a hot new startup that has raised nearly a quarter of a million dollars in funding that is aimed at ending confusions between Shizzas and Fizzas once and for all. We hope this will be a game changer for the industry and truly be a disruptor.

SOCIAL MEDIA ROUNDUP

No comments on Hascol, but if you want to learn about dividend investing, check this out

Playing or not playing at all? (AND SAVE BABAR FROM KARACHI)

Taking things to heart

Bat first, bowl first, and be the captain of the team. Is the SBP the little sibling in this match that is being strung along?

Some people take things to heart. Looks like Razak Dawood is one of those people. Sir pls just do your damn job.

{Note from editorial staff: Just because of the minor reference to cricket, we would like to take this as an opportunity to say Babar Azam needs to be freed from the clutches of Fixer Kin- sorry, excuse us we met ‘Karachi Kings’ even though the other name would be more appropriate. Not only is he having to carry the team at a time when he is struggling with his own form (and scoring 90s despite said dip in form) it is simply about getting him out of this toxic relationship. Babar, if you’re listening, blink twice at the next toss and we will save you. Sincerely, your Lahori brethren.}

Bigger is better?

DM me for job

But no, being the biggest and setting new benchmarks is more important than everything else.

Entitlement is real in Pakistan. Then again, if instagram pages can ask people to dm for prices, then they can actually reach out to people that sound interested in jobs. It is not an exact comparison, but how much does that really matter in Pakistan’s business and professional landscape.

Okay boomer

Dorito richness

Some day I want to be rich enough to buy doritos without messing up my entire budget. Goals to be rich enough to buy doritos without having to think about the price. Oh what a day that would be.

Sometimes all you need to do is tweet okay boomer. That’s it.

{Note from the editorial staff: Not on a journalist’s salary you’re not!}

SOCIAL MEDIA ROUNDUP

Honda’s big gamble

With the Honda Civic tipping over the Rs 6 million mark, what does the auto sector’s landscape look like in the immediate future? By Abdullah Niazi

ive million rupees. That is nearly $30,000. It is more than what the average Pakistani family makes in terms of income over the course of a decade. It is also the price of the cheapest variant of the newly released 11th generation Honda Civic. The new Civic will hit the showrooms this March and the prices announced for different variants of the car range between Rs 5-6.1 million. This will make it the most expensive sedan in its category in the country, and will also mean that Honda’s mid-range sedan will be in the same price range as the Hyundai Sonata - which is Hyundai’s top-of-the-line luxury sedan. The implications of this are far reaching. Some models of the new Honda Civic will be

AUTOMOBILES

more expensive than the recently launched and wildly popular KIA Sportage, which belongs to the cross-over SUV segment - a class above the sedan segment and supposed to be more expensive too. For a very long time in Pakistan, the automobile industry has been dominated by the ‘Big Three’ car manufacturers - Toyota, Honda, and Suzuki. These Japanese automakers have been competing with each other in similar car categories. Suzuki would focus on hatchbacks and Honda and Toyota would duke it out over the sedan segment of cars. As a result, Pakistan’s automobile industry grew stunted and kept offering the same few car models in around the same price range. Over the past few years, with the introduction of new car companies like KIA, MG, Changhan, and Hyundai, the car market in Pakistan has undergone a diversification. We are

finally now at a stage where there are midline sedans that are as expensive if not more expensive than crossover SUVs and sedans that are in the same price range as hatchbacks. How we have gotten here is a long, complicated story and the future is anyone’s to take. What we can say for sure is that as the competition continues to heat up and car prices continue to soar, it will be interesting to see how the older players deal with competition that they have not had much practice with in the past.

The car market as it is

urrently, Pakistan has more options for cars than it has had at any time in its history before this, in the sedan segment it was restricted to the Honda City in the cheaper sedan option with

the Toyota Corolla’s XLI and GLI variants competing with it. On the higher end of the spectrum, the Honda Civic competed with the Corolla’s Altis and Grande variants. In recent times, the KIA Sportage has become a major competitor for the Civic and Corolla, providing a crossover SUV in the same price range as the sedans. A basic model of the Toyota Corolla with a 1300cc engine used to cost around Rs 2.7 million, and a fully loaded Toyota Corolla Grande with an 1800cc engine went for around Rs 3.6 million. Similarly, the Honda City in its top most variant was priced around Rs 2.4 million at this time and the Honda Civic with its top most variant cost around Rs 4 million. If you wanted to buy an SUV, you either had to get a Toyota Fortuner for around Rs 7 million or a Hyundai Tucson for around the same price. These were the prices around 2018-19, and around this time, the import of Japanese refurbished cars was down. In 2019, KIA Lucky Motors launched the KIA Sportage for around Rs 4.5 million. Most people loved the design and KIA provided a quality SUV in Rs 4.5 million. Before the KIA Sportage, SUVs were being sold in the Rs 7-8 million range even by new entrants like Hyundai. The KIA Sportage suddenly meant that people buying the top most variant of the Toyota Corolla or the Honda Civic could now simply add another Rs 500,000 and enjoy the comforts and the sex-appeal of an SUV. And if a person can come up with Rs 4 million to buy a car, it is more than likely that they will be able to muster up another Rs 500,000 from somewhere or the other. Especially in a country like Pakistan, where SUVs and Land Cruisers are considered the height of wealth. The KIA Sportage could give you that feeling of being a Chaudhry Sahab without the extra Rs 3 million that it cost to upgrade from a Corolla or a Civic to a Fortuner or a Tucson. In response, Toyata realised very quickly that KIA had succeeded by undercutting an entire category of car. To fix this had the idea to launch the Toyota Yaris. Essentially, they discontinued the cheaper variants of the Toyota Corolla with 1300cc engines, and launched a new car from scratch that was cheaper. Now, people could either buy a Toyota Corolla in the Rs 3.5 – 4 million range, or a Toyota Yaris in the Rs 2.5 – 3 million range. Essentially, Toyota did to the sedan exactly what KIA did with the SUV. KIA offered an SUV at a comparable price to a sedan and people went crazy for it. Toyota offered a sedan at just a little over the price of a hatchback. At the same time, the competition continued to rise in this department. The Chaghan Alsvin is now providing a sedan in the Rs 2.4 - 2.9 million range. At the same time, the Hyundai Elantra is providing a 2000cc engine car in the Rs 3.5-4.3 million range. At the same time,

they are also offering a luxury sedan, the Sonata, in the Rs 6.5-6-8 million range. This will directly be in the same price range as the new Honda Civic. Think of it this way. The Hyundai Sonata is Hyundai’s luxury sedan. Honda’s luxury sedan is the Honda Accord. Meanwhile, the Civic is the direct competitor to the Elantra in the compact sedan category. However, the Accord is over Rs 10 million compared to the Rs 7 million Sonata - which is the same price as a Honda Civic. The Honda Civic is now also close to the same price as the Hyundai Tucson and the Toyota Fortuner, although both of those cars will most likely increase their prices in the near future. All of this means that Honda has poised itself as the most expensive car company in Pakistan. On the surface, since Hyundai and Toyota are the same in terms of brand equity, it seems to be a bad business decision. Why would consumers not gravitate towards the cheaper options in a higher category of car? However, it might just work because of certain kinks in the Pakistani automobile industry that have resulted in cars becoming fixed assets instead of depreciating assets. How did the car industry get to this point? It is necessary to understand the history of car manufacturing in Pakistan, and the particular economic conditions that have made the industry develop in the way that it has. How we got here - an industry history The Honda Civic occupies a very special place in Pakistan’s auto-history. One of the first locally available and assembled sedans in the country, the Civic hit Pakistan in 1995 and for the next two decades competed exclusively with the Toyota Corolla. While the Corolla has remained the most sold sedan in the country, the Civic has long occupied the position of being the slightly more expensive darling of petrol-heads. It is, however, strange that up until now it has mostly only copped competition from one other car. That is because Pakistan’s automobile industry has developed rather unnaturally over the years. Our story begins in the early 1980s. Up until then, cars were mostly only for the uber elite, and the auto industry in Pakistan had flip flopped between privatisation and nationalisation. A quick perusal of Wikipedia will give you the details of what cars were being produced before the 90s, but the critical moment that spelled the fate of car buyers in Pakistan was the arrival of Suzuki in 1982. Pak Suzuki Motors was launched as a joint venture between the government of Pakistan and Suzuki Motors Japan, formalizing the arrangement by which Awami Auto Ltd. had produced the Suzuki SS80 from 1982. Suzuki originally owned 25% of the stock, but when the Pakistani automobile market began to deregulate around 1990, Suzuki Japan began

an aggressive campaign to gain control of the company and have since increased their holding up to 75% of the company. And why would they not want to do that? Pakistan was an open market with no major player already there and Suzuki saw the opportunity to thrive. In 1989, they launched the now iconic (and now discontinued) Suzuki Mehran. Other models like the Suzuki FX followed and even their vans like the Suzuki Bolan became wildly popular. Suzuki was the first real car manufacturer that Pakistanis got an opportunity to buy from, and they were offering small, affordable, hatchback models that were reliable and provided comfort and safety according to the standards of that era. Sensing this success, other Japanese companies knew that Pakistan was an open market and decided to step in. These companies were Toyota (which also sells under the brand name Daihatsu) and Honda. At this point Suzuki had already taken first-mover advantage and would fight tooth and nail to keep their monopoly, which is why Honda and Toyota decided to target a completely different market – sedans. In a joint venture with Toyota Japan, Indus Motors Pakistan rebranded itself as Toyota Indus in 1990 and started to assemble. The Toyota Corolla started being manufactured in Pakistan in 1993. Honda Atlas was based in Lahore, and under the auspices of Yusuf Sherazi and the Atlas Group, launched in 1992. By 1994, they were giving Toyota Indus a run for their money with the production of the Honda Civic and Honda City in direct competition with the Toyota Corolla. Suddenly, the Pakistani market had three new entrants and what seemed to be a world of choice. Initially, Suzuki did try to fight back by trying to produce their own sedans from the Suzuki Khyber to the Margalla and the very modern looking Baleno. However, all of their attempts to make sedans work, even up until recent years with the Suzuki Liana and Ciaz, have failed. The Big Three from this point on maintained a tactful and unspoken agreement. Suzuki kept its monopoly on the hatchback category and Honda and Toyota slugged it out for the sedans. If any new entrants came onto the market (and many tried), they were quickly sullied and sent packing. In this way, for nearly three decades there were essentially only six options for locally assembled ‘family cars’ in Pakistan. Suzuki at any given time was assembling three to four hatchbacks, with mainstays including the Mehran, the Alto, and the Cultus. Meanwhile Honda produced its cheaper sedan the Honda City, and it’s more expensive competitor to the Toyota Corolla the Honda Civic. Toyota focused on making just the one car, albeit in different variants with different engine sizes.

The lopsided automobile market

ery quickly this became the status quo and for two to three decades things remained the same. A number of companies tried to launch in Pakistan. The Chinese company FAW brought in its hatchbacks along with heavy loaders around 2014. All of the attempts failed. Why? One simple reason – resale value. There is a brilliant column in this week’s Profit by Ammar H Khan titled “The lopsided market structure of the automobile industry.” Without picking out in particular cars, Khan explains how the car market in Pakistan is topsy turvy because cars are seen as a fixed asset and not an asset that depreciates in value over time. In simpler terms, this is what is known as the dreaded ‘resale’ concept in the Pakistani car market. Successively bad car policies and the unwillingness of these three companies to manufacture completely in Pakistan meant that car prices remained high. Even though the cars were being assembled in Pakistan, they were being imported here part by part. This meant that no matter what car prices would also rise with the price of the dollar. So very quickly, cars in Pakistan were no longer just a mode of transport, they also became an investment and a crutch against the devaluation of the rupee since most parts of the cars were imported. So, for example, if a person bought a Suzuki Alto in 2007 for Rs 500,000, a likely price they would sell the car for in 2012 would be somewhere between 600,000 – 700,000. Because of this phenomenon, one of the major factors when buying a car became resale value. And because the Big Three had become mainstays, anytime a new manufacturer came

around, consumers would be worried that if they failed and packed up, then the resale value of their cars would plummet. In this way, resale value became perhaps one of the most important factors in choosing what car to buy in Pakistan. However, around 2015-16, the government changed some auto policy in terms of providing space to auto manufacturers in SEZs and giving them tax breaks. As a result, new companies tried to make an entry again (this has been KIA’s third attempt at entering the Pakistani market) and this time it worked.

Will Honda’s gamble work?

n terms of market size, Toyota is secure, KIA is growing, MG is about to introduce a sedan, and Changan is targeting a very specific segment of consumers in the lower-income background. In all of this, it was Honda that was taking the hits. Since KIA cut into their sale of the Honda Civic, and the Toyota Yaris meant another budget sedan was available causing the sales of Honda City to be affected. That is why Honda Civics and Honda Citys combined sold a total of 37,195 units in the past two years. In comparison, the Toyota Corolla alone, despite being challenged by the KIA Sportage, sold 38,514 units in the same two year period. The KIA Sportage meanwhile sold 25,000 units in two years.Toyota had an incredible run with the Yaris, with 29,622 units sold in 14 months. If we take an average of the number of Yaris sold in 14 months, we get 2115 cars. If we then multiply it with 24 months, that makes it 50,780 cars in total. Meaning, had Yaris been produced and sold all 24 months, it would be the most sold car. At

this rate, the number of Toyota Yaris sold are double the number of KIA Sportages – something that is to be expected since the Yaris is Rs 2 million cheaper and cutting into both the Suzuki Cultus market and the Honda City market. Essentially, at the end of the day, both the Honda Civic and City combined did not manage to outsell the Toyota Corolla while the Toyota Yaris broke car buying records. The Sportage also clearly made more of a dent in Honda’s market than it did Toyota’s. Meanwhile, there has also been competition from Hyundai, which has introduced two new sedans, the Elantra and the Sonata, that have been mentioned before. From July 2021 up until December 2021, Hyundai sold 1522 units of the Elantra and 1240 units of the Sonata. At the same time, Honda sold around 17,000 units of the Honda City and Civic combined. While that is significantly ahead, it is still worth noting that the Elantra and Sonata have only just been launched and are already pulling a significant customer base which could be challenged now that the prices of the Civic and City are going up with new generations of both being introduced.. Honda’s bet here is once again on resale value. They are under the impression that if customers see Honda products as expensive they will consider the resale value of these products as expensive in the future as well. However, what Honda would do well to remember is that now that there are more than three companies on the market, the status of cars as fixed assets may finally begin to eb and people might get used to cars becoming a depreciating asset. However, if this does not happen and people once again flock to the Honda Civic, their gamble might just pay off in a big way. n

AUTOMOBILES

COVER STORY

By Khurram Husain

n the last full year of its term, the PTI government has managed to land itself back to the same position it was in at the beginning, back in 2018. Once again they are looking at a severe adjustment to control a ballooning current account deficit, a raft of deeply popular tax measures to shore up the fiscal equation and continued hikes in interest rates to curb inflation. In short, once again they have to apply the brakes to growth in order to manage growing macroeconomic instability, and along the way pay the political price that comes with such measures. Look at the projections for the current account deficit (CAD) in the remaining months of the fiscal year, running from January to June 2022. In line with the State Bank’s projection, the CAD is expected to reach $13 billion by June 2022 according to the IMF. At the same time, gross official reserves stock is expected to hit $21.2bn, when it currently stands at $17.7 (including the one billion dollar each from the IMF tranche and the recent Sukkuk flotation). Now consider this. The CAD has already reached $9bn in the July to December period, meaning it can only rise by another $4bn at best in the remaining months of the fiscal year to remain within the program projection. This means an average monthly CAD of $666 million for the next six months where it has averaged $1.5bn per month so far. How is such a sharp deceleration in the CAD to be achieved? The only way would be through a sharp deceleration in the trade deficit. But the program projects anything but a deceleration. According to the original projection on trade deficit (goods, services and net income) for FY2022 made back last April this deficit was supposed to come in at $34bn by this June. In the projection made in the latest document released on Friday, this amount will be more than $45bn. For the next few years it is projected to remain around this level, meaning the additional import requirement that the economy has added since April last year now has to be carried through more stringent reserve accumulation measures. Perhaps this partly explains the sharp jump in the external financing needs, the near unseemly urgency of the government to borrow (lifting a billion dollars from international markets at exorbitantly high interest rates even before the IMF program had been approved by the board). The government’s stint in power began with the country facing a massive current account deficit and a troubled approach to the IMF for immediate assistance. It took

them nine months to get an agreement on a Fund program, and jettison their star finance minister – Asad Umar – along the way. From November 2018, when the negotiations began, till July 2019, when they were concluded with Hafeez Shaikh’s signature, the government cut a difficult path trying to water down the scale of the adjustment the fund was demanding and soften some of the conditions. Nine months later they signed on the dotted line, after removing their finance minister and bringing another one in. Today they are back to this position all over again. The negotiations for restarting the facility, that was suspended in March 2020 with the arrival of the pandemic and the start of the Covid lockdowns, began in November 2020 and came to a culmination in April 2021 when the program parameters were agreed to and the government gave the commitment that “we are unwinding the Covid crisis related economic stimulus spending measures (1.2 percent of GDP) and freezing non-priority spending”. This was from the Memorandum of Economic and Financial Policies submitted by the government to the IMF back in April 2021. This commitment to unwind the fiscal and monetary stimulus announced in the wake of the pandemic was the core of the Fund program at that time. But the government reneged on its commitment, after obtaining approval from the IMF board, and after receiving the $500 million that was disbursed against it. And just like the beginning, they changed their finance minister. Hafeez Shaikh was out and Shaukat Tarin was brought in his place. The budget that Tarin announced in June 2021 was supposed to carry a raft of new taxes, remove exemptions and restrain expenditures. By that point the State Bank was supposed to have passed a series of interest rate hikes as well, although the goal of “mildly positive real interest rates” was to be reached gradually, not suddenly. None of this happened. Instead we had a budget without a credible tax plan and no real expenditure restraints. Weeks after the budget came the announcement of the Kamyan Pakistan program, further adding to the expenditure commitments as if there were no constraints on government resources. That budget, the IMF says, magnified the vulnerabilities and led to a rapid rise in the current account deficit, as well as the external financing requirements for the economy. “[T]he approved FY 2022 budget marked a departure from EFF objectives and contributed to rapidly increasing macroeconomic vulnerabilities” says the IMF in its accompanying Recent Economic Developments report released on Friday. “It delivered a significant fiscal relaxation through large

spending increases and the unwinding of several EFF tax revenue commitments, notwithstanding the past revenue underperformance.” Even though revenues had underperformed in FY2021, the government powered ahead with further tax breaks and expenditure increases in a desperate bid to boost growth at a time when the economy had not recovered from the adjustment it had embarked upon from July 2019. “On the expenditure side, it allowed for large increases in public wages and allowances, a doubling of subsidies, and an increase in investment of over 50pc” the report says. “On the revenue side, it expected unrealistically strong tax revenue growth (from marked improvements in tax administration and strong domestic demand, notably imports) and high non-tax revenue receipts, thus introducing significant risks of fiscal slippages. In addition, the budget delayed key reforms and reversed some key policies, damaging revenue prospects.” This is what made the minibudget of January 2022 necessary. All through the months that followed that budget announcement, the government touted the growth of exports. It did not mention, though, that in the course of securing these incremental exports, the external financing requirements of the country rose by $7 billion for FY2022 alone. Back in April the IMF had projected external financing requirements at $23.6 and $28bn for fiscal years 2022 and 2023 respectively. Those projections have now been raised to $30.4bn and $35bn respectively, and increase of around $7bn per year. The more meaningful number here is external financing requirement as a proportion of current external receipts – exports plus remittances, since these are the two large dollar earning heads from which Pakistan earns its foreign exchange reserves and services it external debt burden. As the graph shows, external financing requirements reached 67.2pc of current external receipts in the bad old days of FY2018, right before this government came to power. They fell sharply after that as the painful adjustment under the IMF program began in 2019, falling to 39pc by FY2021, but have spiked again and are projected to return to their earlier level by end of next fiscal year. In terms of the economy’s ability to meet its external financing requirements through its own resources, the country has returned to 2018, back when the story began. This is the other side of the coin to the export growth that they tout all the time, and it does not paint an edifying picture, the side they don’t tell us about. Some realization began to sink in among policy circles that the course of action taken after the budget of June 2021 was not sus-

tainable as far back as September. That was when the State Bank administered the first of its monetary tightening measure, saying “the pace of the economic recovery has exceeded expectations” and led to “a strong pick-up in imports and a rise in the current account deficit.” It announced a small, 25 basis point, hike in the interest rate to “slow the growth in the current account deficit” and shift its focus away from supporting growth towards “tapering the significant monetary stimulus provided over the last 18 months.” In significant measure their hand had been forced by a strong bout of volatility in the exchange rate all summer, forcing substantial interventions on their part that have now also been acknowledged in the IMF report. This was followed by two extraordinary and hurriedly arranged rate hikes, of another 150bps in November followed weeks later by another 100bps hike in December after which the Governor announced a “pause”. But now that pause may also need to end, given the challenging external sector requirements shaping up in the remaining six months of the fiscal year. “Staff welcomed the recent policy rate hike” the IMF says in its latest report, “and sees continued monetary tightening critical to support much-needed disinflation.” This “continued monetary tightening” will have to come about through raises in the interest rate as well as “phasing out various liquidity-enhancing facilities over the medium term”, referring specifically to the raft of refinance facilities the State Bank announced as part of its monetary stimulus in the wake of the pandemic. Gone are the targets for lending

to the housing sector, the Ehsaas Emergency Cash assistance program, the refinance facilities and the flush of easy money they brought for industry. Along with this there are upward revisions coming in gas and power prices. Some of the impact of these measures is already programmed into the monetary targets. All the components of broad money show sharp reductions in their growth in the fourth quarter of the current fiscal year – the months running from May to June, pointing towards a rate hike before May. Keeping exports going in the face of these measures will be a challenge, but any decline in exports earnings will have to be compensated with interest or exchange rate adjustments since borrowing more will no longer be an option to build reserves.

It is for this reason that the budget of fiscal year 2023, to be announced this June, will have to contain further tax measures as well as continued expenditure tightening. FBR revenues are programmed to rise by around Rs1 trillion in the next budget. On the other hand expenditures are projected to rise by Rs613bn, of which Rs500bn is incremental interest expenditure alone. Development spending shows slight declines from current year and defense spending is projected to rise by Rs186bn each year in the next two years, also a very slow pace of increase. The thrust of the program seems to be towards swinging the primary balance from a projected deficit of Rs688bn to a surplus of Rs751bn in one year. All equations will be extremely tight for the government from this point on, anchored ultimately in exchange rate flexibility, interest rate hikes, strong revenue performance while keeping expenditure firmly under tight limits. The program aims to shore up the country’s debt sustainability by redirecting resources away from growth towards stabilization, as is the norm in any IMF program. But the real scale of the adjustment has become more pronounced since April 2021. The delayed acknowledgement of the reality – that Pakistan was not ready for a growth spurt at that point in time, especially not with fiscal and monetary stimulus – now brings enormous cost in the shape of hardship for the people as well as for industry. Staying on track with this program going into an election year will be extremely challenging for the government. Let’s see if they can muster up the will to walk the path they have embarked upon. n

COVER STORY

Pakistan is pretty connected for air travel The country has more direct and indirect international flight connections than you might think.

By Ariba Shahid and Taimoor Hassan

ou’re sick of your job, you’re tired of Karachi’s traffic, and you just want to get as far away as possible. Where do you go? Well the farthest place you could get to from Karachi is Pias in Peru. All it would take is a three-hour Qatar Airways flight to Doha, followed by a layover before a flight to Madrid, where you would have another layover. Another three hour flight later you would find yourself in Peru, except you’d be in Lima. To get to Pias, you would then board a domestic flight and finally make it as far away from Karachi as you possibly could. Easy-peasy, right? Not quite - but definitely possible. And that is sort of the point. Even though it was a hectic process (it would take you around 35 hours) Pakistan has better air-connectivity than one might think. The country is ranked 45th on the Air Connectivity Index of the International Air Transport Association (IATA) out of 219 total rankings, and has climbed up from 52nd spot in 2009. Compared to countries with similar or greater

GDPs, Pakistan ranks better than Bangladesh, Iran and Sri Lanka for air connectivity. Why does this index matter? Because global air travel is paramount to unlock a country’s economic potential by increasing foreign investment and flow of human capital, and, of course, tourism. No airport in Pakistan is considered a “connectivity hub.” However, because of a large expat population and a business class with deep ties to the Middle East, Pakistan’s access to the rest of the world is doing pretty well. Profit looks at how well connected Pakistan is, and why it matters.

What does air connectivity count for?

uch like Olympic medals, human rights violations, and war crimes, the world leaders in global air traffic are the United States of America and China, maintaining the first and second spots as most connected for at least the past decade. Japan comes in third after them. A country that is well connected to various destinations has better odds at fostering

exchange of goods and services, investment and ideas, labor force, job creation, and of course tourists. In addition, more airport connectivity means more labor and earning opportunities associated with the sector. For Pakistan, increased connectivity also improves travel experience by reducing air travel time which also makes it a better tourist destination. Airport connectivity is defined as the sum of direct and indirect connectivity of an airport. It is a scale to see the level of how well an airport is connected to the rest of the world in the form of direct flights to and from destinations, or indirect connections through other airports. In contrast, hub connectivity facilitates a large number of connecting flights. The footfall at the airports of a country largely include passengers transiting, in addition to travelers to that destination. While the US and China have consistently been the leaders, over time the Middle East has also emerged as a connectivity hub. No airport in Pakistan is actively considered a connectivity hub but because of a large influx of flights between Pakistan and the Middle East, connectivity has increased.

TRAVEL

Pakistan’s air connectivity

akistan is home to around 151 airfields. There are major international airports in Pakistan now which include airports ar Karachi, Islamabad, and Lahore. Meanwhile cities like Peshawar, Multan, Sialkot, Faisalabad, Quetta, Rahim Yar Khan, Gwadar, Skardu, also serve as international airports. Civil airports in the country are operated by the Pakistan Civil Aviation Authority (CAA) with the exception of Sialkot International Airport, the country’s first privately owned and operated airport. An analysis of the flight data provided by the CAA over 28 January 2022 – 30 January 2022 shows that around 56% of all flights at the Karachi, Lahore, and Islamabad airports are international flights, whereas 44% are local. As per flightconnections.com, you can fly to 41 cities from Pakistan. This includes all major international airports - Islamabad, Karachi, Lahore, Peshawar, Sialkot, Multan, Faisalabad, and Quetta. Most of these cities are based in the Middle East. To put this in numbers, let’s look at the number of flights to and from the three biggest airports in the country - Karachi, Lahore, and Islamabad. A random sample of three days is taken from 29 January - 31 January, 2022. There were 97 flights to and from Dubai, 48 for Jeddah, 44 for Doha, and 40 for Sharjah. Cumulatively, this means 44.4% of all international flights flew to and from the United Arab Emirates, 18,9% between Saudi Arabia and Pakistan, 10.9% Qatar, 4.7% Oman, and 3,7% Bahrain. This shows how important the middle east is for the Pakistani aviation sector and airports. While the middle east is more accessible, Pakistani airlines no longer fly directly to multiple destinations in North America. PIA had direct flights to cities in the United States including New York. After over 50 years of service, PIA stopped flying to New York in October 2017. This is a result of TSA regulation preventing nonstop flights from Pakistan and the US. This leaves Toronto as PIA’s only destination in North America. This is also the longest direct flight one can get to and from Pakistan. As per flyconnections.com, the options in Europe are also limited with the United Kingdom, France, and Istanbul (the only city in the world that is made up of two continents). However, Profit’s analysis of CAA flight schedule shows that there are flights to and from Georgia and Germany too. It is possible that these are not frequent flights. While there is no surprise that there are no direct flights to far off destinations like Australia, Scandinavia, or South America, it is interesting to note that Central Asian Republics like Tajikistan,

How well connected is Pakistan for air travel?

f there is one industry that has drastically changed over the years, it’s the aviation industry. It’s one of the most sensitive industries out there considering the impact of terrorists attacks, rising fuel costs, global recessions, and ofcourse pandemics. These factors impact international connectivity for a country’s aviation industry. The keenness of an international passenger to transit through an airport in Pakistan is probably on the lower side of the spectrum considering the terrorism the country has battled over the years and the perception set out about safety concerns. In a previous story by Profit, we talked about how Pakistan’s airport connectivity is better than you think. An argument used was the fact that regular flights to London existed from Karachi, Lahore, Islamabad and Sialkot airport. Moreover, you could catch direct nonstop flights from Sialkot to cities like Milan and Barcelona every week. That has reduced significantly ever since PIA was banned from flying to Europe.Back in 2018, the top 5 international tourist arrivals by country of residence were the United Kingdom, United States, India, Canada, and People’s Republic of China. The top five busiest direct flight arrivals were United Arab Emirates, Saudi Arabia, Qatar, Oman, and Bahrain. The topfive busiest air cargo routes were the United Arab Emirates, Qatar, Saudi Arabia, Turkey, and Thailand. As per the IATA, The Middle East was the largest market for passenger flows to Pakistan, followed by AsiaPacific and Europe. 6.1 million passengers arrived in Pakistan from the Middle East (51.5 per cent

of total), 4.1 million passengers arrived from AsiaPacific (34.6 per cent of the total) and 1.2 million passengers arrived from Europe (9.8 percent). Despite all this, like we said earlier, airport connectivity is not just the number of cities you can take a direct flight to and from, it also includes the total number of indirect flights you can take. The very fact that there are frequent flights to Dubai, Abu Dhabi, and Doha from Pakistan show just how connected the country really is. It is entirely possible that you can fly to nearly any corner of the world by transiting through these three airports. The very fact that there are a frequent number of flights on a daily basis makes Pakistan better connected than you’d expect. n

TRAVEL

OPINION

Uzair Younus

The challenge of inflation

medium- and long-term inflationary pressures, especially if tensions in Europe and the Gulf do not ease any time soon. If global oil prices remain stubbornly high, the government will have to both dramatically increase prices in the near-term and force the State Bank of Pakistan to allow a sharper depreciation of the rupee, which would lead to second- and third-order inflationary effects in the economy. Inflation remains a near and a This then would mean that the political benefits of near-term “relief” future challenge to the masses would be swept away by citizen anger over sky-high inflation in the run-up to elections. The smarter political choice then would have been to allow nflation has continued to plague the economy for several domestic prices to reflect reality, make the argument that the govyears now, significantly eroding household purchasing powernment has no choice on this matter given that the country is an er and pushing millions of citizens towards poverty. The importer of energy, and make the relief argument by expanding the emotional and physical trauma of rising prices is unimagEhsaas cash transfer umbrella to provide relief to the most margininable, and its broad impact has been a key reason in erodalized citizens of the country. Such a strategy would also leave the ing the popularity of Imran Khan’s government. This is one door open for the government to sharply cut petroleum prices should reason why the prime minister has asked Pakistani corporations exogenous factors turn in the favor of the government, meaning that to “raise their employees salaries.” The most recent data released the Russians ease up on Ukraine and the Iranians stop their belligerby the government does not signal a near-term end to the pain, and ent actions. with Russia knocking at Ukraine’s borders, exogenous factors may Then there is the issue of food inflation, which continues to further complicate the situation for Khan’s government. be high on a year-on-year basis but is showing some signs of calm; According to January 2022 data, inflation measured by the however, month-on-month food inflation, which declined by 0.45 consumer price index increased by 13 percent on a year-on-year percent in January 2022, may spike up once again in the coming basis. CPI comes in at a red-hot 13 percent. Urban food prices weeks. This is mainly due to the fact that wheat output may be increased by 13.3 percent while rural food prices were up by 11.8 missed, with farmers in Khyber Pakhtunkhwa pointing out that percent. The Sensitive Price Index, which measures inflation in a a fertilizer shortage may impact the province’s wheat production narrower basket, showed an alarming increase of 20.9 percent and by up to 40 percent. This miss in expected output, coupled with a the Wholesale Price Index, which one could argue is a forward dramatic humanitarian crisis in Afghanistan, could lead to an adverse indicator of consumer prices, registered an increase of 24 percent. impact on wheat prices in Pakistan. A shortage of wheat would then It is for this reason that Prime Minister Khan “rejected” a mean that Pakistan needs to import to meet local demand at a time summary to increase petroleum prices by 11 rupees per liter – this when the crisis in Ukraine is pushing international wheat prices to decision has been taken, according to the government’s spokesmen near-record levels. and supporters, to provide “relief” to the masses. Both the economWhat all of this means is that there is a strong likelihood ic and political logic of this decision is flawed: on the economic that Pakistani citizens are likely to face a lot more economic pain front, keeping prices stable in the near-term will only increase before things get better. And with elections around the corner, Imran Khan’s government will face increasing criticism for sky-high inflation. Based on the government’s past narratives, it is likely that spokesmen will come up with all sorts of novel arguments to defend the government. However, a citizenry that has faced rising inflation for months on end is unlikely to be in a The writer is Director of forgiving mood. the Pakistan Initiative It is for this reason that Khan’s advisors ought to provide a more comprehensive strategy to the prime at the Atlantic Council, a minister. This strategy must go beyond near-term gimmicks, such as the provision of “relief” to the masses Washington D.C.-based through the prime minister’s interventions on petroleum prices. Such actions, as argued above, will only think tank, and host of lead to more pain at a time when the ruling party needs to avoid such criticisms. the podcast Pakistonomy. As elections draw near, perhaps the best course of action for the prime minister and his team is to He tweets @uzairyounus. pray that Russia backs off Ukraine, that the Iranians go easy on the Gulf, and that the global economy slows down. The combination of these factors is likely to lead to a sharp decline in international commodity prices including oil and provide much-needed relief to the prime minister and his party. n

COMMENT

OPINION

Ammar H. Khan

The lopsided market structure of the automobile industry

cases. In-effect, an automobile buyer will have to pay a certain percentage of the price in advance for booking, following with full payment. Furthermore, any price increases during this period are also borne by the customer. Such an erratic pricing and payment regime as well as waiting times extended to twelve months or more, automobiles have essentially become financial assets. Many individuals even use automobiles as an asset class, given its strong correlation with value of PKR against major currencies. A depreciating PKR eventually results in an increase in price of automobiles. More importantly due to a long wait time, there exists a substantial premium for delivery of vehicles on spot. A premium of 10 to 15 percent is fairly common on various models, if someone wants the automobile on spot, or with a much shorter waiting. Such market distortions have resulted in emergence of a class of investors who act as market makers, and pocket a n automobile is supposed to be a depreciating asset. An sweet low-risk financial spread on automobiles bought and sold. asset which is used and over time its value depreciates Creation of a shadow financial market has also been made possible as wear and tear takes hold, and new technology results due to increasing prevalence of cash in the economy, with most in better, and safer cars. In Pakistan, it is the complete transactions being done outside the financial system, devoid of any opposite. A protectionist regime which has protected potential capital gains taxes, or even income taxes. A market disthe incumbents for almost three decades now contintortion eventually having a ripple effect across the economy, from ues to manufacture cars which are not just expensive relative to other welfare loss to consumers, to creation of a shadow market. regional markets in US$ terms, but also of substandard quality, often There must be some kind of way out of here, said the joker skimping on technological advances available in similar models in other to the thief. Jimi Hendrix uttered these words in his seminal regional, and global markets. work, all along the watchtower. The way out of a protectionism In presence of a protectionist regime, competition from importregime is creation of a vibrant, and more open market. Reducing ed automobiles is discouraged through an excessive duties regime. In duties on imports is one way to enable more competition, but an absence of competition from imported automobiles, local manufacturers unintended consequence of increased automobile imports can be do not have the incentive to improve their product offering resulting in a deteriorating current account deficit situation given precarious a welfare loss for consumers, as they continue to pay a higher price for state of our foreign exchange reserves. However, any such incresubstandard automobiles, relative to the choice set available in other mental imports must be compared with imports of Completely markets. Knocked Down (CKD) units, and other components. Through an extended protectionist regime, and absence of any exIt is estimated that roughly 60 to 70 percent of components ternal competition, local manufacturers increase prices every few weeks, of an automobile sold in Pakistan are imported. In essence, we often pegging the prices with parity of PKR against major currencies. are importing a significant quantum of components regardless. Any depreciation in PKR results in increase of prices locally by a proRestricting imports further disincentivizes local automobile manportionate, or higher increase in prices. Furthermore, as demand often ufacturers to increase local production of components and reduce outstrips local supply, there is an extended wait time for delivery of the import component. Increasing competition through reduction automobiles, often stretching from six months to even one year in many in duties and sticking with the policy rather than succumbing to pressure of the automobile lobby may actually benefit consumers in the long-run. A tiered taxation structure where a lower tax is applied on automobiles with higher proportion of local components, thereby making the automobiles relativeThe writer is an ly more affordable can also be a policy action to steer the industry towards a more competitive market regime. independent Policy actions need to focus on enhancing consumer welfare, rather than safeguarding producer surplus. macroeconomist and A protectionist regime rarely enhances consumer welfare and often results in creation of a market structure energy analyst. which even stunts growth of an industry when a global marketplace is considered. Automobile industry is a classic example of the same where adverse incentives has created more problems than it has solved. A gradual opening up of competition in the industry and ensuring policy continuity for the same would enable availability of better and affordable products for the local consumer. In essence protection of infant industries shouldn’t be till perpetuity, the infant has got to grow someday. n

Cars are supposed to go down in value. Here they are a fixed asset

COMMENT

Could gaming emerge as Pakistan’s underdog industry? VCs already have an eye out for an industry that potentially has access to a global $200 billion network By Zunairah Qureshi

hen you think of games you think kids, but the business of gaming is a far cry from child’s play. The average reader would not be surprised to know that this is a multi-billion dollar industry globally. What might be surprising to most, however, is that Pakistan’s gaming industry is surprisingly vibrant and reportedly has an annual average revenue of $25 million. What makes that number pop even more is that a few years ago, that figure might have been close to zero. The first local game-production houses were set-up in Pakistan around 2005. In the nearly two decades that have passed since then, the industry has grown from an initial three players to just over 60 major game developers. Include smaller setups and you have an industry with at least a few hundred competitors. As demand for the games rises, particularly post-pandemic, the industry is expanding. The local industry employs around 15000 creatives and engineers, and going by the number of job openings on the companies’ websites and LinkedIn, they are always hungry for more.

To cater to this demand, universities have started offering degree programmes and specialisations in game development and design. Game makers in Pakistan typically produce games for a global audience. Most of the games are published by international game giants like Entertainment Arts (EA) Inc., Ubisoft, and Supersonic Softwares. This means that potentially Pakistan has access to a $ 90 billion mobile gaming industry. We talk about the mobile gaming sector separately because it is huge, but also because the local industry currently specialises in mobile gaming applications. However, the mobile gaming sector is part of a much larger video game industry which is valued at $ 200 billion. That is more than what the global film and music industries make combined. The industry also includes e-sports champions who make the news for earning game winnings that amount to more than what an average graduate of the Lahore University of Management Sciences (LUMS) will ever make in his or her life. Click on the e-sports earning live leaderboard for Pakistan and you will see that the local champion, Sumail Hassan has made close to $ 4 million dollars by playing a single game, Dota 2, an online multiplayer game where teams fight against each other to defend a battle tower.

Game development, the next big thing for investors and VCs?

“I

was very surprised to see that a leading and prominent investor was expressing interest in game development,” says Muhammad Hilal, CEO of Peshawar-based Aptechmedia. In an interview with Profit he said that the investor cited a figure of $ 260 million as the amount Pakistani consumers have spent on video games through e-commerce (this is the combined expenditure by Pakistanis on games and game systems produced worldwide) in 2020. This was a 53.3% increase in expenditure on games from the previous year. These figures are surprising, yes. But at the rate that the industry is expanding, this is only the start. In the last few years, two VCs have branched out from pouring funds into fintech and e-commerce to investing in game production companies. In late 2020, the venture capitalist Sarmayacar invested Rs 300 million seed funding in the San Francisco-based game studio, Revolving Games, which has its only off-shore studio in Lahore. This funding was in addition to the $ 12 million investment made by a global game publishing giant alongside

GAMING

Sarmayacar. Another round of investment was made by 47 Ventures, a VC that focuses on promoting local companies in the technology industry. These investments are coming in despite the fact that traditionally VCs do not invest in game development. Samar Hasan, co-founder of Epiphany Games explained to us that, ‘VCs investing in Pakistan are investing by and large in e-commerce, logistics, fintech, healthtech, architech, and edtech. Investment in entertainment-tech and games is high-risk and requires large ticket sizes.’ Initially VC investment in game startups was not really a thing around the world. This changed in the late 2000s when companies like Zynga and Playdom brought in high returns. Jump forward to the misery of pandemic days and the global gaming industry is booming with investors lining up for it like never before. This pattern shows that as investors are realising the potential in game development in Pakistan, the local industry is on track towards becoming a major sector within the tech industry. Experts in the local industry have pointed out how the lockdown era also led to accelerated growth in the Pakistani game industry. ‘Improvement in the quality of games has happened at an exponential rate, especially during the pandemic. So, we can hope to see that Pakistani companies will soon be making AAA (triple-A) games,’ said Muhammad Hilal, CEO of Aptechmedia. AAA games make up the category of games that are top-tier in terms of scale and quality and require huge investment and advanced resources. More opportunities are opening up in the industry with developments in VR, AR, NFTs, and the launch of the Metaverse that beckon game companies and investors alike. Samar Hasan of Epiphany games predicted that considering investor’s increasing interest we might see a unicorn from among game startups by 2030.

Pakistan’s demographic is ideal for a game industry boom

ur country has a youthful population which is tech-savvy and readily adapts to advancing innovations. This is one reason why even the government sees potential in developing the tech industry, which includes gaming. In 2020, Minister for Information and Broadcasting, Fawad Chaudhry tweeted about plans to bring certification programmes for game development and animation so that we can become a part of the $ 90 billion (mobile gaming) industry. Samar Hasan told Profit that in December 2020, Fawad Chaudhry met with leaders from

the local industry to discuss potential opportunities and expressed favourable inclination. In January 2021, e-sports was recognised as an official sport. The first national e-sports tournament was held in March of the same year in partnership with Garena, a Singapore-based online game development company. Earlier this year, a much hyped and bigger national tournament with a prize pool worth $ 20 million was held in Islamabad in partnership with the leading e-sports organisation, Galaxy Racers. Alongside the tournament it was announced that Pakistan’s very own professional e-sports league, ‘Supreme Galactic League’ and a nation-wide inter-school and college championship will be set up. E-sports academics and opportunities for local players to enter international tournaments were also promised. While the government and international industry’s recognition of e-sports talent in Pakistan is a step up, there still exists a lack of attention for the game development industry. Babar Ahmed, CEO of Mindstorm Studios, one of the leading and pioneering game companies in Pakistan, said, ‘What they don’t realise is that a single game, if it hits, can generate a billion dollars. Pakistan’s IT exports are worth $ 2 billion, while Turkey’s game industry alone now stands at $ 1 billion.’ The story of Turkey is an inspiring one for Pakistan. Turkey’s gaming industry started from ground up almost a decade ago and is now worth a billion dollars and has already achieved a gaming company with unicorn status. Middle East Eye reported in 2020 that ten years prior, the industry was only starting out with some 10 – 15 companies, each employing, on average, a single worker. Now it has 100 companies that are attracting billions of dollars’ worth of investment. Experts attribute its success to a young population and the devaluation of the lira against the dollar, which made its games more lucrative for foreign investors. These are both points that Pakistan too has the potential to capitalise on. A key difference between the two countries’ gaming landscape though, is that apart from an expanding international market, Turkey was also able to generate revenue from a local player base worth $ 800 million. In our case however, it appears that while Pakistanis like playing games, they don’t like paying for them.

The local game industry’s very own obstacle course

e asked Babar Ahmed, who’s been working to develop the industry since 2006 through Mindstorm, when are we going to see Pakistani games made by local

companies for the local player. You know ones with representation of Pakistan’s diverse culture and perhaps Biryani Crush instead of Candy Crush? Ahmed responded, ‘Not anytime soon. Because Pakistanis are not willing to pay for games. Our society is still utilitarian and values materials over experiences.’ This would explain why to-date the local industry is mostly services-based. So, most of the game companies develop products that have been outsourced to them by international companies and publishers. For instance, the casual game, Fruit Ninja, launched by Halfbrick in 2010 that became a popular sensation and hit billion downloads in five years, was partially contributed to by the local game development company, Caramel Tech Studio. However, Waqar Rana, product manager at Caramel Tech told us that many companies ‘… are not just services-based but also get into partnerships with foreign companies. Caramel Tech has always done more partnerships than services work. So, we charge less for development but get a greater share in the revenue of the games published.’ Though there are local publishers, like GenITeam, whose games have had 10 to 100 million downloads, most games that are produced locally are published and marketed by global publishing giants like Lion Studios in San Francisco where Babar Ahmed also serves as senior director strategy. He told Profit ‘why would game developers produce games for the local user only when American and European markets are worth billions of dollars?’ And this is a good thing. Because working with international companies and selling games to a global audience means Pakistan can become a hub for game development services and potentially tap into the $ 200 billion global market. Leading Pakistani companies like Mindstorm Studios and The Game Storm Studios have published close to 100 and 1000 plus games respectively, with more than a total of billion downloads garnered by each studio. This reach would be difficult to achieve if games were not being marketed at a global audience by international companies who have both the infrastructure and knowledge of game marketing, something that Pakistan lacks. Babar Ahmed told us that the digital advertising industry in Pakistan is not yet advanced enough to support in-game ad revenue models. According to Waqar Rana from Caramel Tech, ‘If you want to advertise a medium-sized game, you need at least $ 250,000 to get started. And usually for bigger games, their advertisement budget is millions of dollars. Typically, local companies don’t have this kind of money.’ However, he also added that there are some investors out there who are beginning

to work in this area. ConsoliAds, is a mobile ads management platform that recently launched its immersive ads service which is a major step for games and the developing virtual reality landscape. Imagine a racing game with a track for cars to race on. On the side of the tracks is a landscape consisting of tiers of seats or metro city skyscrapers. As in real life, the ads spaces along the tracks or on the high-rise buildings can be bought by advertisers to market their products within games. Developments like these depict advancement in Pakistan’s technological sphere, which can directly benefit the emerging game industry.

From ground zero to escape velocity

onsider the fact that games produced locally are mostly mobile gaming applications of the casual and hyper-casual game (HCG) variety. HCG is a trending market. This is because HCGs require less investment, in terms of capital, effort, and time, and bring fast returns. Meaning that for a small industry that is just preparing to take off and is short on investment, the HCGs are an ideal product. HCGs are typically mobile game applications that focus on simple gameplay mechanisms comprising a combination of tap and swipe interactions that result in repetitive actions in the game. Popular examples are Candy Crush Saga, where the user plays endless levels of matching same candies in certain patterns, and endless runner games like Subway Surfers, where the player is faced with an endlessly moving path outlaid with collectible tokens and obstacles that have to be avoided. The allure behind these games are that they are easily winnable and don’t require intense mental exercise or time commitment from the user. In comparison to larger-scale games, HCGs do not require the user to have special devices, nor do they have to specially take out the time to play these games. They can simply pull out their phones and open the game in their down-time, while riding the bus or even during official meetings. These games are typically free-to-play, hence, can easily accumulate downloads. Hyper-casual games are an apt starting point for new companies from where they can build their basics, gather investment, and move onto bigger projects. Babar Ahmed explained to Profit, ‘HCG took off in the past five years. It opened the door for anyone to come in as it makes money and is a good entry point into gaming because HCGs are easy to make.’ He further added, ‘However, since they are easy to make, a lot of low-quality games have begun to be produced and the market is now too

competitive. You need some studios to level up from HCG to move forward.’ He went on to describe that a problem with the local industry is that most companies are focused on ‘margin play’, which means they do not scale up. Companies need to aim for escape velocity, which is the point at which a business begins to grow exponentially. This is rare in the Pakistani game industry but according to Ahmed, the companies established since more than a decade are reaching this point. These are the ones developing their own products instead of just providing services. The issue is that there is a lack of creative education in Pakistan and not enough individuals being trained in game making. ‘Software developers cannot become game developers without specialised training. Game View Studios was successful until it tried to scale up to a thousand people and you can see how that went down. It was bought by a Japanese company for $ 30 million,’ said Babar Ahmed.

Raising a generation of game makers

amar Hasan of Epiphany games said, ‘Pakistan produces 20,000 IT graduates each year. None of them go towards game development. It is a very inclusive industry, where developers, artists, writers – even if you have studied anything, there’s a place for everyone.’ She added that the industry has ample opportunities for women as well which is one of the reasons, she decided to launch Epiphany Games under the larger accelerator project, Epiphany Labs, in 2020. ‘We were seeing that fintech was well on track. Gap existed in games.’ Similarly, Mindstorm Studios launched its M-LABS initiative which is a $ 500,000 investment towards providing the youth in Pakistan a platform to develop their game development skills. They offer fellowships, incubation programmes for independent developers, and are opening up their chapters across universities in Pakistan that bring exposure to and opportunities in game development closer to students. These companies and other gaming platforms host a variety of events like game jams, that are hackathon-modeled events where teams are provided the chance to produce games under the guidance of field experts. In January 2022, Epiphany Games hosted it’s second Developer’s Game Jam which was sponsored by Gamestorm Studios and Consoli Ads with prize money worth Rs 100,000 and $ 2700 in advertising rights for the top games. The game jam invited experts from leading local and foreign companies like the Turkey-based Mood Games, Tapnation, and the French video game publisher, Ketchapp.

The most important development is the opening up of degree programmes in universities. Between 2019 and 2021, at least four prominent universities launched 4-year Bachelor of Science (BS) programmes in game design and development. Air University in Islamabad, University of Management and Technology, and Insitute of Arts Culture (IAC) offer game design and production programmes that share course outlines with other computer science programmes until the fourth semester. After which, the degree branches off into more creative and game specific courses like 2D and 3D animation, game narrative, game design and artificial intelligence for game development. We talked to the production associate at Riphah University in Islamabad who told us that, ‘Riphah offers the only game degree that is arts-based, most of the other university programmes offer game development as an engineering degree.’ However the National Computing Education Accreditation Council does not recognise game development programmes as a computer science major, instead assigns it to the creative technologies domain. This is notable because game development is commonly thought of as an engineering degree but it’s just as much an arts degree. Game design majors are offered in art schools around the world. Many of the industry experts we spoke to complained about a lack of focus on creative skills in our education system, which are essential to game development. Each of the degree programmes have around 20 – 25 enrolled students, while UMT has around 40 students already enrolled and according to the university representatives the numbers rise every new academic year. The faculty include professionals with computer science expertise as well as game software trainers, designers, and animators. The program coordinator at IAC told us that game development degree programmes require specialised software and facilities. Apart from bachelor degrees, other universities like University of Central Punjab offer specialisations in game design and elective courses. Institutes dedicated to game development training such as the PixelArt Game Academy founded in 2019, see the potential in the industry and offer certification programmes in game development and design. Many platforms offer training in softwares such as Unity and Unreal Engine, which are leading game development softwares. The fast-paced growth of the game industry in numbers as well as advancing scope, alongside the opening up of educational opportunities in the field demonstrate a clear trend towards an expanding market. More awareness among investors and stakeholders might just be the only thing that the Pakistani game sector awaits. n

GAMING

Credit cards are treated with suspicion in Pakistan. But what does the average citizen need to know about holding (or not holding) plastic money By Ahtasam Ahmed

hsan knew he had messed up by overusing his credit card. He knew that he didn’t quite understand how the card worked, and that made it easy for him to keep swiping it whenever he needed without thinking much as to the consequences. He also knew that he had spent around Rs 1.5 lakh on the credit card and that eventually he would have to save the money up somehow and pay it back. Afterall, the bank that had issued the card had been calling and sending mail quite persistently. And while this knowledge was tucked somewhere in the back of his mind, what he did not expect was that one fine day

his doorbell would ring and there would be a collection agent on the other side of the door handing him a Rs 5 lakh bill and a dead-eyed warning to pay up - or else. The first-ever universal credit cards were introduced in the United States in the 1950s. And while plastic money blossomed and evolved over the course of the twentieth century, the first credit card was not introduced in Pakistan until as late as 2005. Nearly two decades later, only 0.76% of Pakistanis hold credit cards compared to 70% of Americans that hold at least one credit card. A large part of that has been both an inability to and an unwillingness to understand what these cards are, how they work, what benefits they bring you, and what trouble they can get you in. And other than the very real

danger of a credit card bill spiraling out of control, there is a lot else to know. Profit brings you the ins, outs, highs, and lows of holding (or not holding) a credit card in Pakistan.

How they work

he perception of this product varies in Pakistan. One section of society associates it with having a higher income, which means that these cards then become status symbols. Others see it as a trap laid by greedy banks to lure them into debt. The perceptions come from incidents that we hear around us, such as the anecdote we began with. The reality is somewhere in between. Credit cards can be a convenient financial tool when used responsibly, and als become a

crippling source of debt. Essentially, the card represents a short term loan. When a credit card is issued, the bank gives you a credit ‘limit’ which is the amount of money you can spend on the card to purchase items and pay bills. To understand this, think of a credit card as an allowance you are given at the start of the month that has to be paid off a certain amount of time after the end of the month. Essentially, say if you have a credit limit of Rs 250,000 that means you can make purchases for that amount for say one month. During that time, whenever you make a purchase it will not be cut from your bank deposits. At the end of the month, you will get a credit card bill. If the bill is, for example, Rs 150,000 that means you borrowed that much money from the bank to pay for things in that month. If you can pay off the bill within a defined ‘grace period’ no interest will be charged on the credit you used. However, if you are unable to pay off the amount you have used, the bank will start charging you interest on it. So, for example, let us again say that you have a credit limit of Rs 2.5 lakh. Imagine you spend Rs 1.5 lakh on this by the end of February and the bank sends you a bill for the month you have to pay by March 20th. You think you will wait for your salary and pay it off, but an unexpected expense pops up and you immediately have to pay Rs 1 lakh to deal with it. Now, you can only pay off Rs 50,000 of your Rs 1.5 lakh credit card bill since you don’t get your next salary until April. Suddenly, you have a credit card ‘balance’ of Rs 1 lakh. The bank will give you credit for Rs 1.5 lakh for the next month, but will also start charging you interest on the Rs 1 lakh that you have been unable to pay. The interest rates on cards are unusually high and can go up to as much as 40%. This can, of course, lead to a path down credit card debt. However, such stages are mostly reached when customers make bad choices and use the cards inefficiently, ending up paying higher fees and not fully maximising the benefits at their disposal.

How the bank makes money

roadly categorising, the banks earn on three fronts from credit cards. These are transaction fees charged to merchants, interest payments and service fees charged to cardholders. Merchant fees are charged to the businesses that are accepting the cards. Basically banks charge them on a per transaction basis as compensation for providing them with an additional method of payment acceptance. This fee isn’t of our concern as cardholders

50% of your disposable income needs to cover unavoidable expenses like EMIs, Rents, Utility Bills, Groceries etc. Then 30% needs to go for wants, I mean one has to have fun. Your dine outs, shoppings and other stuff needs to be in this category. Then we are left with the 20% amount that needs to be saved and invested for the future. There are a lot of budgeting apps available online, you can download them on your phone for keeping track aren’t being charged. However, what is of concern is the fact that credit cards are an expensive way to borrow and the banks really want you to opt for this channel. Fees charged on credit cards are also a very lucrative earning point for the issuer of the card and most customers are not even aware of the full extent of fees that they are subject to. The customers will be quite aware of their annual charge that ranges between Rs. 2000-5000. But the issuer profits from your obliviousness towards other fees. These include: n Cash Advance fee which is charged on withdrawal of cash through your card e.g. ATM withdrawal. The fees on each such transaction is around 3% of transaction value subject to a minimum fee of around Rs.1000. (Moreover, if you go overdue with your cash advance, you can face an interest rate as high as 40%) n Foreign currency transaction charges will also apply if you are paying in another currency either travelling abroad, to an online merchant abroad like Ali Express or paying fees to institutes like CFA, ACCA etc. n Over the Limit Fee are charged when you exceed your credit limit assigned at the issuance of the card. These can be as high as Rs. 1200-1400 per transaction. n Late Payment Fee, as the name suggests is basically the penalty for failing to pay a minimum amount by due date. These can vary, but are generally around Rs.1200 to Rs.1500.

How do they acquire customers?

o as we have an idea of the channels issuers can earn through, the next question is how are they luring in the customers? Basically, what banks

do is profile the customers and sell credit card products accordingly. Broadly speaking there are two profiles, Transactors and Revolvers. Transactors are those customers who pay off their bills in full and do not carry any balance. They use cards as money and are not interested in the credit offered. These customers usually don’t provide much avenues for the issuer to earn other than merchant transaction fees and annual card fee. For such customers, the banks usually market cards with high rewards and low annual fee or zero annual fee for a specified time period (usually the first year). The second type, Revolvers, are the most profitable for the issuers. This group uses credit cards as a form of borrowing by only paying the minimum bill instead of the total balance. This provides the issuer to earn a high rate of return at times double what it would normally charge for conventional loans. To entice this segment, what issuers do is that they offer introductory periods with interest free credit, but the catch here is the spending thresholds that you need to achieve before being eligible to earn that offer (For example, you might be offered a 0% interest rate for the first 12 months, subject to a spending of at least Rs.50000 in the first 3 months). Furthermore, these customers are made a victim of what is called an anchoring bias. So what happens is that if you see a minimum payment amount alongside your total bill, you are more likely to pay an amount closer to that rather than your whole bill and this will ultimately leave you with a debt. What is more interesting is the fact that over the years banks have reduced their minimum payments so that the gap between actual bill and minimum payments maximises leading to an increase in consumer debt. (Like it goes as low as the higher of 5% of outstanding balance or Rs. 500).

PERSONAL FINANCE

What if I buy a TV on credit?

eventually realise what has happened.

et’s take a simple example, assume that you have bought a TV for Rs.75,000 and have chosen to pay for it through a credit card. You aim to just pay off the monthly minimum amount (5%) for a year and then pay the total amount once you get that expected promotion at your job after 12 months. So your debt situation can be better explained through

Payment Payment Date No.

The dos and don’ts

he first rule is to use your credit card as money. Don’t overspend and take unnecessary credit. If possible, delay expenses that are avoidable rather than having them paid immediately and running with a credit. Your spending can only be managed if you budget for your expenses.

Payment Amount

Interest

total credit limit available on your card, use around 30% so that even if you fall behind your payments any month, the debt is manageable. Even if you aren’t accruing a lot of interest, there are other card fees you still need to look out for in order to save money. To avoid an unexpected charge, you should read the fine print contract and contact your credit card issuer for any clarifications. If you are too lazy to do that, at least obtain a credit card schedule of charges from your

Principal

Balance

Jan-22...................... 1................... PKR 3,750 .................... PKR 2,500 ..................... PKR 1,250 .................. PKR 73,750 Feb-22.................... 2................... PKR 3,688 ..................... PKR 2,458 ..................... PKR 1,229 .................. PKR 72,521 Mar-22....................3................... PKR 3,626 ..................... PKR 2,417 ..................... PKR 1,209 ................... PKR 71,312 Apr-22.................... 4................... PKR 3,566 ..................... PKR 2,377 ...................... PKR 1,189 .................. PKR 70,124 May-22....................5................... PKR 3,506 ..................... PKR 2,337 ...................... PKR 1,169 ................. PKR 68,955 Jun-22..................... 6................... PKR 3,448 ..................... PKR 2,299 ..................... PKR 1,149 ................. PKR 67,806 Jul-22.......................7................... PKR 3,390 ..................... PKR 2,260 ...................... PKR 1,130 ................. PKR 66,676 Aug-22....................8................... PKR 3,334 ..................... PKR 2,223 ....................... PKR 1,111 ................. PKR 65,564 Sep-22.................... 9................... PKR 3,278 ..................... PKR 2,185 ..................... PKR 1,093 ................. PKR 64,472 Oct-22...................10................... PKR 3,224 ..................... PKR 2,149 ..................... PKR 1,075 .................. PKR 63,397 Nov-22...................11.................... PKR 3,170 ...................... PKR 2,113 ..................... PKR 1,057 ................. PKR 62,340 Dec-22...................12..................... PKR 3,117 ..................... PKR 2,078 ..................... PKR 1,039 ................... PKR 61,301 Total........................................... PKR 41,096 ................... PKR 27,397 ................... PKR 13,699 the following table: Now what has happened is that by the end of the first year, you have paid Rs. 41,000 but you still owe your issuer Rs. 61,000, So actually you bought a Rs. 75,000 product for Rs. 102,000. Secondly, what the credit issuer does is that they offer you a lower limit initially and then gradually increases your limit over time. This in turn tricks the consumer to snatching up more credit and ultimately finding themselves in a bigger debt. Adding to these psychological tricks, the issuer racks up profits from additional services (as mentioned earlier) by printing out lengthy contracts and hiding these in those pages. Given the financial literacy of our country, it almost guarantees that the consumer will only come to know of the fee when they go through their card bill and see an alien amount being charged which initially they will assume to be a mistake but will

A popular way is to use the 50-30-20 rule. 50% of your disposable income needs to cover unavoidable expenses like EMIs, Rents, Utility Bills, Groceries etc. Then 30% needs to go for wants, I mean one has to have fun. Your dine outs, shoppings and other stuff needs to be in this category. Then we are left with the 20% amount that needs to be saved and invested for the future. There are a lot of budgeting apps available online, you can download them on your phone for keeping track. A habit to develop is to know when your card bill is due every month. Try to set a due date that is a few days after you receive your salary so that your bank account has enough to pay off your dues. An automatic payment can be set up which debits your bank account monthly with your card bill and that way you eliminate the chance of incurring late payment fees and subsequent, high interest charges. Also, don’t use the

banker and read the document to get a better understanding of the applicable fees. Lastly, choose the card yourself and don’t let the card choose you. For example, If you are a frequent traveller or have regular international transactions, you should opt for a card that charges the least Foreign Transaction Fees. So, before choosing a card, think about what are your spending patterns and which card would be the right match for you. There are online platforms like mawazna that can help you compare card features. Though it might seem that the banks are too smart and will always have the upper hand in the credit card game between you and them, however, a bit of research before opting for a card and attention to details can go a long way for your financial wellbeing. You can even turn the tables and use some hacks to pile up rewards and get some free stuff, but that’s a discussion for another time. n

PERSONAL FINANCE

By Ahtasam Ahmad

ver the past few years, Pakistan’s Telecom industry has shown extraordinary growth on the back of an increased demand for connectivity as businesses and consumers spend more and more time digitally. Particularly, after Covid-19 pandemic, the country’s IT sector has picked up which has further propelled the demand for telecom services. Profit sat down with Irfan Wahab, the CEO of Telenor, to discuss the issues, opportunities and developments of the telecom sector and Telenor. The quality of service provided by the Mobile Service Operators in Pakistan is not upto the global standards. It is something that is acknowledged by all stakeholders. There is a perception that the big multinationals are just sticking around because they have too much skin in the game. “To be honest, we’re (Telenor) very proud of being part of this journey of telecom revolution in Pakistan. One can see that between 2004-2011 the Telecom sector brought in billions of dollars of FDIs, at times around

60% of the total figure. As a result there was an infrastructure and ecosystem developed for the industry including the nurturing of suitable IT talent” says Irfan. “But we see much bigger Opportunities. Telecom, just like any other industry, is evolving and transforming. If we look at global research, it is evident that returns on invested capital are squeezed or are squeezing for the industry. Reason is the sector being a very capital intensive one. Every few years the technology changes and then companies have to invest in that in addition to investing in increasing the network and capacity. Therefore, the cost of doing business for us is very high” he added. He quoted the Murree snow blizzard incident as an example, saying that “When the catastrophe hit the city it resulted in us having to rush to restore our network as the power was cut off. Our people were actually carrying fuel to the mountaintop on foot, in their bags on their heads, basically walking through the snow to reach tower sites to make sure that service was restored.” He further elaborated saying “in a country where there are infrastructural problems like electricity, stability and security challenges, fuel issues, the cost of operation will inevitably be very high.

Therefore, to run a sustainable business, these issues need to be addressed. You cannot change the quality of service just by having the regulatory direction change. You need to really see how you create an investment friendly business environment. So, more companies can invest and because of (increased) competition, customers will automatically have more choices.” The capital intensive nature of the Telecommunication industry leads to a bona fide problem of resource duplication and inefficiencies which ultimately lead to lower returns on investment. A solution to this problem, quoted by many industry experts, is increased synergies. The sector should be sharing infrastructure like tower sites, so that the industry might be optimized. As per a GSMA report, Pakistan: progressing towards a fully fledged digital economy, Tower tenancy in the country is still significantly lower than the global average, with more than 60% of mobile operators’ towers within close proximity; operators should take advantage of the policy framework to share assets, which as per estimates could cut opex by 35–55%. Addressing this issue, Irfan said, “When we were building most of our sites back in 2004-2008 period, there were no tower sharing

Source: Pakistan Telecommunication Authority companies. Therefore, we had to build our own infrastructure but now we are sharing and we are sharing quite substantial numbers. However, I suggest we should move on from passive sharing to more active sharing like in other countries where regulators and the policymakers are moved to the point that they allow for electronics and frequencies to be shared. Because that’s where the biggest synergy lies.” “Unfortunately, in our country, we’re still waiting for a framework that was promised more than five years ago in the Policy.” He added However, he also acknowledged the shortcomings from the industry’s side, “Looking back, the industry is also responsible. Initially when we were creating the infrastructure, there was not much sharing but now we need to focus, as all of us are responsible for shaping up the next decade of digital Pakistan.” As per PACRA’s Telecommunication sector case study, 2021, Pakistan has a relatively low Average Revenue Per User (ARPU) and predominantly a prepaid subscription market where subscribers enjoy the flexibility of altering their usage patterns in response to any price fluctuations introduced by operators. The ARPU is on a declining trend over the years as the customers adjust for inflationary pressures, while the taxation on the industry has also increased partly because of the government’s IMF ambitions. We asked Telenor’s Head honcho that amongst all the growing pressures, is the Telecommunication business in general and Mobile services business in particular, a sustainable venture? “Let’s be very clear, we want more predictability on the direction of taxes and how they’re evolved, and we want a level playing field in regards to taxes.

The taxes were reduced in budget 2021 and there was a direction given that it would reduce further in 2022. But when we entered the new year, the regime was revised with increased taxation for the customers and that changed the pattern going forward which impacts business predictability. Secondly, if we consider the sustainability of business, our key cost elements are in U.S. dollars which is insane for a country like ours. It made sense back in 2004 when we entered into the market as an international investor, but now we are a player here. We are earning here. Our customers are paying us in rupees. You cannot pay your annual license fees and your spectrum fees in dollars, specially, in an environment, where the dollar has rapidly devalued. All our equipment which we need to procure has to come from international markets in dollars. So if we could buy, say, ten base stations earlier, now we can only afford eight because of that.” The latest spectrum auction held in September 2021 failed badly as only one player participated (State owned Ufone). The government which aimed to raise $1 Billion from the auction only managed to rack in $279 Million. The industry cited pricing as a primary reason for not participating in the auction actively. Also, the market players were vocal about lack of inclusivity in the process of decision making by the regulator. “I firmly believe that this kind of thing should be discussed. There has to be a consultative process. Aklay Kul koi bhi nhi ho sakta. So we need to engage with each other, hear each other’s perspectives and find out a converging point based on the ground realities. One of the roles of the regulator is also to protect the investors and to make sure they have a decent return.

To ensure sustainability of the businesses. So I hope we hear each other out, otherwise the results won’t be much different.” Irfan said. Profit in its earlier addition covered the problem of lack of infrastructure to grow broadband penetration both mobile and fixed. We also highlighted the lack of a policy framework on the matter. Commenting on the Broadband Policy, Ifran said, “Our expectation is that everything cannot be accepted. But at least, the perspective of the industry should be heard and where possible, rectifications should be made because we all have a common objective. In the case of the concerned policy (Draft Broadband Policy 2021), even objectives weren’t defined. I firmly believe that policy frameworks are the starting point of bringing in investments to the industry and if that isn’t established properly, then what would be the roadmap for the industry going forward?” He further added, “So I hope that sanity prevails, and again an industry wide engagement should take place.” Last year, in December, a delegation of the US-based global satellite broadband provider, Starlink, had called on the Minister of IT & Telecom to discuss the policy and operation model. If such companies open shop in Pakistan, the existing Telecom market will be disrupted as a big chunk of their Mobile Broadband customers will shift to the presumably better service. So are players like Telenor ready for this challenge? “I believe in competition. I believe in choices for customers, we welcome any other intervention which helps us as a country and as a society. More options means an improvement in services. I personally welcome that increased competition. It has to make sense obviously for

TELECOMMUNICATIONS

the country and for our consumers so I’ll just say that.” Irfan replied. Rumors were making rounds that Telenor is looking to exit the market which were later denied by the company. However, such rumors are not new for the market as the experts have regularly emphasised that the Industry, as of now, is crowded and some players will have to leave or merge eventually. “I will only say mergers and consolidations are a regular feature of any industry and Telecom is no different. There’s a huge degree of mergers and consolidation which has happened in every major market. When I was working in the US, there were 15-16 GSM operators and now there are only three. Also, look at our neighboring countries like China, a market which has so many resources. They are adamant on not rolling out more than 2 networks on 5G. So you need scale in this industry and that’s why I think consolidation is important for any healthy market.” Irfan said. He further added, “If a country like the US agrees on three operators and they feel that three is the right size or even if you look at much larger markets, they have settled with a number less than four, Why should Pakistan be an exception?” In the last few years, Telenor Microfinance Bank, which is also the force behind Easypaisa , has made losses mainly attributed to provisions set aside for credit irregularities which also include fraud. So what has the Institution learned from this? “I think, we as any business need to really acknowledge the ground realities. Ethics and code of conduct are fundamental for businesses and individuals and we need to be aware of that. However, this is all behind us. Now, it’s (Telenor Bank) position is much healthier. So we’re able to actually address some of the challenges which we see coming.” Irfan said. “Of course we take the learning of all our experiences. So there’s much better controls, much tighter controls, background checks, etc which are used both at the front end as well as the back end to make sure that those things don’t happen at that magnitude again.” He added. When the Pandemic started, the State Bank issued a circular instructing Banks to abolish IBFT charges to promote digital payments. This however, was one of the main earning points for Mobile Financial Service Operators like EasyPaisa. Coupled with the market opening up to FinTechs and Commercial Banks venturing into digital banking space, EasyPaisa and similar services are now challenged for the dominance of Pakistan’s Mobile Banking Market. Declining income of Telenor Bank from Branchless Banking (EasyPaisa) “My point is sustainability of any business is important. In the case of Easypaisa there is a

Sources: Pakistan Telecommunication Authority, PACRA’s Telecommunication sector case study, 2021 different regulator. Roughly 30% of people have conventional bank accounts. These people can transfer money from their bank account and that should be free. That should be frictionless, that’s OK. But on the other side there are 70% of Pakistanis who don’t have access to alternate bank accounts. Their choice is only to go to the Mobile financial service retailers out there and deposit money (cash in). The retailer has to manage that cash, deal with that cash and there’s a cost associated with it. That means the retailer will want some incentive for the service and that incentive we should be allowed to charge. We have to build that long tail of retailers, we have to manage cash, there’s a cost of servicing, there’s a cost of cash handling.” Irfan commented. He further added, “So there we feel that just abolishing IBFT charges altogether perhaps is not a long term sustainable strategy, we need to really understand the long term sustainability of the entire sector holistically.” “The market opening up for competition, at this stage is a good thing, again we welcome the competition. We feel that the market size today is still very limited. More players are investing in building the use cases. Creating awareness will only help because the sector has a long way to go. As more players enter the market with the introduction of additional banking licenses, whether it’s EMI license, whether it’s Raast as a super app, I think these are all good steps because they will help us build a more financially inclusive society. As such, we still have a long time to go in this phase and then over time, obviously we will see if there’s a need for any consolidation.” So we asked Irfan that if the market is such a lucrative one, then why is Telenor looking to sell its stake in the Telenor Bank?

“These are two different things. We believe that there’s a big market size. There’s a big opportunity and then comes our own strategy. Telenor itself is a telecom player. When we came to Pakistan we saw an opportunity to build this fantastic brand which is a household name. But then we saw a lot of synergies with other telecoms. Now we want to focus more on our core business, because we see so many opportunities there. However, it doesn’t mean that there are no new opportunities in the mobile financial services market, this is more of our own decision or a strategy driven decision.” He answered. So what was the thought behind entering the mobile financial services market in the first place, given that other market players were reluctant to partner with Tameer bank’s (former name of Telenor Bank) idea of EasyPaisa. “As I mentioned earlier, in our market, in our own breeding space, we need to see where other opportunities are. So this particular opportunity, no one in Europe or America could see as majority there was banked. But we saw that at that time (2008-9) about 85% of Pakistan’s population was unbanked. We had some global examples like Safaricom in Africa who were doing something similar and we asked ourselves a question: why can’t we replicate the same model or a similar model in Pakistan? And so that’s how the EasyPaisa journey started to it now being a category product” The innovation by the big players of the Telecommunication Industry has stagnated a bit given that new startups are penetrating the market with novel ideas and technologies. This might be indicative of a lack of motivation from the side of some large multinationals to step-up their game. However, Irfan disagreed with this

Declining income of Telenor Bank from Branchless Banking (EasyPaisa) statement. He said, “So I will give a couple of examples. Our product Kushal Zamidar is one example. We have digitized the whole experience for farmers with the (easypaisa) application. We are expanding more and more in the (agriculture) sector, like the service of video chat with the agriculture expert is also made available to a farmer. Recently, Telenor launched Pakistan’s first (at least in the telco space) ESports platform. We feel that’s a huge segment, especially after Covid It became even more evident and Global forecasts also support these assumptions.” He further added, “In technology space, we are the first one to have everything internally, our own network which is virtualized. This has given us huge efficiencies. It’s all the cloud and the data you’re managing from Pakistan. We are the first Company actually in Pakistan to do that. Similarly we are offering services in IoT and cloud cover, based out of Connexion, which is our global company out of Sweden and one of the largest IoT platforms. In Pakistan, we have deployed tens of thousands IoT solutions primarily in energy management, vehicle tracking and similar solutions. We work with a lot of banks, have been working with energy companies and FMCG merchants like Nestle, Unilever etc. In the IoT space, our B2B solutions are cloud based and we are selling those cloud solutions to our customers as well. So as the market evolves, you will see more and more shouting around it as well. Pakistan has seen an upsurge in digital

and data driven crimes in recent years. Not only has the country gone through multiple instances of ATM fraud and skimming scams, the proliferation of personal data theft, leakage and other such cybercrimes against individuals has gone unchecked. This happens because organisations collect and tabulate personal data of their consumers without adequate provisions for information security, and when their hit-and-miss security is breached, that personal data is leaked. “I totally agree, won’t comment on the industry, but I can tell you about what we are doing. So now there are two aspects, one is information security. Obviously, we need to acknowledge that as the digital footprint expands so will our exposure to this risk. But we have made huge investments in making sure that we have state of the art information security architecture and systems monitoring. Then there are some audit service learning as well which can solve some problems, but it’s a journey. It doesn’t mean that we can assure 100% protection, as threats are also evolving every day, so that means that we need to be on our toes.” said Irfan. He further added, “When it comes to privacy. Yes, there are some discussions happening on the draft of the privacy policy. We’ve adopted a higher moral ground when it comes to the privacy framework. We will always be above the minimum local regulation because we are a global company and we believe in data privacy. While we are also working with the relevant policymakers and regulators.

There are some discussions about data protection policy, but I cannot comment because the ministry is the right forum to check with. But there are some discussions for sure.” Where do you see the industry as a whole and Telenor going forward? “I remain very positive and optimistic about the opportunities. I firmly believe that telecom is a sector of sectors. I firmly believe that if we have to progress as a country. Our success actually relies on how successfully we are able to evolve as a Telecoms. We have done it one in terms of FDI. We are ready to take the responsibility again, but what all we are asking is some support in terms of forward looking policy, progressive policy and predictability. I would also like to make a point that in order to evolve as a digital economy, more spectrum should be made available. Why have we only deployed one-fourth of the spectrum compared to Europe or Saudi Arabia or New Zealand? Each country has a similar number of bandwidth airwaves. Why are we saving this? I mean, this is not contributing to the national exchequer. It’s just like a melting ice business. We need to fix some of these things, work together and then I remain very positive that we will be the foundation of economic growth which will revolve around the knowledge economy. The digital economy, it’s a proven thing, will generate most of the wealth in the coming decades. ICT sector exports, young freelancers, startups all have to rely on this and we acknowledge the added responsibility and are committed to that.” n

TELECOMMUNICATIONS

AreYouShiza.io raises $23 million dollars for app that determines whether an individual Shiza

ew Karachi-based startup AreYouShiza.io has raised an impressive $23 million dollars for an app that determines whether any individual goes by the name Shiza. “It’s a simple, basic problem and we’re a simple, basic app,” said founder Zia Haider. “Of late, there has been much media coverage about how sometimes people can get it wrong.” “Our app helps to change that,” he said. “And we do it in a really simple manner,” he said, referring to his app’s award-winning simple User Interface,

which is just a screen that has the text, “Are you Shiza?” written on it and “Yes” and “No” buttons underneath. Users simple give their cellphones to individuals whose Shizahood they want to ascertain, who then fill out the immensely simple form. “Single screen app, just like Google.com,” said a beaming CTO Hajira Khan. “Yes, some people are asking why there was a need for a tech disrupt here and why people couldn’t just ask whether someone was Shiza but, as some recently unearthed footage shows, some people are not able to do that.”

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