Profit E-Magazine Issue 244

CON TENTS

How and why the census has far reaching implications on policy making and politics itself

16

Grow your company size by 3 to 6 times in just months. At least two Pakistani companies have done this & you can too. Here is how

20

Is this economic crunch ready-made for the Sportage to flex on the competition?

24

Changing how Pakistanis commute and think about commuting Ahmad Iqbal

29

Pakistan’s emerging position in the global gig economy

Note from the editorial board

Record inflation and the journey there

April saw more of the punishing inflation characteristic the last couple of years, with a record 36. percent rise year-on-year. The month’s increase was 2.4 percent, and the year-on-year inflation last month was 36 percent, marking the 11th month since last June that inflation was above 20 percent. The economy is not heading into hyperinflation yet. Hyperinflation is defined as over 50 percent a month. That works out at several quadrillion times a year. That is then prices change on an hourly or daily basis, not weekly or monthly.

What has made this inflation so unbearable is that it is accompanied by low growth. An indication of this came in the monthly trade figures, which showed that the trade deficit in the first nine months of 2022-2023 had shrunk 39.62 percent from $39.3 billion to $26.7 billion. This does provide some relief to economic managers worried about where to make the next payment, but it has not been achieved because of some mighty surge in exports, which have indeed shrunk 11.2 percent from $26.2 billion to $23.3 billion. Imports declined 28.4 percent from $65.5 billion to $26.9 billion. The trade volume thus shrank from $91.7 billion to $50.2 billion.

That decline in commercial activity implies a severe contraction, especially in an economy where export sales lead growth. Not only are households losing their sources of income, as breadwinners become jobless, but that bread goes out of reach. The inflation news was bad enough, but the hike was on the basis of high food inflation. Not only do households have to handle loss of income, but pay more to put food on the table.

One of the main difficulties is that the path out of this lies in a massive expansion of exports, which have

shrunk. That is not going to happen. The import bill can only fall so far, with the decline in the global oil price likely to translate into benefits for Pakistan. However, a disturbing fact has been the failure of consecutive interest rate hikes to tame inflation. They have probably led to contraction, and thus stagflation. The experience of half a century ago shows that interest rate hikes to tame inflation may well have caused the stagflation characteristic of the era. Interest rate hikes are always bad for business, and are a really bad idea if they don’t work either to tame inflation. The IMF wants to suggest them. The government must not fall for this, as it reflects a lack of solutions.

What it must also do is reflect. There is much that is wrong with Pakistan’s economy, and little can be achieved in the short-term by going over where the rot started over the past 75 years. But it is worth looking at where these more than seven-decades as a nation state have brought us, if not why they have brought us to this point.

Pakistan’s Human Development Index value for 2021 is 0.544— which puts the country in the Low human development category—positioning it at 161 out of 191 countries and territories. Between 1990 and 2021, Pakistan’s HDI value changed from 0.400 to 0.544, a change of 36.0 percent. The great irony of this, of course, is the fact that this index on which Pakistan finds itself slipping fast was in fact developed by a Pakistani — Dr Mahbub ul Haq, who created HDI in 1990. The index was then used to measure the development of countries by the United Nations Development Program (UNDP).

Meanwhile, the Gender Development Index (GDI), which measures gender gaps in achievements in

Little can be achieved from fixating on when the rot started to set in. What is needed is a focus on where we stand and what can now be done

three basic dimensions of human development: health, education, and standard of living, shows a massive gap. The 2021 female HDI value for Pakistan is 0.471 in contrast with 0.582 for males, resulting in a GDI value of 0.810, placing it into Group 5, making it part of an unenviable group of countries that includes Ethiopia, South Sudan, and Afghanistan. Meanwhile on the Gender Inequality Index, Pakistan ranks 135 out of 170 countries.

In 2021, the World Justice Project’s Rule of Law Index ranked Pakistan 130 out of 139 countries. Pakistan ranked second-last in South Asian countries behind the likes of Nepal, Sri Lanka, India, and Bangladesh. Only Afghanistan was ranked lower. In particular, the report showed Pakistan doing badly in the areas of corruption, fundamental rights, order and security and regulatory enforcement.

Just this year, Pakistan fell by 12 places on an index of media freedom. Pakistan was 145th on the 2021 index and fell to 157th on a list of 180 countries in 2022. The report noted that despite changes in political power, “a recurring theme is apparent: political parties in opposition support press freedom but are first to restrict it when in power”. The report also claimed that the “coverage of military and intelligence agency interference in politics has become off limits for journalists”. On the economic front, matters have not been much better.

None of the indicators paint a pretty picture. Human development in Pakistan has taken beating after beating. Political turmoil has left the country without any stable government, making the government of Pakistan a dodgy business partner. Consistent security failures and the inability to protect our own citizens means that the possible potential of Pakistan as a tourist destination, something other South Asian countries like Malaysia, Thailand, Vietnam, and Indonesia have done successfully, has been squandered.

And on top of all of this, Pakistan now faces the major crisis of climate change — which is perhaps the single most relevant and dangerous threat to our national well-being. According to the Center for Global Development, developed countries are responsible for 79% of historical carbon emissions. Yet studies have shown that residents in least developed countries have 10 times more chances of being affected by these climate disasters than those in wealthy countries. Further, critical views have it that it would take over a 100 years for lower income countries to attain the resiliency of developed countries. Unfortunately, the Global South is surrounded by a myriad of socio-economic and environmental factors limiting their fight against the climate crisis.

This year has seen Pakistan receive a bumper crop of wheat. While this is a cause for immediate happiness, we must also face the sobering reality that this year has seen an excess of rains and cooler temperatures that have come from climate change. While we are reaping the benefits for now, there is no telling where weather patterns will take us this monsoon season. Far from being prepared for such events, Pakistan is far from out of the crisis caused by the 2022 floods.

The sheer immovable force of climate change was painfully displayed last year. There was a gargantuan increase in the amount of monsoon rainfall that Sindh and Balochistan have seen this year. The two provinces saw the highest amount of water fall from the skies in living memory, recording 522 and 469 per cent more than the normal downpour. All in all, according to the latest report of the Post-Disaster Needs Assessment (PDNA), Pakistan needs at least $16.3 billion for post-flood rehabilitation and reconstruction. The PDNA report, released by the representatives of the government and the international development institutions, calculated the cost of floods at $30.1 billion – $14.9 billion in damages and $15.2 billion in losses.

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By: Bakht Noor

Every five years all over the country federal and provincial governments with the help of police, military personnel and other government functionaries band together to undertake a massive exercise: counting how many people there are in the country and where they live.

This constitutionally mandated activity determines some of the most important elements of our Republic. It determines the delimitation for federal and provincial legislatures as well as providing important and useful data that is used across various levels of government to formulate policy and aids an even wider variety of research in the private sector.

Yet almost every time this exercise takes place, it is mired in controversy and bad-blood. Profit sets out to explore what this census is, how it is conducted, and what the issues surrounding it are.

Let’s start with the basic question, what is a census?

“Acensus is a survey of all citizens of the country in order to accurately enumerate the population. ” explains Dr. Ali Hasanain, Professor of Economics at the Lahore University of Management Sciences (LUMS)

This brings us to the next question. Why on earth would we conduct the painstaking task of recording data of the whole population?

The answer is fairly straightforward. “The census is intended to improve the accuracy with which we understand who lives where. A key objective of this is being able to determine how many eligible voters live in each region of the country.” Dr. Hasanain elucidates.

“Theoretically, we should already have perfect registration of births and deaths. After that, it’s a trivial calculation to determine who is currently an eligible voter. In devel-

oped countries, where records of births and deaths are very carefully maintained and updated, administrative databases are increasingly relied on for the census exercise” adds Hasanain. “Obviously no country has a perfect record, but while NADRA’s records are generally well-regarded, our system remains considerably weaker than developed countries’, as many people lack CNICs. Therefore, the census exercise remains important.”

The Research Methodology

That being said, the research methodology of conducting census surveys is generally the same across the world, as a census basically needs to remunerate every single individual that’s residing in a country.

“The only thing different for the census this time around in Pakistan is that it’s being conducted digitally. The tablets for remuneration and data are being collected in real time,” said Dr. Umair Javed, a professor of Sociology and Political Science at LUMS.

So, how does digital data collection work?

“Data is collected in a tablet, which then transfers the data to the census office. Data is tabulated there and consequently, the results come out quickly,” explained Dr. Javed.

With the new digital system, there are questions about whether or not the officials are trained to use tablets.

“There are some slippages there, but the greater issue of census recording in Pakistan has been either under-counting or over-counting in particular areas for political purposes,” concluded Dr. Javed.

There is another positive aspect about the census being conducted this year. Dr. Muhammad Saleem, an economist, shared a personal example to demonstrate this.

“I come from Swabi but am presently living in Islamabad. If you are living in a city for 6 months or longer, you are counted as its resident under this census. Figures haven’t been released yet but you’ll notice a higher population of Islamabad in the latest census

results. I personally know many people who, though based in Islamabad, were counted as residents of their towns and villages according to the 2017 census. The research methodology of the new census seems more accurate”.

Other problems with the census

There can be serious logistical issues as well in conducting the census, according to Dr. Javed. “Sometimes, it’s genuinely hard to count far-flung populations. People are often living in logistically remote areas. This has historically been a problem in both the North West province (ex FATA region) and Balochistan. That’s why conventionally, people consider census estimates in Pakistan to be about 90% of what the actual population might be.”

There is another drawback too.

“The time frame to complete the census was announced but the deadline has been extended 3-4 times now. The Pakistan Bureau of Statistics (PBS) should have taken the provinces on board and collaborated with them to complete this census. There is a probability that they might have missed this step, which is why extensions and reverifications are continuously happening. This should not have been the case,” informed Dr. Saleem.

The Relationship between census and elections

According to Dr. Hasanain, the census helps the country track births and deaths. Typically when people die, adequate records of their deaths are not made.

“A database of who is a potential voter is going to have inclusion and exclusion errors,” Dr. Hasanain elaborated.

An inclusion error is when someone has been included as an active voter by mistake. This usually happens in circumstances where someone has passed away but the database has not been updated and he or she is still registered as a voter. An exclusion error, on the other hand, is when someone of eligible voting age is not registered as a voter.

“Errors occur everywhere. It is the degree to which the national database is erroneous that the country needs to control.” Dr. Hasanain asserted.

On a purely apolitical level, the purpose of the census is to make data corrections. However censuses are typically highly politically salient and people often resort to strategic behavior. You try to exclude people who are unlikely to vote for you and include

“The time frame to complete the census was announced but the deadline has been extended 3-4 times now. The Pakistan Bureau of Statistics (PBS) should have taken the provinces on board and collaborated with them to complete this census. This is causing otherwise avoidable delays”

Dr. Muhammad Saleem, Economist

people who are more likely to vote for you.

“If you have access to someone’s CNIC, you can resort to ballot stuffing which pushes fake votes into the system. A CNIC number is required for this to prevent people from cross-checking whether voters’ CNICs are fake or authentic. Election fraud becomes relatively convenient when the CNIC is authentic because it is presently hard to verify at scale whether the thumb print is that of the actual CNIC holder,” he detailed.

“If you have the CNICs of a few thousand dead persons, you will assign some

people to continue imprinting their thumbs and register fake votes, if you’ve captured the polling booth. This is one way in which election rigging happens. You make sure that you’re not excluding people who should have been removed from the list of registered voters by virtue of their death.”

This practice can acquire other modulations as well. For example, let’s assume that political party X is not popular amongst the young population as opposed to party Y, which presents itself as a youth oriented party. Party X will therefore try to prevent the

What is delimitation and how is it done?

One of the key functions of any census, particularly in a parliamentary democracy, is the allocation of halqas’ or constituencies. These are the basic units that make up the patterns of any republic that is governed by the will of its elected representatives.

The goal of delimitation, or halqa-bandi, is to divide up the country into equal parts by number of people. So, each of these parts is an area, that is called a ‘constituency’, which will have, on average, an equal number of people residing within it.

By rule, the delimitation process takes each district as a territorial unit and the demarcation of constituencies is begun from the northern end of each district. After the ECP releases provisional delimitation maps, the public has a chance to make objections and propose revisions before the delimitation is finalised.

The number of people per constituency should be on average equal for all 272 constituencies, with allowance for 10% variance. Meaning that every district can have 10% more or less population than the average number. During the last delimitation process, which was done right before the 2018 general elections, the average population per constituency was calculated at 779,886 based on the 2017 census data.

Each constituency is represented by a seat in the National Assembly (NA). The equal number of people per constituency means that each seat in the assembly holds the same weightage of representation. So each member of the NA that is directly elected has had the chance to be chosen by, on average, the same number of people, so that every citizen’s vote has equal power.

Reading this, you may wonder: how will the proposed overseas voters figure into this. But that and the fate of electronic voting machines is yet to be decided and the ECP itself cannot predict the future.Delimitation is done separately for general and provincial elections. For the purpose of this story, we’ll focus on general elections – the round of elections that determines who sits in the country’s National Assembly.

There are a total of 272 seats in the NA for which members are directly elected through elections held in each constituency. So, the codes NA-256, NA-34, that is different for your voting station versus your friend’s, who is residing in another district or city, is actually the number of the National Assembly seat that will represent your constituency. In this way, you get to directly vote for who sits in one out of 272 seats in the NA. The total number of seats in the assembly is actually 342 when the 70 reserved seats for women and minorities are added. However, due to the merger of FATA into KP, the seats for directly elected members has reduced to 266. Hence, the need for a new delimitation.

young demographic from voting by making it harder for new voters to register.

This increasingly happened in Karachi in the 2018 general election. “Residents are often not counted as part of the population, and enumerators are told to stay away due to political reasons,” said Dr. Javed.

An additional concern has been raised this time.

The population in Balochistan has increased by 60% in the inter-census period, which is between 2017 and 2022. “This can mean two things: Either the 2017 census horribly undercounted the population in Balochistan or there has been tampering with the census results this year- ostensibly for political purposes,” highlighted Dr. Javed.

The census has concrete implications for how the national assembly seats are allocated in Pakistan. With the current count, Balochistan is attempting to acquire seven more seats in the national assembly. This substantiates that there are clear implications insofar as elections and political outcomes are concerned.

“A census is like any data collection exercise, and data is important for any policy making.The census holds data pertaining to housing, education, literacy and access to education. It can be used in different ways to create informed policy. The most immediate impact on the political domain though, as it’s directly linked to how the distribution of the national assembly constituency takes place between the provinces,” emphasised Dr. Javed.

For example, the number of seats in the parliament is now fixed at 266. This used to be 272, until FATA lost 6 seats. These 266 seats now have to be divided amongst provinces based on the number of population housed within each province. With the results coming in, Punjab stands to lose 7 seats from its total with one seat going to Sindh and 6 to Balochistan. The political implications of the census are therefore more overt.

There is yet another important political implication of the census. According to Dr.

The only thing different for the census this time around in Pakistan is that it’s being conducted digitally. The tablets for remuneration and data are being collected in real time

Dr. Umair Javed, Professor of Sociology and Political Science at LUMS

Javed, once a census is released and its results gratified by the Council of Common Interests, the election commission of pakistan is bound under the constitution to carry out delimitations under census results.

“This might have implications on when elections can be held and if they can be held on time,” summed up Dr. Javed.

Economic relevance of census

The census has profound economic implications. According to Dr. Javed, having useful data that covers the entire population is central to how economic and social policy making is done in the country.

The most substantive economic relevance of the census is in terms of the National Finance Commission Award (NFC), according to Dr. Saleem. The NFC award was enacted in 1951 to regulate financial imbalances and manage financial resources between the center and the four provinces.

“The funds for MNAs and senators are contingent on the NFC award,” said Dr. Saleem. “The quota for government jobs is also assessed on the basis of population numbers.” All of this stresses the importance of census data.

How is the NFC share for each province determined?

NFC takes into account several key factors: the population of each province, its tax and fiscal effort/revenue, poverty/ income-distance, area/inverse population density, demographic performance, and forest and ecology.

In Pakistan, the NFC share for each province is predominantly measured in terms of the population number based within that province. In fact, population number carries 82% weightage in the NFC award.

“When the population of one province grows more than other provinces, its share in the horizontal distribution of resources under the NFC also increases,” said Dr. Saleem. This means that provinces have an incentive to overcount their populations in order to have a

greater claim on the NFC award. This happens to be the most profound problem with the NFC award in Pakistan. “There are other federation systems in the world. To reduce intra province disparities, the NFC share is mostly based on the relative income distance or poverty between provinces,” added Dr. Saleem.

In India for example, 45% of the NFC award is based on poverty/income distance and only 15% on population. In contrast, in Pakistan only 10.3% of the NFC award is based on poverty/income distance while 82% on population. This means that an overwhelming share of the NFC award in India is distributed according to the relative poverty of each province.

The situation in Pakistan was even more abysmal prior to 2010. Dr. Saleem provided some historical context, “until 2010, the resources were distributed amongst provinces solely on the basis of their population numbers. Finally, the multiple indicator NFC award was introduced which took into account a plethora of factors such as relative poverty, population density, revenue generation, and so on and so forth. This explains why the population majority province of Punjab has historically been recipient to most of the resources. Hence, Punjab has experienced more development while the remaining provinces are relatively poorer.”

Now even though a multiple indicator is in place for deriving the NFC share, the 82% weightage on population is still inexplicable and sort of bizarre.

How can the NFC award be made non-controversial in Pakistan?

According to Dr. Saleem, there are two solutions to this problem.

“Firstly, there should be more effective devolution of power. Provincial autonomy should be increased- financial, administrative, in whichever form. The 18th amendment of our constitution guarantees this. However, according to the World Bank report released last month, devolution is not effectively being implemented. Provinces have only received one-third of the autonomy that they were supposed to receive,” delineated Dr. Saleem.

“The second solution is to reduce the population weightage within the NFC award,” he adds. “We should increase the weightage of other indicators, like India for example. Other factors can also be considered. For example, these days Punjab is progressing in terms of population control. We can incentivise provinces to make efforts to control their population by increasing their NFC share. This will lead to competition amongst provinces for population control.”

Dr. Saleem also had an intriguing anecdote to share with regards to this.

When the census occurred in 2017, preliminary results were announced in 2018. They depicted an alarming surge in population compared to the previous census that had been held in 2018. There was a lot of protest and media outrage against the dramatic population increase, and comparisons were drawn with India and Bangladesh that had taken decisive measures to control population growth.

One person was particularly appalled by the result. Saqib Nisar, the Supreme Court Chief Justice at the time undertook suo moto action to probe into the matter. He construed this as a human rights issue, summoned governments of the four provinces and discussed strategies.Stakeholder suggestions from both the civil society and government were garnered. As a result of the ongoing conversations, a Federal Task Force was created in 2018 for the purpose of population control.

The Federal Task Force created a fund in which PKR 10 billion was deposited. The provinces were allocated funds to control their populations. However, the plan backfired terribly.

“You see, the provinces are not stupid. Their NFC share is dependent on the amount of population they have. You’re giving them funds without offering any real incentives to control the population. The provinces fear that their NFC share will decrease if their relative populations stagger in growth. Hence, they acquire the funds without taking any meaningful action,” concluded Dr. Saleem. n

The census is intended to improve the accuracy with which we understand who lives where. A key objective of this is being able to determine how many eligible voters live in each region of the country

Dr. Ali Hasanain, Professor of Economics at LUMS

By @2paisay & Mariam Umar

Step 1: [This step is only applicable to Development Finance Institutions (DFIs) and other non-banking financial institutions (NBFIs) that can accept deposits,so move directly to step 2 if you are a normal business]

Get commercial banks and money market funds (mutual fund companies that invest most of their money in government bonds, but also keep some of it in cash) to either deposit their cash holdings or place money (Letter of Placement, Certificates of Deposits) with you.

Step 2: Use the funds received in Step 1 (in case of NBFI/DFI) or any excess funds that are already available with the company (in case of a non-financial corporate) to purchase units of money market funds or short-term government securities i.e. T Bills. You could also buy long term government securities i.e., PIBs s. Just make sure that PIBs are floaters, i.e if interest rates increase, your return should also increase.

Step 3: Now pledge your units of money market fund or the government securities with commercial banks to borrow money against these. Banks will happily lend you at very low rates as this lending is secured by the two of the most liquid collaterals in the country i.e.

1. Highly marketable and credit risk free Tbills and PIBs issued by Government of Pakistan and

2. Money Market Funds that mainly invest in aforementioned TBills and PIBs.

But if you have a DFI license, go to Step 3b as it offers even cheaper loans.

Step 3b: Use the Government of Pakistan securities to borrow from the SBP directly through a repo (recently made available to DFIs only). The rates offered by SBP for these loans are almost always lower than the rates charged by commercial banks. .

Plan such that the tenor of your borrowings (whether through commercial banks or SBP) is longer than the duration of your investments.

Step 4: Now use this newly borrowed money to buy more government securities (or units of money market funds).

Step 5: Go back to Step 3

Step 1 and Step 2 are there just to kickstart the process. The exponential growth comes from continuously cycling through steps 3 to 5 i.e. buy-pledge-borrow. U Microfinance Bank (Ubank) has been able to double the size of its balance sheet in a year, and it has been successfully doing this for the last few years, while Pak Kuwait Investment Company (Pak-Kuwait), Pakistan’s largest DFI has been able to increase it by 6 fold in around 9 months by just cycling through steps 3 to 5.

On each position, you make a very very small profit. However, if you can build a very large position like UBank or Pak-Kuwait by repeatedly cycling through steps 3 to 5, the size of your profit may become meaningful.

FAQs

Question 1: In light of developments in the US banking sector wherein banks have been collapsing on account of mismatch between assets and liabilities, isn't this a risky position?

Answer: The US banks took positions in long-dated fixed-rate mortgage securities which can become illiquid or accrue valuation losses in a rising interest rate environment. The strategy we followed in Pakistan involves investing in securities which aren’t affected much in a rising interest rate environment. As interest rates rise (as had been the case for sometime now) you would get higher interest income on your investments because your long term investments carry a floating rate and you can roll over your maturing short term securities into the higher yielding newly issued short term T bills. Thus, unlike the US banks, there is hardly any valuation loss on

your asset side and your interest income has actually increased. While on the liability and expense side, your borrowing costs are fixed. Thus, in a rising interest rate environment, this strategy produces a positive return, albeit a very small one.

Question 2: This is a huge increase in balance sheet size. This strategy would have resulted in earth shattering income.

Answer: Unfortunately, that does not appear to be the case. It is hard to tease out the net impact of this strategy for UBank from its financial statement. We can, however, calculate the return to Pak-Kuwait of this strategy. Pak-Kuwait’s total investment in government securities increased from Rs.64 billion to Rs.679 billion from Dec 31, 2021 to Dec 31, 2022. During the same period, Pak-Kuwait was able to increase its net markup income by mere Rs.272 million which translates into a return on average assets of 0.07%. But hey, it is risk-free easy money.

Editor’s note: Both UBank and Pak-Kuwait recently released their first quarter financials for 2023. Based on extensive interviews, a deep dive into both UBank’s and Pak-Ku-

wait’s strategy and performance to follow in following issues of Profit.

Question 3: Is there a limit to this strategy?

Answer: To date we have not seen a ceiling. Pak-Kuwait successfully grew its assets 6 fold purely based on the aforementioned strategy in 9 months (total assets grew from Rs 137 billion at the end of March 2022 to Rs 798 billion on Dec 31, 2022). UBank doubled its asset size from Rs 104 billion on Dec 31, 2021 to Rs 221 billion on Dec 31, 2022 and its leverage (total assets/net assets) from 15x to 30X in the same period.

Question 4: Is this strategy followed by DFIs and NBFIs in other parts of the world?

Answer: Such strategies are usually part of relative value "long short" strategies adopted by hedge funds wherein they fund their extremely large position in treasuries through repos, while at the same time selling corresponding future contracts and profiting from small differences between yield on cash treasuries and the corresponding futures. Since the cash yield and futures yield move together, the hedge funds can pocket the small yield difference regardless of which way the market moves. Such strategies are affectionately referred to as "picking up pennies in front of a steamroller" as hedge funds have a tendency to blow up when such strategies don’t work as advertised.

In the case of UBank and Pak-Kuwait, there is no corresponding futures contract or short position to hedge their long position. Both are earning pennies based on the yield difference between their borrowing/repo yield and government securities yield.

Question 5: UBank maintains deposits of retail accounts. PakKuwait is using SBP repos which are usually short tenor (around 7 days or less). Isn't the SBP as a regulator worried about UBank and PakKuwait behaving like hedge funds?

Answer: SBP's mandate is the financial stability of the system. I cannot claim to understand what SBP is thinking other than what has already been explained in Question 1 above, however, I can assume that despite the fact that leverage of UBank has increased from 15x to 30x based purely on the above strategy, SBP does not deem it to be a systemic risk to the financial system. Pak-Kuwait does not have retail deposit accounts and all its borrowing is against “risk free” government securities which are pledged with SBP. Also Pak-Kuwait, for now, is using longer-term repos to borrow from SBP, that range from

63-70 days.

Question 6: Don't the auditors or the board of directors or board risk committees find this approach risky?

Answer: The auditors have not highlighted any risk from the aforementioned strategy in the annual accounts. If the board or the risk committee had any concerns, they have been allayed by the management. Otherwise how could UBank have increased its leverage to 30x in a year and Pak-Kuwait increased its asset size by 6 fold in 9 months. The board of directors and risk committees would be fully on board with this strategy.

Question 7: DFIs are allowed to participate in open market operations under SBP DMMD circular 11 of 2022 which allows DFIs to participate in OMOs for liquidity management. Pak-Kuwait is using OMOs to take highly leveraged and speculative positions in Government securities. This isn't the objective of the circular. Is SBP not aware of it?

Answer: SBP should be fully aware of it. Over the years, repo balances on the SBP balance sheet have been increasing and have become a permanent source of indirect financing, via commercial banks, to the Government of Pakistan. Since the late 2021 and throughout 2022, SBP conducted 63, 70 and 77 day OMOs, not necessarily to inject liquidity in the system, though that is the official line, but to provide cheaper source of money to commercial banks to nudge them to participate in the auction of government securities which otherwise the banks are reluctant to do so fearing rising interest rates. All this to say that SBP should be fully cognizant that participation by Pak-Kuwait in OMO isn't for liquidity reasons but to be a leverage buyer of government securities, similar to the commercial banks.

Question 8: Why do banks lend against pledged Money Market Fund (MMF) units?

Answer: The banks own the Asset Management Companies (AMC’s) that manage the MMFs. By lending against the MMF units, banks help their AMCs increase their Asset Under Management (AUM). This enables AMCs to earn higher income as AMCs charge management fees based on AUMs. From a risk perspective, the MMFs invest in government securities so banks are essentially lending against government securities thus taking minimal risk.

Question 9: For this to make sense

for NBFIs and DFIs, banks should be lending at a slightly lower rate than the yield on government securities. Why are banks leaving money on the table and not investing directly in government securities?

Answer: In September 2021, the government decided to impose an incremental tax on banks whose advances-to-deposit ratio (ADR) would fall below particular benchmarks apparently to encourage the banks to lend to the private sector. However, the banks it seems found a way out of this conundrum i.e., window dress their investments by lending to NBFIs etc., which then purchase government securities with this money and pledge those securities to the same banks. The banks may be leaving a few bps (one bps is 1/100 of 1%) on the table but saving a few percentage points on the tax. It is funny how egregious some of the banks have been in this i.e., first lending/depositing money to/with the borrower to invest in MMFs, and then lending more money to the borrower against the very MMFs to buy government securities, and so on. In the bank and SBP reporting, this appears as advances/lending whereas effectively it is indirect investment in government securities.

Editor’s Note: Two big banks, namely UBL and ABL, were specifically asked to explain their intentions behind lending to NBFI’s and not investing directly in government securities. No response was received till the filing of this report.

Question 10: If a new corporate/ NBFI/DFI wants to take part in this strategy, which are the main institutions to approach?

Answer: For a DFI, doing repo with SBP is the easiest and most straightforward strategy using government securities as collateral. As of Dec 31, 2022, Pak-Kuwait had 97% of its government securities pledged as collateral.

For others (NBFIs/Corporates), we have seen banks accept Faysal Asset Management and ABL Asset Management MMFs as eligible collateral.

On the bilateral lending side and repos, UBL, ABL, MCB, Askari Bank and Bank of Punjab appear to be big players. There may be others, but we haven't been able to establish them. This is not to imply that all of the above mentioned banks were involved in window dressing. n

@2paisay is a citizen journalist who writes about the SBP, real estate, and other subjects. He prefers not to disclose his real identity, and thus writes and tweets under the pseudonym @2paisay.

Mariam Umar is a member of the staff.

Is this economic crunch ready-made for the to flex on the competition? Sportage

By: Daniyal Ahmad

Picture this, dear reader: a company bursts onto the scene with a novel product or service, captivating consumers and cementing their offering as the industry benchmark. This phenomenon is known as a first-mover advantage. The potential rewards are colossal, yet the stakes are equally high. Companies must execute flawlessly from the outset, with little margin for error. The nexus between first impressions and first-mover advantage is paramount.

Take the KIA Sportage, for instance. It was love at first sight. Few vehicles have forged their own automotive niche and

upended established players quite like the Sportage. Were Pakistan to document its iconic vehicles, the Sportage would rank alongside the Mehran and Corolla in terms of cultural significance.

But with first-mover advantage comes the peril of second-mover advantage. One might assume that the Sportage was merely the hors d’oeuvres in terms of all that came after it, because so many did come. It was taken for granted in that regard, which is why the question was raised if its crown was up for grabs. And, Profit did pose the question last year: was its crown in jeopardy? While we remain no closer to resolving that conundrum, we do have an inkling of how the Sportage might counter those vying to usurp it.

If it ain’t broke, why fix it?

Especially when your rivals’ localisation plans might be up in the air

By the time this article goes to press, the Sportage Black will have been unveiled. It may not be the latest global edition of the Sportage, but that is of little consequence. The Sportage is poised to accomplish something far grander - it is about to demonstrate to the crossover market why taking initial risks can pay dividends. And it comes armed with the battering ram of Pakistan’s most severe economic and supply chain crisis in recent memory.

What are we on about?

In June 2022, Muhammad Faisal, President of the Automotive Division at Lucky Motors, spoke to Profit about the success of the Sportage. “Launched in July 2019, the Sportage will soon celebrate its third anniversary in the market. Yet, it has not reached its zenith; it remains in its nascent stage,” he elucidated.

“The Sportage not only established a foothold in the market but also blazed a trail for subsequent entrants. We comprehend the significance of timely innovation; procrastination can result in competitors capitalising on opportunities,” Faisal expounded.”Nonetheless, we also acknowledge that launching a product at a palatable price point is paramount to its triumph. The Sportage is still relatively new to the market; we have made substantial investments in localising it,” he continued.

Faisal concluded by discussing the potential of the Sportage. “It possesses untapped potential and delivers value for money at its current price point. It can continue to flourish in the market for the foreseeable future,”.

At the time, these statements were perplexing because the market was in a much better condition. Yes, the economic deterioration was evident as the State Bank of Pakistan (SBP) had abandoned a myriad of sectors, including the automotive sector. Automotive sales ended with an all-time high to see out FY 2022-23 in June. However, the gravity of

the situation had yet to set in. It was then that Profit asked how the KIA Sportage would retain its crown in the segment that it had not only created but had also become perhaps the most dynamic in the automotive industry as a whole.

Read more: The attack of the SUVs Now, Profit has documented why we chose the Sportage of all cars, why the segment had become so competitive, the dynamics underpinning it, and so forth. What’s relevant to us is that it looked like an uphill battle for the Sportage. Fast forward almost a year later, Pakistan is still in the midst of the very same crisis that began last summer. If anything, it has only worsened with respite still a bit further away. Automotive supply chains are strained, forcing manufacturers to raise prices to levels unfathomable last year. This is where this current story diverges from the previous one.

“The latest generation of the Sportage represents a leap for the vehicle,” mused Muhammad Faisal, President of the Automotive Division at Lucky Motors. “It commands a premium price in every market in which it has been launched. From Pakistan’s perspective, volumes must be justified to ensure viability. Without sufficient volume, no automotive company can sustain itself,” Faisal added.

If the new Sportage wasn’t viable in June of 2022, then it is even less so now amidst the teetering economy. The thing is, this was KIA saying this after having achieved its success for the past three years. If it’s this bad for them, what about all the shiny new competitors that came in 2022 alone to dethrone it? Let’s just say things are not going to plan.

Localisation, and a ticking clock

Localisation denotes the utilisation of indigenous components in manufacturing. In the automotive industry, it entails producing vehicles with a preponderance of local parts. However, not

everything can be produced domestically.

The Automotive Development Policy (ADP) 2016-2021 sought to fix this by providing duty waivers on imported components to local groups collaborating with foreign brands. The objective was to enable these groups to assemble their cars, cultivate their supplier networks, and ultimately produce everything locally. The duty waivers furnished a competitive advantage against established companies such as Toyota, Honda, and Suzuki.

Section 4.2.1-C of the ADP stipulated a concessional rate of customs duty at 10% on non-localised components and at 25% on localised components for a duration of five years for car and LCV manufacturing. Recall that first-mover advantage? In the competition against the five-year deadline, KIA may have had an earlier cut-off date, but it has succeeded in seizing a larger share of the market to bolster localisation while it could. The remainder may have later cut-off dates but will have expended a significant portion of that time battling this crisis, and localisation is not an instantaneous process.

“Localising any component necessitates a minimum of one year, while on average components can take up to two and a half years to be fully localised. The rate of localisation varies depending on the intricacy of the component,” elucidated Syed Shabbiruddin, Director of Sales & Marketing at Master Changan Motors. “The localisation duration for a metal brake will be comparatively brief, while it will be considerably protracted for a fuel tank due to the disparity in their intricacy,” added Shabbiruddin.

Solely based on the duration of time, KIA is likely to have localised a larger portion of their supply chain compared to their competitors. The fact that the current Sportage model is not the most recent generation and, as a result, not as technologically advanced as other options available in the market, means it is also relatively less intricate. This only expedites the rate of localisation.

Then there’s the volumes.

When manufacturers want their vendors to make new parts for them, they have two options. They can either bear the tooling cost themselves and upgrade the vendor, or they can amortise the vendor’s cost by allowing them to charge a higher price for a certain number of units to recoup their expense

Ammar Hameed, Director at Sazgar

Volume glut vs scraping the barrel

“When manufacturers want their vendors to make new parts for them, they have two options,” explains Ammar Hameed, Director at Sazgar. “They can either bear the tooling cost themselves and upgrade the vendor, or they can amortise the vendor’s cost by allowing them to charge a higher price for a certain number of units to recoup their expenses,” Hameed adds.

In either of the two scenarios, volume is paramount. The greater the number of units, automobiles in our case, the lower the per-unit cost of production will be. How crucial is volume? “Our localisation plans are formulated in conjunction with our volume forecasts. The feasibility for everything hinges on whether the volumes exist or not,” adds Shabbiruddin. Again, recall the first-mover advantage? Not only did KIA absorb the initial dose of volume, but it managed to reap perhaps the most from the glut of volume that existed in FY 2022-23 simply due to its prior presence in the market for a few years.

Similarly, it’s not the fault of any new competitors that they didn’t anticipate the economy going South in such spectacular

fashion. None of us did, really. However, again, everyone else’s CUV offerings have endured more time in this crisis since their launch as a percentage of their total time relative to the Sportage simply because the Sportage was launched when it was.

The potential localisation advantage is merely the dividend KIA has earned for taking the risk with the Sportage. It is the dividend on their decision to release the Sportage when they did, and to beat out to their initial competition.

The Sportage’s cudgel to weather the storm

Let’s recap. KIA opted not to launch the new Sportage when their success seemed vulnerable. They had introduced CUVs to the Pakistani market, resulting in a surge of competitors. However, the economy took a downturn, leaving less volume for everyone to distribute their localisation costs over. Additionally, time is of the essence. The Sportage retains its previous volume and has the potential to capture new volume with its less intricate technology, resulting in enhanced control over their supply chain.

What does this mean? Why haven’t we discussed the black edition of the Sportage mentioned earlier? And what about rumours of imminent improvements to the Sportage? It’s time to make sense of everything and wrap up.

The black edition of the Sportage is just as its name suggests. Will it have improvements? This piece was written before its launch, so it’s possible. This ties into the next part: rumours about future upgrades.

Will they happen? Upgrades are common in the industry. Localising and further developing the Sportage necessitates upgrades. When will they happen? It’s hard to say. Doesn’t this mean the Sportage’s price should drop? Theoretically, and it has over the past year. KIA’s marketing strategy includes occasional limited-time price drops, but they’re unpredictable.

The reworked Sportage is basically a ‘facelift’ of sorts, the kind that is most common with Indus Motors Toyota with Honda also going for cosmetic updates for launched models, from time to time. While the attempt to pass these changes off as ‘new’ or ‘updates’ can be appreciated, it is often comical. Corolla’s typical upgrades to the headlights and grill that comes with a price hike are laughable.

Localising any component necessitates a minimum of one year, while on average components can take up to two and a half years to be fully localised. The rate of localisation varies depending on the intricacy of the component

Syed Shabbiruddin, Director of Sales & Marketing at Master Changan Motors

Muhammad Faisal, President Automotive Division at Lucky Motors

Honda, with its famous ‘shark fin antenna’ inclusion as a feature to the previous generation Civic was equally hilarious.

These are big companies with massive customer bases. They have to do better and have time and again failed to justify and qualify some of their production decisions and quality promises, respectively.

Will the ‘black edition Sportage’ be more of the same? It might just be the case. But KIA is at an advantage; it does not yet have the reputation that Indus Motors and Honda have with regards to making over-marketed mid-life upgrades to elongate the life of a particular model of car to keep sales up. It really depends on how significant and appealing the changes are to come to a conclusion. A simple grill and headlights upgrade will not do the job, but in the current circumstances this might just be the right amount of satisficing.

What does a company do when it has additional proceeds on its hands? All sorts of things: they could advertise more, add features, reduce their prices, provide promotions, increase salaries or save for a rainy day fund. The fact of the matter is that at a per unit of profitability, the Sportage likely trumps its competitors now.

What Lucky Motors does with that is their business. At worst, their iterative updates will not work, and they’ll just weather the current economic storm until they can release the new Sportage once the dust settles. At best, they can now toy with the competition in ways they really couldn’t before and maybe even release a lot more cars than just the new Sportage by allocating their additional proceeds to those developments or even introduce a fully loaded new Sportage at a reasonable price.

Will the rest of the industry take it lying down?

“Our research unveils a universal truth: price sensitivity permeates every segment of the world. Sensitivity to price fluctuates with the product at hand, varying in degree from individual to individual. With car prices soaring beyond income growth, customers are compelled to rationalise the prices of their coveted cars based on the features they offer. However, CUV buyers remain rela-

tively impervious to price sensitivity, their sights set firmly on acquiring the latest and greatest,” elucidates Shabbiruddin.

Past triumphs offer no guarantee of future victories. New entrants are hot on their heels, making strides of their own. However, what appeared to be a decisive victory has reverted to a contentious match. Was this a fortuitous turn of events or did KIA anticipate the crisis? The jury is still out. What is indisputable is that KIA’s decision to retain the old model appears to have been a judicious one. The new Sportage will make its debut at Lucky Motors’ discretion, rather than bowing to market forces as previously anticipated.

On the other hand, CUVs from China, Korea, Malaysia and Japan may very well dominate the market and dethrone the Sportage. Even such a scenario may not be perceived as entirely unfavourable at KIA’s headquarters. Should their competitors flourish, KIA could subsidise the costs of cutting-edge hybrid engines that seem poised to be the must-have feature going forward and other components that would otherwise need to be localised independently for the new Sportage. n

The latest generation of the Sportage represents a leap for the vehicle and commands a premium price in every market in which it has been launched. From Pakistan’s perspective, volumes must be justified to ensure viability

Ahmad

Iqbal OPINION

Changing how Pakistanis commute and think about commuting

This February marked a decade of Lahore’s BRT service. But what can we learn from the past to better our mass transit future?

Cities are profoundly influenced by how people move around to go about their daily lives. Yet for all the discussion of the need for public transport and walkable cities, there is a profound and historic relationship between innovation in modes of transportation and urban development.

In many ways, a city is a living, breathing, body with a vast number of moving parts. Often information about these spaces is processed and decisions made based on two-dimensional maps drawn on paper. This does away with the pulse of the street. Space and cities are not simply a fact of landscape or a count of roads and buildings. It might in fact be more helpful to conceptualise a city as an area where the past leaps on the present, even as the present attempts to raze the past to the dust.

In very simple terms, it means that an area’s past is constantly in battle with its present realities and challenges. And historically, one of the major contributors in this struggle are modes of travel. This impact of transportation on cities and the

The writer is the former mayor of District Narowal. He has worked extensively on local government.

way we live can be best understood by looking back at how innovation in transportation influenced urban development.

Cities were densely populated before motorised transportation took over in the twentieth century, and the form of that era can be seen in the walled city of Lahore or the Purana muhallas (old city neighbourhoods) of most of our cities in Pakistan, which were built as walkable cities, catering to the residential, economic, and recreational needs of a relatively large number of people.

If one takes Lahore as a case study, then the advent of the motorcar and its increasing dependence over the decades has given birth to low-density car-based neighbourhoods such as Gulberg, Model Town, DHA, Bahria Town, and now almost all the farmland between Kasur and Gujranwala is being converted on the same model. The breakneck speed at which Pakistani cities are sprawling is also compounded by the public sector investment in urban infrastructure that caters to the motorcar in the shape of underpasses, signal-free corridors (urban highways), overhead bridges, etc.

This car-based development mindset has resulted in the phenomenal expansion of our cities and increasing congestion and inequality of access in the absence of well-functioning public transport systems in the country. The world is now reverting to the idea of dense people-friendly cities, and the idea of a 15-minute city.

This February marked the end of the first decade of mass transit investment in the modern history of Pakistan. Lahore’s metro bus (BRT) was inaugurated ten years ago in February 2013. We look at the history and the recent journey of our cities and mass transit.

Pakistan’s journey towards a modern and efficient public transportation system has been a rich tapestry woven with two distinct threads: the Lahore Tramway network and the Karachi Circular Railway (KCR). Let’s take a closer look at these two iconic transportation systems and how they have influenced the development of mass transit in Pakistan.

Lahore’s pioneering tramway network

In the late 19th century, the Lahore Tramway network made its debut, ushering in a new era of mobility for the citizens of Lahore. With its tracks winding through the city, connecting the central business district with various neighbourhoods and suburbs, the tramway provided a convenient and reliable mode of transportation for the people of Lahore. However, the golden age of the Lahore Tramway network was short-lived as the system struggled to compete with other modes of transportation, suffered from a lack of investment and maintenance, and was ultimately brought down by political instability and rapid urbanisation. Despite its decline, the Lahore Tramway network remains an important chapter in the history of mass transit in Pakistan and continues to inspire new initiatives and developments in the field.

The Karachi Circular Railway (KCR): A Modern Rail System

In 1964, the Karachi Circular Railway (KCR) made its debut as a modern rail system powered by overhead electric wires. It consisted of a circular route that connected the suburbs of Karachi with its bustling central business district, providing an efficient and affordable means of transportation for the residents and workers of the city. Despite its popularity and success, the KCR faced numerous challenges in the years that followed and eventually closed its doors in 1999 due to financial and operational difficulties.

The state of our state’s cities

Transport infrastructure projects should always serve city residents equitably, especially when projects are funded by public money. Projects that benefit a wealthy few are an extreme form of regressive spending, and—when coupled with regressive tax laws—effectively redistribute resources from the poor to the wealthy.

Even a cursory look at the transport infrastructure in Pakistani cities shows that local governments have continually focused primarily on building roads, addressing the mobility needs of a few car owners while ignoring the needs of many low-income residents. Metro bus projects in Lahore and Islamabad are a step in the right direction, but they only scratch the surface. Lahore, with a population of over 10 million, has a single bus rapid transit (BRT) corridor stretching 27 kilometres, whereas Ahmedabad, a city with less than half of Lahore’s population, has twelve corridors spanning over 85 kilometres and plans to develop five new corridors.

Enrique Peñalosa, former mayor of Bogotá, Colombia, has been a prominent advocate of using road space in a more equitable and

efficient way. He’s even hailed BRT buses zooming past cars stuck in traffic as “democracy at work.” But if Lahore’s road space does not equitably meet the needs of public transport users, it does even less for bicyclists, who account for 5 percent of trips according to the city’s urban transport master plan. Bicyclists and pedestrians together make up almost 45 percent of all trips in Lahore, but they get next to nothing when it comes to transport infrastructure and investment.

By prioritising car-centric infrastructure through new development contracts, the city is making traffic congestion, air pollution, and road safety—already major challenges—worse. Infrastructure projects are important triggers for economic development. However, it’s important to question whether Lahore really needs more valuable urban land dedicated to cars.

In a city where 40 percent of total trips are taken by foot and only 8 percent by private car, should infrastructure spending really prioritise car owners? Increasing road capacity is not a sustainable solution to tackling traffic congestion. In fact, it adds more demand for vehicular travel, eventually resulting in more congestion and emissions. The logic is simple: more lanes on Lahore’s roads will increase the demand for travel, leading to additional car purchases and resulting in heightened traffic congestion.

So in the past 10 years, what has the BRT mansooba done for public transportation in Lahore, and what lessons can we learn from

the journey?

The journey to BRT in Pakistan

The implementation of Bus Rapid Transit (BRT) in Pakistan was a long and complex journey, marked by numerous discussions and debates about the best way to improve public transportation in the country. In the early stages of BRT planning, various organisations and institutions, including the Japan International Cooperation Agency (JICA), the World Bank, and the Asian Development Bank (ADB), proposed various mass transit projects in Pakistan, including a Light Rail Transit (LRT) system in Lahore, a mass transit project for Karachi, and a BRT system for Islamabad. However, many of these ideas were later dropped due to various challenges, including funding limitations, opposition from stakeholders, and technical difficulties.

Despite these setbacks, the idea of BRT continued to gain traction, and transportation experts and urban planners began exploring new concepts and approaches to implementing BRT in Pakistan. One of the most promising ideas was the creation of dedicated bus lanes, which would provide faster, more reliable transportation for commuters while reducing congestion on the roads. However, this idea was met with resistance from some quarters, who argued that dedicated bus lanes would take up valuable road space and create additional traffic problems.

The birth of the Metro Bus System in Lahore

It was the Metro Bus system in Lahore that finally brought BRT to life in Pakistan. This system was based on a combination of dedicated bus lanes and high-frequency bus services and was designed to provide fast, convenient, and affordable transportation for the people of Lahore. Despite initial scepticism and opposition, the Metro Bus system quickly proved to be a success, attracting millions of riders and reducing traffic congestion in the city.

The Lahore BRT: A success story

The Lahore BRT was launched in 2013 and covers a 27-kilometre route with 29 stations. It operates high-capacity buses on dedicated bus lanes. The BRT is a dedicated bus lane that runs through the heart of Lahore, providing a quick and efficient way for residents to get around.

The system was introduced to address the growing traffic congestion and air pollution problems in the city. The BRT has not only reduced travel time for commuters but also helped to reduce air pollution levels by reducing the number of vehicles on the road.

Following the success of the Lahore Metro Bus system, the concept of BRT was quickly adopted by other cities in Pakistan, including Islamabad, Peshawar, and Multan. Each of these cities implemented their own unique BRT systems, with features tailored to meet the specific transportation needs of their residents.

The Islamabad-Rawalpindi BRT was launched in 2015 and covers a 23-kilometre route with 27 stations. Like the Lahore BRT, it operates high-capacity buses on dedicated bus lanes and provides a fast and convenient means of transportation for the people of Islamabad. The Islamabad BRT has already had a positive impact on the city, reducing traffic congestion and providing a safe and reliable mode of transportation for commuters in the twin cities.

The Peshawar BRT was launched in 2018 and covers a 22-kilometre route with 23 stations. The system operates on a combination of dedicated bus lanes and mixed traffic lanes, providing a fast and efficient means of transportation for the people of Peshawar. The Peshawar BRT has been well-received by the public and has helped to reduce traffic congestion in the city.

The Multan BRT was launched in 2019 and covers a 23-kilometre route with 25 stations. Like the other BRT systems in Pakistan, it operates high-capacity buses on dedicated bus

lanes, providing a fast and convenient means of transportation for the people of Multan.

The Multan BRT has been well-received by the public and has helped to improve mobility and reduce traffic congestion in the city.

In addition to these BRT systems, Pakistan has also recently launched the Orange Line Train, a modern high-speed rail system that connects various neighbourhoods and suburbs in Lahore. The Orange Line Train operates on a dedicated track and provides a fast, convenient, and efficient means of transportation for the people of Lahore. The Orange Line Train has been well-received by the public and has helped to reduce traffic congestion in the city.

Even this project has had its detractors, despite providing cheap and respectable transportation to hundreds of thousands everyday. Many people see projects like this as a white elephant. Yes, public transportation comes at a high cost. It is expensive, time consuming, and difficult to build, and then it also requires subsidies, attention, and upkeep. But that is precisely the point. Projects like the OLMT never make a profit because they are not supposed to. They need to be sustained through subsidies precisely because facilitating mobility for those that cannot afford cars or motorbikes is a government priority.

Finally, the city of Karachi is currently in the process of implementing its own mass transit system, which will consist of a com-

bination of BRT and LRT lines. The system is still in the planning stage, but it is expected to provide a modern, efficient, and affordable means of transportation for the people of Karachi.

Pakistan’s journey towards a modern and efficient public transportation system has been a long and complex one, marked by numerous challenges and obstacles. However, with the successful implementation of BRT and other mass transit systems, including the Orange Line Train, Pakistan is now well on its way to providing its citizens with the transportation they need to thrive in the 21st century.

Is there a way forward?

Pakistani cities are struggling to serve their citizens; those who can’t afford a car are excluded from the city, and those who own a car are stuck in traffic, while all of them are breathing poisonous emissions. Public transportation has become a critical need for the future of our cities if we want to take a turn toward a more sustainable future. There are many things that Pakistani cities need to do to improve their public transportation systems. We need to invest in new infrastructure, which includes more mass transit lines but also investment in the public bus. Complemented by bike and pedestrian-friendly transport infrastructure. In addition to improving public transportation in cities, it’s also important to improve connections to suburban and rural areas. This might mean developing new bus routes, increasing the frequency of existing routes, or making public transportation more accessible to people living in these areas.

As the world embraces electric vehicles, Pakistan has this huge opportunity to go “all in” and shift to a 100% electric public transport system which includes buses, taxis, 2 and 3-wheel micro-mobility options such as e- rickshaws, e-scooters/bikes. Given that 22% of our import bill is spent on petroleum, this may actually be a smart financial decision that Pakistan can make at this juncture to reduce its dependence on imported fossil fuel. n

Pakistan’s emerging position in the global gig economy

Enterprising young men and women are making a killing working for foreign clients. But could this become a major export for Pakistan?

By Abdullah Niazi

Every morning, Muhammad Akram

Khan sets out from his house in Lahore’s cantonment for a small office suite in Defence phase V. From the outside, the building that houses his office is plain. Close to the area’s central market, the rent for the place isn’t cheap.

“We pay just over Rs 200,000 a month to rent the office space. It isn’t a very big area, but there are just three of us and it suits us very well,” he explains. “Of course we have to pay on top of this for maintenance, basic office staff and a lot of amenities but we manage to do this pretty comfortably.”

For Akram and the two other people he shares the space with (one man and one woman) this is very much a luxury. But it is a luxury they can afford. All three of them are freelancers that have developed skills in different fields and exclusively work for foreign clients. They earn money in dollars, and as a result have been able to beat out inflation. “We don’t really need the office space. There aren’t clients coming to visit us, we don’t have a lot of guests, all of our employees work remotely and this is really just so we can emulate a workplace environment and increase our productivity. Otherwise all of our work can very easily be done from home,” he says nonchalantly.

Akram and his two associates all have separate work. They met through online forums where freelancers discuss their trade, share ideas, and help each other with leads. “We didn’t know each other before we opened the office. It just so happened that on one of our Whatsapp groups it was being discussed how some of us miss working from an office. The

three of us expressed how it would be nice to have a space and that idea sort of snowballed into this little office,” explains one of the two people that work with Akram.

This, of course, poses a question. Pakistan’s economy is in deep shock. Inflation has skyrocketed close to hyper-inflation rates, the country is in the middle of a protracted dance with default that has gone on for a few songs too many, and most salaried individuals are finding it hard to keep up with the increasingly bleak situation that the country finds itself in. So why on earth do three people that have no need for an office space find themselves renting one in an expensive part of town? Akram gives a wry smile when we pose the question. “God has been kind. We are making enough and since we are earning in dollars it isn’t so difficult to keep up.”

These three men and women are part of a rising group of young Pakistanis that are finding themselves an integral part of the global ‘gig’ economy. Through platforms such as Upwork and Fivver they have built entire careers for themselves that pay far better and offer more security than most salaried positions in Pakistan.

The gig economy, as it is called, is that segment of the labour market which is characterised by the prevalence of short-term contracts or freelance work as opposed to permanent jobs. It is not altogether a new concept. This working framework has existed since businesses started hiring temporary or seasonal workers. In essence, every person that works as part of the gig-economy is a small firm or company in and of themselves. They look for clients, do the work, submit it, collect the money and move on to the next project or the next client.

“I am a doctor by qualification,” says Akram much to our surprise. “I finished my degree in medicine and was making just over Rs

40,000 a month during my house job. It was a depressing existence if I’m being honest. At one point I needed money so a friend recommended I look for content writing work online. I’ve always had a clean copy so I thought I’d give it a whirl and there has been no looking back.”

Today, Akram has moved out of content writing and has specialised his skill-set towards search engine optimization. Last month he pulled in $3500 from his work online. That translated to a whopping monthly income of just under Rs 1 million. At the age of 28, Akram says he is making more money than anyone in his batch of medicine. In fact, he reckons he is probably in the top two or three earners among everyone he did his A levels with — including the people working in consulting for international firms and for multinational companies and large banks. On top of this, the income in dollars means that they have been safe from the worst of inflation.

The gig-economy is an emerging sector in Pakistan. Freelancers in the country earned around $400 million in both 2021 and in 2022 which accounts for about 15% of Pakistan’s total $2.6 billion ICT (information-communication-technology) exports. At the recently held 16th edition of the annual ‘Managing Pakistan’s Economy’ hosted by the Lahore School of Economics (LSE), Dr Theresa Azam Chaudhry presented a paper titled “The Global Gig Economy: Pakistan’s Opportunity to Become a Leader in Service Exports.” The paper offered keen insights into the kinds of jobs these freelancers are doing, the mediums they are using, and the shifting trends in what is in-demand in the gig economy.

This much has been apparent for a while that the gig-economy is very much a reality in a country like Pakistan. As a report in The News International pointed out last year, for a devel-

oping country like Pakistan, with unemployment being a concern and with 64 percent of its population under the age of 30 (the youth, aged 15-29 make up 41.6 percent of the country’s total labour force, according to the Pakistan National Human Development Report (NHDR) by the UNDP), the gig economy model may be a welcome solution. An Oxford Internet Institute (OII) report ranks Pakistan 4th in the global digital gig marketplace, with about 8% of the total freelance work in 2017. The same report points out how in 2021, Pakistan generated an amount of $500 million entirely from freelancing and has ranked as the 4th fastest growing markets in the world for freelancers.

According to the same OII report, Pakistan generated $1 billion in revenues entirely from freelancing gigs as early as 2017. The report pointed out that Pakistan contributed to over 8% of the global gig economy. Pakistan stands at 4th position due to a rising number of qualified graduates who are working by freelancing their expertise. “Higher education institutes produce a humongous count of 600 thousand graduates annually from varying fields of business, computer science, and software engineering. Thus, this pool is lured towards freelancing jobs due to their better wage rate,” it reads.

“There are many different kinds of gig-workers. The most well paid ones are software engineers and people that can code. For that, however, a lot of people have set-up entire companies in Pakistan. They hire talented graduates at a competitive salary range and get them to work for many clients that they have. The graduates doing the work barely get a cut,” explains one person that worked at one such software house before becoming a freelancer. “I am making much more money freelancing now, but it took me time to build a profile and gain the trust of regular clients.”

That is generally a problem. The research paper presented at LSE was based on data scraped from the popular freelancing website Guru.com. The data of Pakistanis on the platform revealed that out of the 85,314 freelancers that were members of this platform only about 1100 (1.3%) ever completed a transaction. This means that almost 99% of the people that sign up for these websites do not end up finding clients. Now put this into context. As mentioned before, freelancers are accounting for about 15% of Pakistan’s total ICT exports — and these are just individual freelancers. On top of this, IT services like web development, logo design, graphic designing, and developers of mobile apps and java actually fell while non-IT services such as content writing, translation, and virtual assistantship rose. This means that there is a growing demand for gig-work among young individuals that are not able to meet their needs from the job market in Pakistan.

That is not surprising.

According to the Pakistan National Hu-

man Development Report (NHDR), Pakistan needs to create 4.5 million new jobs over the next five years, in order to be able to absorb its youth (15-29 year olds who make-up 41.6% of the total labour force) at the current participation and unemployment levels. This can not be achieved if we are “fixated on upskilling coal-miners into data miners” as Louis Hyman, assistant professor at Cornell University and author of Temp: How American Work, American Business and the American Dream Became, notes in his medium article on fixing the Gig Economy.

This essentially tells us two things. The first is that Pakistan’s population is increasingly young and is looking for opportunities to earn foreign money through the gig economy. The second part is that those wanting to find this kind of employment are having a hard time at it — because of the alarming figure that only 1% of people ever really find work.

According to the Organisation for Economic Co-operation and Development (OECD) estimates from 2018, Pakistan has approximately 2% of its labour force engaged in the platform economy through online and location-based services. Experts continue to ponder as to how Pakistan can increase this abysmally low number with its significant youth bulge.

According to the United Nations Development Programme (UNDP), approximately four million young people enter the working age in Pakistan every year. However, only one million are able to secure employment.

According to the Organisation for Economic Co-operation and Development (OECD) estimates from 2018, Pakistan has approximately 2% of its labour force engaged in the platform economy through online and location-based services. Experts continue to ponder as to how Pakistan can increase this abysmally low number with its significant youth bulge.

It is an avenue more than worth explor-

ing. Remember, all of the money coming in is in dollars. That means Pakistanis are essentially exporting this labour and in a cash-strapped economy that is desperate for exports it is vital to encourage such enterprising individuals. In the presentation of the paper on the gig economy at LSE, Dr Theresa Chaudhry, Professor of Economics at the Lahore School, co-Director of the Innovation and Technology Centre and Hamna Ahmad discussed whether Pakistan can look to the service economy, specifically to the gig economy, as a source of dynamic export growth.

The paper uses unique data from IT services offered online to foreign companies to understand the types of jobs that are being demanded, the characteristics of those offering IT services and the remuneration offered to those offering services. They also discussed the potential for IT exports and also discussed government policies to promote IT exports.

Yet there are many problems that plague freelancers. The lack of access to payment gateways such as PayPal have made life difficult for freelancers for example, who find it difficult to collect their earnings. On top of this, the banking system also incentivises this kind of work when it should in fact be doing the opposite.

The paper presented at LSE actually does provide some hopeful data. For example, while the majority of freelance workers are in Punjab, Sindh and Islamabad there are a handful of extremely active workers in the Northern Areas and Azad Jammu and Kashmir. And while a majority of the profiles are of men, nearly a third belong to women. Annual earnings are highest in search engine optimization, e-commerce, and customer services.

All of this data gives us insights into the world of the gig economy and how it operates in Pakistan. While there is still a long way to go, with the right policies and encouragement the gig economy and services could very well become Pakistan’s next big export sector. n