Profit E-Magazine Issue 250

CON TENTS

8

08 What plagues the solar industry and what can be done about it?

14

12 Golden opportunity for cement manufacturers as Afghanistan slashes duties

16 A tale of two defaults

24

24 Bykea managed to dodge a bullet, but will everyone else be as lucky?

20

20 Anatomy of a stock market crash: How the SECP sat back and let mayhem unfold in 2000

Publishing Editor: Babar Nizami - Joint Editor: Yousaf Nizami

Senior Editor: Abdullah Niazi

Executive Producer Video Content: Umar Aziz - Video Editors: Talha Farooqi I Fawad Shakeel

Reporters: Taimoor Hassan l Shahab Omer l Ghulam Abbass l Ahmad Ahmadani

Shehzad Paracha l Aziz Buneri | Daniyal Ahmad |Shahnawaz Ali l Noor Bakht l Nisma Riaz

Regional Heads of Marketing: Mudassir Alam (Khi) | Zufiqar Butt (Lhe) | Malik Israr (Isb) Business, Economic & Financial news by 'Pakistan Today'

Contact: profit@pakistantoday.com.pk

By Urooj Imran

One thing the citizens of Pakistan may have been particularly frustrated with last week was the sun, which shone intensely wherever one went. The government, perhaps, would have taken it as another reason why solarization would be a highly successful prospect for the country.

It is well-known that Pakistan has a recurring balance of payments crisis and its foreign exchange reserves are critically low — $ 4.01 billion as of June 9, 2023, which is not enough to cover even a month’s imports.

As the country’s foreign exchange reserves depleted sharply last year, the government identified that energy generation-related expenses, for which Pakistan has to import fuel, were quite high. It, therefore, decided to launch the National Solar Energy Initiative, with Prime Minister Shehbaz Sharif announcing the government would launch solar projects to generate 10,000 megawatts

of electricity.

While announcing the budget for fiscal year 2024 on June 9, 2023, Minister for Finance and Revenue Ishaq Dar revealed the decision to remove customs duties on the import of raw material of solar panels, inverters and batteries.

The government also allocated Rs 300 crore to convert 50,000 tube wells to solar energy. Following the announcement, the solar industry must have collectively breathed a sigh of relief, for it has been plagued by numerous problems in the current fiscal year that will end on June 30.

The problems began back when the Pakistan Tehreek-e-Insaf (PTI) government decided to impose a 17 percent general sales tax (GST) on the import of all solar equipment at the start of 2022.

While the incumbent Pakistan Democratic Movement government eventually removed the tax in May 2022, demand for solar systems remained subdued in the first half of the year due to the increased costs.

Then, in April, the State Bank of Pa-

kistan (SBP) issued a requirement for solar imports to post a 100 percent cash margin on all letters of credit (LCs), which placed another burden on the cash flows of businesses operating in the sector.

And then came an even bigger blow — given the country’s deteriorating economic and foreign exchange reserves situation, the government banned the import of “non-essential” items on May 19, 2022.

Subsequently, in a circular issued on July 5, 2022, the SBP updated the list of items for which importers would need prior approval from its Foreign Exchange Operations Department for opening LCs. The list included items covering solar panels, inverters, and batteries. This led to an industry-wide equipment shortage with companies facing challenges in completing their orders.

Despite this, Prime Minister Shehbaz Sharif approved a 10,000 megawatts solar energy project in December. In the project’s first phase, power generated through the solar project would be supplied to government buildings, tubewells running on electricity

A major chunk of electricity is produced from imported fuel whose prices have gone up in recent months. Our National Solar Energy Initiative is aimed at substituting costly energy with cheap solar power, which will provide massive relief to people & save precious foreign exchange

Mian Shehbaz Sharif, Prime Minister Pakistan

The removal of customs duties on import of raw material for solar panels, batteries and inverters may be a welcome step but is it enough?

or diesel, and households with low consumption.

“Govt buildings & tube wells running on diesel will be shifted to solar. Power plants operating on diesel, coal & furnace oil will be partially replaced,” the prime minister tweeted.

“A major chunk of electricity is produced from imported fuel whose prices have gone up in recent months. Our National Solar Energy Initiative is aimed at substituting costly energy with cheap solar power, which will provide massive relief to people & save precious foreign exchange.”, he added.

The website of the Alternate Energy Development Board (AEDB), which was tasked with overseeing the project, shows that bids have been received for designing and installing solar systems on government buildings.

While the SBP removed the requirement to obtain prior approval on December 27, 2022, it still directed banks to prioritize the imports of essential items such as food, raw pharmaceutical material, medicines, surgical equipment; oil, gas and coal; raw material and spare parts for the export-oriented industry; seeds, fertilizers and pesticides; items imported on self-funded or deferred payment; and plant and machinery for export-oriented projects near completion. There was no relief for the solar industry yet again.

Meanwhile, the rupee was on a steep decline. According to SBP data, on June 30, 2022, the PKR closed at Rs 204.85 per USD in the interbank market. On June 16, 2023, the rate had fallen to Rs 287.19 per USD; 40% depreciation year-on-year. Naturally, this not only increased the cost of importing solar equipment, but the exchange rate volatility also made it harder for companies to maintain stable rates.

What do local sellers say?

Pantera Energy CEO Furqan Ali Akhtar said the biggest problem the solar industry faced this fiscal year was supply chain disruption after

solar equipment was deemed “non-essential” following the government’s move to curb imports. Consequently, companies faced challenges in opening LCs. Since solar equipment needs to be imported, companies “had limited equipment to sell and the demand-supply gap caused prices to increase, he said. Reon Energy CEO Mujtaba Haider Khan said 70 percent of solar equipment is imported so there was a very big impact on demand due to the curbs.

Feroze Power Sales Manager Ammad Asif also agreed. In addition to the import ban leading to an industry-wide equipment crunch, the rupee’s depreciation affected the solar industry’s financial health, he pointed out. “Even though prices of solar systems were reduced in the international market, the dollar rate in Pakistan was so high. If you were getting some solar equipment for Rs 30,000 previously, you would now get it for Rs 55,000-60,000, so the system costs rose.” Resultantly, customers that had locked price agreements with the company were able to get the systems installed with “minor rate adjustments” but those who hadn’t were informed that the price had now risen significantly and they decided to not go ahead with the installation, Asif added.

There was yet another factor that affected the solar industry which was related to subsidized financing, the sales manager said. The SBP had introduced its Revised Financing Scheme for Renewable Energy on June 20, 2016, under which financing was available to install solar systems under three categories at a markup rate of up to 6 percent, which made it opportune to switch to solar. Last year, the central bank extended the scheme till June 30, 2024. However, the reality was different, according to Asif.

“A large part of the industry [that shifted to solar] used this scheme. But this option was also taken off the table, which had a huge impact on the solar industry.”

Separately, Khan also said that the non-availability of green financing at fixed rates was a problem. While the policy framework existed, no new limits were set by the SBP. “So, the policy was there, but there was no money.

Will the budget change things for the better?

Akhtar said the government had done some “damage control” in the last 2-3 months and the situation had stabilized.

When asked whether he expected the next fiscal year to be better, the Pantera Energy CEO responded with “absolutely”. He said the recently introduced budget was very supportive of the solar industry.

The solar financing option was back as well. “Good things are coming up,” he said.

Asif said that while there were no customs duties on the import of solar panels in the past, the duties on batteries and inverters had also been removed in the budget. While there would be an impact on the price of inverters, this would be offset by the rupee’s depreciation, he noted. On the other hand, the reduction in prices of batteries would mainly affect household consumers as industries did not opt for hybrid solar systems in which batteries are used.

“The overall impact on price will not be a lot. The prices of solar panels, which had gone up a lot, have reduced by 50 percent anyway. People are now again considering installing solar systems, so the expectation is that the industry will grow. A reduction in international prices will not affect local prices significantly unless the rupee regains the value it lost. There hasn’t been a big difference — if something cost $ 1,000 previously, it now costs $ 930, it isn’t like it has decreased to $ 500. Any decrease in international prices is offset by the rupee’s devaluation.”, said Asif.

The prices of solar equipment in the international market, which had risen significantly last year, were lowered earlier this year as new polysilicon factories — polysilicon being a key component of solar panels — became operational at the end of 2022. Besides this, the price of wafers, which are pieced together to make the panels, also reduced.

“The biggest problem the solar industry faced this fiscal year was supply chain disruption after solar equipment was deemed “non-essential” following the government’s move to curb imports. Consequently, companies faced challenges in opening LCs

Furqan Ali Akhtar CEO Pantera Energy

While international prices had gone down, Akhtar explained that domestic rates would likely be maintained because of the rupee-dollar parity. “Of course, if there is foreign exchange loss and the rupee falls to Rs 400 per dollar, there will be pressure.”

Local production

Almost all parts of a solar system have to be imported. There are some companies which assemble the batteries in Pakistan, according to Asif, but the bulk of the cost is due to a weak rupee. The question then arises whether Pakistan will ever become self-sufficient in the production of solar equipment.

The Pantera Energy CEO said “eventually”. He explained that the current demand is increasing every year and eventually it would reach to a point that setting up an entire solar manufacturing plant would be feasible. “When the consumption increases, it will become feasible for companies to set up plants in Pakistan. I hope that happens in another few years.”

Asif said that Feroze Power plans to manufacture solar equipment in the long run but it may or may not materialize because of the many challenges the industry faces in Pakistan. “If resources are utilized correctly, Pakistan can become a manufacturing country and obviously local production would reduce prices by a lot.”

It is pertinent to mention here that the prime minister had directed that a policy for locally manufacturing solar panels and allied equipment be submitted to the federal cabinet for approval earlier this year. Profit reached out to both Minister for Power Khurram Dastgir Khan and Convener of the Task Force on Renewable Energy Shahid Khaqan Abbasi but they did not respond.

What the government can do

“What we have right now in terms of solarisation is just the tip of the iceberg,” Akhtar said. There is a lot more to do in terms of execution, especially when it comes to solarizing Pakistan’s rural areas.

“The government should announce more subsidies and take initiative for solarization.”

Khan had a number of valuable suggestions for the government to help the solar industry flourish. “Around 10-12 years ago, when this industry began in Pakistan, 100 percent solar equipment was being imported — the design, the engineering, the material. Over time, 30 percent of the industry has

been indigenized and some equipment is being manufactured locally such as cables and fabricated metallic structures.

“What the industry needs now is a sustainable run rate — sustainable policies for the next 10 years that are carried through when a government completes its tenure.”

Besides this, the industry also needed a steady demand forecast, the Reon Energy CEO said.

Elaborating on how important solar is globally, Khan pointed out that solar accounted for half of all capacity additions last year, while the total installed solar capacity rose to 1 terawatt (TW).

“A very high percentage of new power generation will be through solar. It is already the cheapest way to generate electricity on any scale,” he said.

A time would come soon when solar would become the preferred mode of electricity generation. Khan said that according to Reon Energy’s calculations, every dollar the government spent on solar would be returned in gains the same year as it would cut fuel use.

Referring to the government’s decision to categorize solar equipment as non-essential and ban its imports, he said it would be mindless to impose import curbs on solar and aggravate the already expensive power generation in the country as Pakistan not only had to import the fuel but also the technology needed when relying on fuel for electricity.

“Solar imports should not be categorized as ‘non-essential’. Of course, we are not saying that they should be placed alongside medicines but there should be something between essential and non-essential.”

Besides this, the solar industry needed to be categorized separately instead of being lumped with the automotive and mobile phone sectors since they were poles apart, he said.

“The government also needed to encourage good imports and check illicit trade. While custom duty on batteries and inverters would be removed in the upcoming fiscal year, solar panels were already exempted and unregistered companies and

individuals had been importing substandard panels and even broken glass in the guise of solar equipment”, Khan said.

He suggested the government only allow companies registered with the AEDB to import solar equipment from suppliers included on Bloomberg New Energy Finance list, and ensure that the equipment imported pass quality checks.

Reon Energy CEO added that the government could also allocate land to solar equipment manufacturers in special economic zones as it is a critical sector, not just for Pakistan but globally as well in view of the transition to zero-carbon energy production to meet climate change prevention goals, and offer concessional borrowing rates to local manufacturers.

He also emphasized on countering the lack of research and development in Pakistan, saying the government should set up a lab under a public ownership model that can conduct sophisticated tests on solar equipment and build a research-oriented advanced facility or university that could collaborate with top universities worldwide on renewable energy. “We need investment in research and development, because without it, we will just remain copycats.”

“If we look at India and Turkey, they have started local manufacturing. What India did was offer higher tariff rates for those companies that were producing electricity through locally manufactured solar equipment. It also now has a 40 percent customs duty on imported solar panels.”

Khan noted that Pakistan’s industry could not compete with China’s, which is why the government should offer subsidies to incentivize local manufacturing. “The government needs to focus on batteries as well since they are useful not only for the solar industry but also the electric vehicle industry,” he added.

With the world recognizing the value of and switching to solar, whether the government will take meaningful steps to facilitate the industry or risk its growth in the upcoming year amid the precarious economic situation can only be assessed later. n

If resources are utilized correctly, Pakistan can become a manufacturing country and obviously local production would reduce prices by a lot

Ammad Asif, Sales Manager Feroze Power

Golden opportunity for cement manufacturers as Afghanistan slashes duties

Afghanistan decides to reduce custom tariff by $15/tonne, and royalty fees by $5/tonne on coal

By Daniyal Ahmad

Cement manufacturers in Pakistan’s northern region could be set to make a windfall in earnings as Afghanistan’s Ministry of Mines and Petroleum has announced a reduction in custom tariff by $15/tonne and royalty fees by $5/tonne on exported coal.

“The primary reason is that international coal prices have dropped, making it more viable for cement companies to import it than procure Afghan coal,” explains Fahad Rauf, Head of Research at Ismail Iqbal Securities. “The savings companies are set to make must be viewed in the context of the North and South regions. This is because Afghan coal

is more economical for players in the North due to lower transportation costs compared to players in the South,” emphasises Mustafa Mustansir, Director Research and Business Development at Taurus Securities.

Regional division of cement manufacturers

By producers in the northern region, we mean companies located in the northern region of Pakistan’s cement sector. The sector is composed of 16 companies divided into two regions: North and South. The North covers areas of Punjab, Khyber Pakhtunkhwa, and Azad Jammu and

Kashmir whilst the South includes areas of Sindh and Balochistan.

Companies in the South are located near ports and bear significantly lower transportation costs compared to companies in the North. However, companies in the North have better access to exports to Afghanistan and India.

Why did Afghanistan slash the cost of its coal exports?

fter the tumultuous Russia-Ukraine war, the price of international coal futures contracts soared, compelling ce-

ment players in Pakistan to switch to Afghan

distinct ways. Firstly, European countries

non-Russian coal. All of this naturally also drove up the price of Richards Bay Coal from South Africa, which is the primary source of Pakistan’s coal imports. In all of this Pakistan found itself compelled to look towards Afghanistan for coal imports. In a shrewd move, Afghanistan seized the opportunity to increase the export duties it levied on coal exports, capitalising on the supply shortage. Coal imports from Afghanistan are estimated to have doubled since the Taliban took over, netting Afghanistan a staggering $160 million despite their increased duties.

However, in 2023, the tides turned as European gas contract prices plummeted, prompting European countries to revert back to gas and subsequently causing the price of coal futures contracts to collapse. Afghan coal was not immune to this international downward pressure.

“The crux of the matter is that coal futures contracts skyrocketed from a mere $50 during Covid-19 to a staggering $350 during the conflict. The Europeans voraciously bought all the gas and coal they could get their hands on and overdid it. Then Afghan coal production surged when prices rallied, and they imposed an export duty to generate revenue,” Yousuf Farooq, ex-Director of Research at Topline Securities and independent analyst, articulates succinctly.

“Afghan coal prices had already commenced their downward trajectory for the last month,” states Mohammad Aitazaz Farooqui, Head of Research at Providus Capital. “Some manufacturers had already ordered Richards Bay coal which is now more economical than Afghan coal. However, due to letter of credit restrictions, limited quantities are being imported. Afghan suppliers had been capitalising on the situation and charging a premium,” Farooqui adds.

coal due to their inability to import coal,” elucidates Fahad Rauf, Head of Research at Ismail Iqbal Securities.

A futures contract is a legal agreement to buy or sell a particular commodity or asset at a predetermined price at a specified time in the future. Futures contracts are the primary instruments of acquiring commodities in the international market. The Russo-Ukraine conflict exerted upward pressure in two

frantically sought to diversify their coal supply chains away from Russia and consequently delved deeper into other international coal markets, driving up the price of futures contracts.

Moreover, as European gas futures prices skyrocketed due to the unavailability of Russian gas, European countries transitioned their power grids from gas to coal, thereby creating an even greater demand for

“Now, as things have eased up a bit on the letters of credit front, companies would opt for imported coal, which makes more economic sense,” adds Rauf. “Letters of credit have started opening so ships are arriving at Pakistan International Bulk Terminal Limited. The Afghans are unable to sell because of the duty. So they reduced the export taxes to match imports from Richards Bay,” adds Farooq.

The primary reason is that international coal prices have dropped, making it more viable for cement companies to import it than procure Afghan coal

Fahad Rauf, Head of Research at Ismail Iqbal Securities

Mustafa Mustansir, Director Research and Business Development at Taurus Securities

What sort of savings are cement manufacturers looking at?

“Cement players in Pakistan could see a significant drop which would increase margins for cement companies substantially,” came as an alert to informed investors from Chase Securities. The notification, however, did not highlight the exact savings companies might be making. The exact saving is indeed elusive. However, Profit has taken the initiative to delve into various

scenarios, or at least had our sources do the intricate maths for us.

According to Farooq’s astute calculations, “Cement margins are poised to expand significantly because of this. Cement players use an average of 130 kgs of coal per tonne. So cement margins will increase by around Rs. 750/tonne. Cement profit before tax in 3QFY23 was between Rs. 2,000-3,000/ tonne. So this impact would be significant. Coal prices during 3QFY23 were around Rs. 56,000 per tonne and are currently hovering around Rs. 48-50,000 (Afghan coal). So the combined impact of the price drop in coal and the duty reduction will be colossal.”

Farooqui elucidates his calculations: “In effect, it would translate into a Rs. 20-30/

bag cost reduction for cement producers depending on the mix of coal used by each producer.” Whilst Rauf states, “Should they choose to retain the extra margin, roughly, it is equivalent to saving Rs. 35 per bag of cement, which means billions in savings for cement sector companies.”

Is there anything for Southern manufacturers?

“No. They don’t have a high proportion of Afghan coal because of the distance. They were relying on imports from different destinations,” Farooqui articulates simply. “Mainly northern producers have been using Afghani coal due to their proximity to Afghanistan,” he adds. There is no additional cost advantage that Profit has been able to identify as of yet.

“Realistically, everyone stands to benefit. Richards Bay landed today at Rs. 38,000/ tonne. So with transport to central Punjab, it’s roughly Rs. 44,000. Afghan coal after this $20 drop will be close to Rs. 44,000,” explains Farooq.

If anything, it’s just the Afghan government trying to ward off competition from South Africa. Northern Cement manufacturers being able to profit from this is just an unexpected windfall. n

The savings companies are set to make must be viewed in the context of the North and South regions. This is because Afghan coal is more economical for players in the North due to lower transportation costs compared to players in the South

Letters of credit have started opening so ships are arriving at Pakistan International Bulk Terminal Limited. The Afghans are unable to sell because of the duty. So they reduced the export taxes to match imports from Richards Bay

Yousuf Farooq, ex-Director of Research at Topline Securities and independent analyst

It would translate into a Rs. 20-30/bag cost reduction for cement producers depending on the mix of coal used by each producer

Mohammad Aitazaz Farooqui, Head of Research at Providus Capital

A tale of two defaults

The word default has spread through the country like a fever. Does anyone really understand what it means?

By Nisma Riaz and Shahnawaz Ali

Let’s talk about default. And that is not to say, of course, that this is some taboo subject that is being skirted around and spoken off in hushed tones. On the contrary, default seems to be on everyone’s mind.

From the prime minister and his cabinet to clerks exchanging water-cooler gossip, there is no one who isn’t worried about the country defaulting. But does anyone really understand what it means for a country to default?

Sure, there is a vague understanding that default is bad. That the price of the dollar will jump up even more and inflation will rise. The more well informed person might even know that vital imports will close down and there might be petrol and electricity shortages. A person even more interested in the nitty gritty of it all could even tell you that once a country defaults it can take years to secure new loans again.

But how much do we really know about this word that has become an important part of our lives in the way the boogeyman is an important part of the lives of children? And how best can we explain and understand default as a concept and in particular figure out what a default for Pakistan might mean?

The best way, perhaps, would be with a comparison. And for that comparison we have gone a little far away from home — all the way to the United States of America. Up until the beginning of June this year, it seemed that the mighty America was also on the brink of default. Of course, their default is very different from ours. And putting the two together provides an interesting comparison of the economics of defaulting nations.

The United States of America, with an economy that is 66 times bigger, with a GDP per capita that is 46 times higher than that of Pakistan, has seemingly come face to face with an issue not very dissimilar to that of Pakistan’s.

How can America, a country that is largely considered the pinnacle of the first world, the land of opportunities and new ideas, and the dreamland for many Pakistanis eager to escape their homeland, be in the same situation as that of Pakistan?

Well to start off it is not quite the same situation. Both nations have faced the risk of defaulting this year, but their economic, as well as, default conditions are vastly different. And that is exactly the point. How can the same word be used to describe two vastly different situations? Let’s start at the beginning.

Demystifying default

If you fail to understand what the craze is all about and feel left out, just know that you are not alone. We cannot possibly settle this debate, however, we can make it simpler to understand. Let Profit take you on a journey to demystify default and explain how it can be tremendously different based on the context.

Imagine that you are at a market, surrounded by stalls displaying the most tempting goods. You come across a magical pop up that lets you take anything, without paying for it but they keep account of everything that you take. Amidst this indulgence, you forget that eventually you will have to pay your dues for everything that you have acquired from the stall. That’s your debt. So, you start running and hiding because if you get caught, you will be faced with the consequences of failing to honour your end of the bargain. That is what we call default.

Profit asked Nasim Beg, Director at Arif Habib Corporation, to simplify the concept of default, to which he said that it means the failure to fulfil an obligation, and is commonly understood as the failure to repay one’s debt.

Now how can we understand the concept of default and debt when it comes to large economies and governments of nation states?

The World Bank calls it Sovereign debts and defines it as the debts incurred by national governments. The nature of these loans can differ based on their characteristics and terms.

One common type of sovereign debt, according to the World Bank, is Government Bonds. These can be understood as debt securities issued by governments to raise capital. Typically, these debts are long-term instruments with fixed interest payments and a predetermined maturity date. They can be further categorised into Treasury bonds, Treasury notes, and Treasury bills, depending on their specific features and duration. Countries can name their own bonds and securities, for example, one long term bond that the PTI government introduced in Pakistan was called the Naya Pakistan Certificate.

On the other hand, we have sovereign loans, which are loans extended to sovereign states by international financial institutions, such as the International Monetary Fund (IMF), foreign governments, or private creditors. These creditors are also referred to as multilateral creditors. These loans come with specific terms and conditions, such as, set interest rates, repayment schedules, and at times policy conditions imposed by the lending party.

Apart from the two main types of sovereign debt discussed above, there are Eurobonds (debt issued in a currency different from the currency of the country where the issuing government resides), Sovereign Sukuk (Islamic financial instruments that align with Sharia law) and Brady bonds (they have longer maturities and lower interest rates).

This debt can be external or domestic, depending on who buys the bonds.

In order to understand how sovereign debt can have different characteristics, conditions and implications for different economies, we will consider the cases of Pakistan and the US, juxtaposing the potential threat of default that both countries are currently facing.

Was the US really about to default?

To save you the trouble, the answer is yes. America was about to default but as of the 5th of June they have managed to stave off the threat. But what exactly was going on in the world’s most powerful country?

According to the NewYork Times, in a thought-provoking analysis released by the Bipartisan Policy Center, it was deduced that the United States could be facing an increasing risk of depleting its cash reserves and possibly failing to meet its financial obligations between June 2 and 13. The alarming possibility of defaulting on its debt urged the Congress and the US government to take required actions and raise or suspend the nation’s debt limit of $31.4 trillion.

Profit asked a renowned investment banker to explain how the USA got into this situation. He shared that it was essentially due to overspending. “America has been overspending for the last two decades, which has caused their debt to triple in the last 15 years. The excessive money floating in their economy has translated into a pattern of over-consumption, which is now catching up to them,” our source claimed.

“No one complained because the economy was booming, there was a lot of investment in the public sector, such as health care, pension support and social services. Low interest rates allowed people to get loans quite easily and start mortgages, along with spending quite freely, however, at a certain point when demand increases to such a level, the supply takes a hit. This has been the primary reason for inflation in the US; most people have good purchasing power but they’re all competing for scarce resources,” he continued.

Whatever the reasons for the current crisis may be, it is also important to under -

Shai Akabas, Director of economic policy at the Bipartisan Policy Center

stand the nature of this crisis.

Shai Akabas, the director of economic policy at the Bipartisan Policy Center, articulated the situation by saying that, “Come early June, the Treasury will be skating on very thin ice that will only get thinner with each passing day. Of course, the problem with skating on thin ice is that sometimes you fall through.” This metaphorical portrayal of the situation strongly emphasised upon the precarious nature of the United States’ financial position, throwing everyone in a panic, as they expected a global economic crash following USA’s possible default.

It was anticipated that the Treasury Department’s cash reserves will deplete to dangerously low levels after Memorial Day, with the risk increasing by the day throughout the month of June. The ex -

traordinary measures taken to delay default since January 2023, when the debt limit was technically reached, were expected to be exhausted soon. According to the report, it was required by the US economy to somehow generate sufficient revenue to sustain operations until June 15, the due date for quarterly tax payments, in order to postpone the possible default until July.

On the 27th of May, the NewYork Times reported that after an exhaustive series of crisis talks, President Biden and House of Representatives Speaker Kevin McCarthy had finally reached a groundbreaking agreement. It was decided that the debt limit would be lifted for a duration of two years, concurrently implementing reductions and limits on government spending during this time period. Despite consequences that would effectively halt the

growth of federal spending, the compromise received approval from both the Democratic president Joe Biden and the Republican speaker Kevin McCarthy.

This deal has provided hope to break the long-standing fiscal deadlock that has plagued both Washington and the rest of the US for weeks, while mitigating the looming threat of an economic crisis, at least for the next two years.

Pakistan’s very different kind of default

So, the USA has saved itself from defaulting. But what about Pakistan?

Whether Pakistan will default or not is the billion dollar question, quite literally in this case, because that is approximately the amount that Pakistan requires to get bailed out by the IMF.

To determine Pakistan’s chances of default, we first need to look at what the country owes right now. Contrary to popular belief, foreign debt is actually a smaller part of Pakistan’s total public debt.

Uzair Aqeel, Partner at Nairang Capital, explains Pakistan’s debt. “Pakistan has three main types of debt. The first is multilateral, which refers to loans from the IMF, ADB and the World Bank. The second is bilateral debt, which is the loans we have taken from China and the Paris Club Countries. The third type of debt is commercial debt, which is basically our

Come early June, the Treasury will be skating on very thin ice that will only get thinner with each passing day. Of course, the problem with skating on thin ice is that sometimes you fall through

There is very little visibility on commercial bank loans at the time, however, we know that historically they have been loans from middle eastern and Chinese banks. To my knowledge there are no major maturities upcoming or or any urgent payments due on these commercial loans, at the moment

Uzair Aqeel, Partner at Nairang Capital

eurobonds that are roughly $8 billion in total.”

“There is very little visibility on commercial bank loans at the time, however, we know that historically they have been loans from middle eastern and Chinese banks. To my knowledge there are no major maturities upcoming or or any urgent payments due on these commercial loans, at the moment,” Aqeel continued.

According to the State Bank of Pakistan, as of April 2023, the total public debt of Pakistan stood at Rs 58.6 trillion, out of which Rs 22.05 trillion is foreign or external debt, whereas Rs 36.55 trillion is owed to local sources.

This is starkly different from the United States and that is due to one reason. US Dollars.

According to Beg, Pakistan, like all the other countries of the world, requires US dollars to buy and sell goods. Infact, the aforementioned debt of Pakistan becomes meaningless to an external lender, because all they want is dollars. “So, while the United States can just raise the ceiling to avert default, Pakistan stays at the behest of international powers and creditors to get out of this maze.” Beg explained. This is not to say that Pakistan does not have a domestic debt problem, in fact domestic debt is almost as big a problem for Pakistan as its external loans.

Now let’s look at what Pakistan really owes, and who do we owe it to. State bank

data shows that as of March 2023, Pakistan’s total external debt and liabilities stand at $125.73 billion. This amount alone is around 36% of Pakistan’s GDP. However, public debt is only a fraction of this amount.

The main external lenders to the government of Pakistan are multilateral lenders, as explained by Aqeel. Multilateral institutions mostly lend out money at subsidised rates. They also lend for development projects and general improvement of the third world. Historical examples suggest that these organisations are the last to declare a sovereign default. The reason is that they are mostly not in the business of profiteering.

Another major part of the lenders of Pakistan are bilateral, these include countries like China, Saudi Arabia, Qatar etc. Majority of the time, bilateral loans are given with an underlying diplomatic reason. It is important to understand that China and its banks gave Pakistan money, not entirely out of a “love thy neighbour” doctrine. Rather the country has strategic and trade benefits to be obtained from Pakistan. Similarly tensions amongst the middle east, lead them to make friends through the one thing that they have in abundance, money.

For these countries to declare default on Pakistan is difficult. Why? Any strategic benefits that they were looking for, takes a serious hit when they willingly call out their partner as a defaulter. A much more opted route for

this is a restructuring of the debt. A rollover of sorts.

Mustafa Pasha, CIO at Lakson Investments, shared his insights on how Pakistan can and might dig itself out of this ditch, keeping historical patterns in mind. “You will probably need a combination of an IMF programme, significant bilateral support and rollovers. But that is a temporary solution as you’re just kicking the can down six months to a yeardelaying it.”

He continued, suggesting that the best route would be a debt restructuring one, “What Pakistan needs to do and what has been discussed and proposed before is that you need to do a debt rescheduling with your major bilateral and multilateral creditors, whether it’s the Paris Club, the Chinese, Saudis or any other lender. Quite similar to what you did at the start of the century around 2001-2002. Pakistan has to reschedule external debt because that is a more permanent solution and you did this in the early 2000s, where you pushed maturities 10-15 years and that allowed you significant breathing room to essentially start growing the economy again. So unless you get a debt rescheduling, you will be stuck in this low-growth, austerity scenario where you have to keep the current account very limited, cap fiscal spending and interest rates elevated and your currency will remain under pressure.”

But there’s a catch. “Even if Pakistan did go for debt rescheduling, it is probably something that might take a year or more to execute. It’s not an easy thing to do. Debt rescheduling talks can be pretty complicated, especially when you have multiple creditors who all need to agree on the rescheduling and the terms of it. We’ve seen that in Sri Lanka and Ghana and other countries which defaulted that it was difficult to get creditors to agree on what needed to be done. The alternative is what I mentioned: you get the IMF, you get the rollovers, you just keep kicking the can down the road but that doesn’t allow you to escape this spiral of inflation, devaluation and low growth,” highlights Pasha.

There is no immediate risk of default but in April 2024, matters become more serious when a $1 billion eurobond payment is due. And that is what the entire IMF deal is about. Without that tranche we are pretty much on our own

Mustafa Pasha, CIO Lakson Investments

That takes us to the real threat, which is the external loans, i.e., the commercial debt and eurobonds/sukuk. Out of Pakistan’s total loans, around 18.4 % are attributed to commercial credits and loans. These lenders are in the bond market for profit. They do not care for dying children and political setbacks. To them, most of it is numbers and if declaring a default gets them the better numbers, they will do it. In the recent past, when Sri Lanka defaulted, it also defaulted on its commercial debts.

But even these profit-hungry hawks of the bond markets can be coerced into taking a haircut. Most of the commercial bonds come with restructuring clauses for which bond holders vote. Unfortunately, a country that has the risk coefficient of Pakistan’s, stands a better chance at restoring true democracy than restructuring its commercial debts.

To give a general idea of the maturity of Pakistan’s eurobonds, Aqeel shared that, “Pakistan’s first eurobond of $42.1 million will mature in October of this year, while the next one matures in April 2024, requiring Pakistan to make a billion dollar payment of principle, along with a $41.25 million in coupon.”

So, in the upcoming year, a small portion of the commercial debts is to be paid. Amount that can easily be paid if Pakistan suddenly amps up its foreign reserves. And the current government’s plan seems simple. Borrow from multilateral and bilateral sources and pay off the commercial debt. That is what the entire IMF debate is all about. Once the IMF tranche comes through, Pakistan is expected to receive an additional $4 billion from Saudi Arabia, UAE, World Bank and AIIB respectively. If it doesn’t come through. We are pretty much on our own to pay off our external debt.

Aqeel resonated the same sentiments by saying that, “Based on the limited public knowledge and information shared by the ministry of finance, there is no immediate risk of default on our commercial debt. However, I caveat that the information provided by the finance minister is quite poor, that being said, there is no immediate risk of default, at least

through the next few months. April of 2024 is when this becomes a real issue because that is when the largest sum of a billion dollars is due.”

According to a US based think-tank USIP, Pakistan’s next fiscal year includes $15 billion of short-term loans and $7 billion in long-term debt, including a vital $1 billion repayment on a Eurobond in the fourth quarter. The short-term debt repayments include $4 billion Chinese SAFE deposits, $3 billion Saudi deposits and $2 billion UAE deposits.

What is scary, is the fact that between April 2023 and June 2026, Pakistan needs to repay $77.5 billion in external debt. For a $350 billion economy, this is a hefty burden. Our estimated reserves and current account deficits do not even allow for us to pay a quarter of this amount.

Let us come to the other problem of Pakistan, the in-house problem. According to the State bank, our domestic debt is Rs 35 trillion. This is thrice the budgeted revenue of Pakistan and almost equivalent to our external debt in dollar terms.

Out of this, Rs 24 trillion are issued in federal government bonds. These bonds, much like the US debt, are issued through the state bank and are paid back at their maturity. With the higher risk, Pakistan pays a much higher interest payment on these bonds, however, our twin deficits do not allow for us to stop taking these loans.

Apart from this, a total of Rs 6.2 trillion have been taken in floating (short term debt), which includes market treasury bills. The repayment of this debt is one of the tight spots for the government as the interest payments and servicing of these debts took up a major chunk of the budget 2023-24. Other than this Rs. 29,500 crore is also taken in foreign currency loans in the domestic debt.

It is important to note that defaulting on your domestic debt is shameful yet not unheard of. It does not inspire confidence from the local lender but saves a country from trade embargoes and international sanctions. What

Pakistan now has is an option; run a huge fiscal deficit or look towards a restructuring of its domestic debt.

A week ago, talking to Profit, Former Chairman FBR Mr. Shabbar Zaidi suggested that “Pakistan needs to consider the possibility of taking a partial haircut on its domestic debt. It is not the best solution, and there are ways around it, as well. But it should at least be under discussion.”

And indeed, that is what Pakistan seems to be considering, Finance minister Ishaq Dar, appeared on a TV programme right after presenting the budget in the national assembly, to hint that a restructuring of the domestic debts was in order and the government was working on it. Even though the claim was later negated by the governor of the State Bank, the finance minister’s words could be held to some esteem.

The far-reaching ramifications of America defaulting

As we have gathered, both Pakistan and the US have somehow managed to save themselves from an immediate default, however, it would be stupid to not consider the consequences of what might have happened had they defaulted. If nothing, brushing so closely past a default should be an eye-opener for the two countries.

Questions of America’s default caused ripples around the globe, raising concerns regarding the stability of the global economy. The country’s mounting debt has far-reaching implications for not just the US, but international financial markets, trade relationships, and the role of the US dollar as the world’s reserve currency. Profit’s source from the banking industry articulated exactly how the US debt crisis can be damaging for the rest of the world. “Firstly, the US Treasury bonds, historically regarded as a safe investment, may lose their appeal if investors begin to lose faith in America’s ability to manage its debt. This can cause the demand for US bonds to decline, having trickle down effects on interest rates, investments, and market stability worldwide,” he explained.

Furthermore, he highlighted how there can be serious ramifications of the potential depreciation of the US dollar on global trade relationships. Our source elucidated that since it is the largest economy in the world, any instability in the United States will reverberate throughout the global trading system, leading to decreased consumer spending, reduced imports, and potential disruptions in supply chains, affecting countries reliant on American markets. “The world cannot afford another economic slowdown, especially after the one caused by the Covid-19 pandemic, with conse-

quences, including increased unemployment rates and reduced business opportunities worldwide.”

Lastly, the debt crisis has challenged the US dollar’s status as the world’s primary reserve currency. The confidence in the US dollar as a reliable store of value and medium of exchange has long been a cornerstone of the global financial system. Profit’s source said that, “A protracted debt crisis may erode this confidence, potentially leading to a shift towards alternative currencies or a more diversified reserve currency system. As inclusive as that sounds, such a transition would have profound implications for global financial institutions, trade settlements, and the overall stability of the international monetary system, and no one is quite ready for a massive shift such as this.”

Who would be affected if Pakistan defaults?

Compared to the US, the default of Pakistan has little impact on the world. Apart from creating market gaps in the import and export of some global commodities, it would not even create a tiny ripple, let alone a shockwave.

Yet the same default would wreak havoc on the country itself and its people. According to a report recently published by Arif Habib Limited, “Pakistan is currently experiencing severe inflation, with a headline inflation rate of over 28% so

far this year. This situation could worsen significantly if the country defaults on its debt.” Past examples show that whenever a country defaults, the government resorts to printing money to fund its spending, causing severe economic and social consequences such as shortages of essential goods, increased poverty levels, and political instability.

A sovereign default can also have a fascinating impact on exchange rates, and it’s no different when we look at the recent example of Sri Lanka during its economic crisis. As the country’s financial situation worsened, the Sri Lankan currency began to bear the brunt of the turmoil. Before the formal default announcement, the Sri Lankan Rupee (LKR) experienced a wild roller coaster ride against the US dollar. Within just two days, the exchange rate plummeted from 202 LKR per USD to a staggering 255 LKR/USD. The downward spiral continued, hitting an all-time low of 370 LKR/USD on May 12th. This real-life financial drama showcased the volatility and potential consequences that a sovereign default can bring to a country’s exchange rate.

According to the report by Arif Habib limited, sovereign default by Pakistan could also trigger economic sanctions from creditors, lawsuits to recover unpaid debts, and further downgrading of its credit rating. It could also result in a downgrade in credit rating, as seen with Puerto Rico, would make borrowing costly. It is important to note that Pakistan’s current credit rating is

already speculative or “junk” grade.

Contrary to popular belief, Pakistan’s default does not shake the world as it once used to. That has become apparent by the reluctance shown by the International Monetary Fund in disbursement of funds.

A glaring dichotomy

Apart from changing the global economic course, what does the US debt crisis say about Pakistan’s debt crisis? It probably raises more questions than it answers, but let’s look at it from a comparative lens. The debt-to-GDP ratio of the United States of America, the biggest economy of the world, is 116% while the same for a country like Pakistan is less than 80%.

Isn’t it then unfair for only Pakistan to be downgraded and scrutinised significantly, while countries like Italy and the USA are let off the hook? Yes and No. Much like our day to day lives, the rich have more luxuries than the poor. They get to make rules, break them and then set new ones. The predominant reason due to which the US cannot default on its dollar debts is that it literally has a machine that can churn out dollars. It can cause inflation, it can ruin lives of its own citizens, but it will never stand at the brink of a situation that Pakistan is standing at. For creditors that is reassurance enough to not write a debtor off, and degrade their ratings.

Dollar dominance, as it stands, is most likely not going to change soon. “Despite global efforts, I think in the years to come, the dollar will remain a dominant currency. Other currencies might be able to capture some market share. But the dollar is not going away any time soon,” said Pasha, talking on the subject.

Pakistan, Sri Lanka and Ghana are all peas in a pod. The pod being the developing world that not many care about or are affected by. The US reigns as a global superpower, so much so that the entire world has a vested interest in saving them from defaulting. And that is why despite both countries making financially unsound decisions that have landed them at the precipice of an economic crisis, it is far easier for the US to avert a default than it is for Pakistan and its like. n

managed to dodge a bullet, but will everyone else be as lucky? Bykea

The Bykea hacking incident has raised some serious data security issues across the nation

By Nisma Riaz and Daniyal Ahmad

Early on Tuesday last week, one of the leading lights of Pakistan’s startup ecosystem became the centre of an embarrassing but seemingly harmless hacking incident.

At 12:01 PM in the afternoon several Bykea users received a pop-up notification from the application.

Hackers had breached a third party application and sent two obscene and abusive messages to users as a nationwide app notification. The incident ignited a firestorm of jokes and mockery on social media, with rival companies joining in on the fun. Bykea quickly bounced back from the

attack by the end of the day, and affirmed that no personal data was leaked.

But this was not a joke. It was a not so pleasant trip down memory lane for both users and tech companies alike. However, the incident did show that Bykea had learned from the mistakes of those before them, by only having an ancillary part of their business affected. Had they stored sensitive user data on their app’s domain and

had that been compromised, the incident would’ve been a lot more serious. But what about other companies? Have they learned their lessons too? And will they be as lucky when hackers strike again?

Let’s start with what happened at Bykea last Tuesday.

Grazed by the bullet

We were eager to know what transpired at Bykea, so we contacted Rafiq Malik, Bykea’s Chief Operating Officer. He divulged that Bykea’s app was not hacked, but a third party tool that they used to send push notifications to their users had been compromised.

Rafay Baloch, an ethical hacker, helped us decipher this enigma. He said that Bykea was using a tool called One Signal that provides push notification services to mobile apps. He said that a security faux pas caused an Application Programming Interface (API) Key to be leaked in the production and the attacker used it to send notifications. He likened an API Key to a password for applications that provides authentication to users requesting service. He said it was like entrusting a duplicate set of keys to your house to someone.

This could have been a debacle if the attacker had access to any critical tools of Bykea’s app. Baloch cautioned us that Bykea does not store debit/credit card details and those are kept with a merchant processor, which is an entity that facilitates card transactions and other payment-related services³. He said that Bykea is not compliant with the Payment Card Industry Data Security Standard (PCI DSS), which is a set of security requirements for card transactions.

Malik corroborated this and said that sensitive customer information is not stored with Bykea, but with local banks, so the hack did not affect their security.

However, one is not so lucky all the time.

Ghosts of cyber security past

The panic that ensued after the recent incident with Bykea has resurfaced some traumatic memories in the industry, reminding us of the misfortunes from the past. Listing all the times a tech company has been dangerously compromised might be out of the scope of this article, however, we can go over a few cases to demonstrate that cyber security is nothing less than a joke for Pakistani tech companies.

Back in 2018, ride-hailing service Ca -

reem experienced a significant cyber-security breach that resulted in the compromise of personal data of several customers and drivers. Approximately 14 million customers and 558,000 drivers across 13 countries were active on the Careem platform during this time. Even though it was assured that passwords and credit card information remained uncompromised, the stolen data consisted of customers’ names, email addresses, phone numbers, and trip history details, such as pick-up and drop-off locations, which raised serious privacy and safety concerns.

Similarly, Careem’s direct competitor Uber was the victim of a similar hacking incident in 2016. According to a Bloomberg report, on November 22, 2017, hackers managed to steal the personal information of 57 million customers and drivers from Uber Technologies Inc., and this significant breach was concealed by the company for over a year. In response, Uber removed its chief security officer and one of his deputies from their positions due to their involvement in covering up the hack, which also involved making a $100,000 payment to the attackers. During the October 2016 attack, compromised data from approximately 50 million Uber riders worldwide included their names, email addresses, and phone numbers.

According to a previous investigation conducted by Profit, it was confirmed that unethical practices, such as blackmail and hacking, are prevalent in the industry. Notable examples include Zameen.com and Pakwheels.com, two highly popular Pakistani startups. Both companies were targeted by a group of bounty hunters posing as ethical hackers. Subsequently, both startups experienced security breaches not long after the ‘warnings’ they had received. In the case of Zameen.com, a real estate portal, the hackers went as far as publicly disclosing sensitive user data, including names, passwords, email addresses, and phone numbers. As a result, the Federal Investigation Agency’s cybercrime wing, the National Response Center for Cyber Crime (NR3C), took action and apprehended several members of the group involved in 2016.

This issue is not limited to private sector companies but also affects public sector enterprises. In an extremely embarrassing turn of events Pakistan’s largest data centre operated by Federal Board of Revenue (FBR) was targeted in a cyberattack resulting in shutdown of all official tax machinery websites. Adding insult to injury Pakistan Revenue Automation Limited responsible for data protection was also compromised around the same time.

Earlier this year in January Pakistan’s National Power Transmission Company

(NTDC) systems were allegedly hacked. But should it be that easy for a country’s power transmission system to get hacked? The answer is no! These events don’t just call for better security but also urge for important law and policy changes to enable a better secure tech ecosystem.

What if lightning strikes twice, or strikes you?

How would you feel if you received obscenities from an app you trust? That’s the shocking ordeal that Bykea’s users endured, when they saw abhorrent messages emerge on their screens.

Fakhra Haq, an IT expert, told Profit that this was a severe breach that could have disastrous consequences. “Firebase code hacks are especially treacherous because they can access and manipulate the database, plunder user data, or disrupt the functioning of the application. Internal leaks can also result in the exposure of sensitive data, intellectual property theft, or compromise the security of the system,” Haq said.

Haq advised that data security is not something companies can overlook, as it affects not only their reputation and operations, but also their customers’ security. “Unauthorised access, hacking, or leaking internal information and code is illegal and unethical. Companies and developers should implement robust security measures, such as access controls, encryption, and regular security audits, to shield their systems and data from such incidents.”

Bykea’s hack may not have imperilled customer safety, but it certainly undermined customer trust. The hack raised many questions about how safe Bykea’s data is and how dreadful it could have been. Haq said that such incidents have intangible consequences as well. “Users and customers affected by internal leaks or code hacks often feel betrayed and concerned about the safety of their personal information. They expect companies to prioritise the security and privacy of their data and may lose trust in the affected organisation. Users may also be nervous about potential misuse of their data, such as identity theft or unauthorised access to their accounts.”

Skeletons in our tech closet?

Trusting app developers to value one’s security as much as they themselves do is a mistake many people make. You are using a mo -

bile app that stores your personal data: your name, address, phone number, bank details, and location. And your data is vulnerable to cyber attacks.

This is not a hypothetical scenario. This is a reality for many users of mobile apps that contain sensitive information. And this reality is horrifying. Profit spoke to a cyber security expert, who wishes to remain anonymous. They exposed the truth about data breaches. “Many mobile apps have blatant vulnerabilities that hackers exploit every few months. The main reason for this is that security is an afterthought. The software is not designed with safety and security in mind, but the task of making the app more secure comes later, and that entails a hefty price.”

They continued, “Some companies have been admonished repeatedly about fortifying their security, but they have no incentive to do so. They shrug off the warnings and claim that the vulnerabilities are features, not flaws. They only consider how the app can be utilised and not how it can be exploited or abused, so it’s a flaw in the development process.” Why are these companies so negligent about security? The expert elucidated that, “Investing in security is exorbitant. It is not facile or economical but it is indispensable and the repercussions can be calamitous and costly.”

“Security is all about tradeoffs,” they elaborated, “Investing in greater security often impairs the application’s performance, usability, operating costs and functionality. To eschew making these changes, companies skimp on their software and staffing, and with following SOPs.”

Our source also highlighted the dearth of proficient professionals in cyber security. “There is a dire need for training. We are severely deficient in well-trained professionals in the field. Many cyber security experts or those who purport to be experts are not trained to be IT and cyber security experts, but emanate from unrelated fields.”

According to the same source, there is a grave lack of awareness and tech-literacy in the country. Everyone from developers to policy makers and auditors to the workforce and the users is oblivious to the risks involved in dealing with sensitive information that can imperil lives.

“People enter very personal information in these apps, having no clue who can access it and how it can be misused. And when the users are reckless and not asking the right questions, companies can easily turn a blind eye to the issue.”

The expert suggested that the government should play a more proactive role in regulating data security and privacy

issues. “Data security and privacy issues will never get resolved unless the government holds feet to fire. When laws that penalise such negligence are enforced, there will be a decline in data and privacy violations. Currently, there is no legal requirement for tech companies to keep data safe, so data security is not a priority for them.”

However, despite the dire need for better policies, the Personal Data Protection Bill of 2021 was not cleared by the Ministry of Information and Technology and a similar 2023 bill awaits approval. Tech companies have no incentive or obligation to comply with crucial safety measures when there are no laws constraining them to do so.

Altruistic and ethical values, thus far, have failed to convince companies into being more responsible but incidents, such as the recent one, serve as reminders for companies to take their cyber security seriously.

It is not only dangerous and costly but also extremely embarrassing for such events to occur, as it reflects upon the carelessness of not just tech companies, but policy makers, law enforcers and auditors, as well.

These events don’t just call for a better sanctity of data, but also urge for some important law and policy changes to enable a better and secure tech ecosystem.

What can companies do to ensure better security?

Baloch asserts that there are ingenious strategies that can be employed to avoid such catastrophes and protect both the reputation of tech companies and user data. “At a strategic level, a foolproof process should be established to prevent any code from being moved to production without approval from the security team.

On a tactical level, it should be ensured that automated security scanning tools are integrated into the CI/CD pipeline to detect security misconfigurations such

as hardcoded keys. Additionally, companies should consider rotating API keys,” Baloch revealed when asked to provide practical solutions to data security challenges.

Bykea was an unfortunate victim of this incident due to the actions of a third-party vendor. However, this does not diminish the threat of internal vulnerabilities that many companies face. Baloch elaborated on this by stating that “Insider threats are one of the most significant challenges in cybersecurity.

The best practices to avoid such issues include implementing the principle of least privilege, where individuals only have access to the minimum amount of resources required to perform their duties. Organisations should also have a robust offboarding process, including revoking access when employees leave. Additionally, user behaviour analytics can be used to identify suspicious users.”

Our cybersecurity expert asserts that common ride-hailing, food delivery, medical services, and dating apps should all have intrusion detection and prevention systems in place to ensure secure storage of user data. “Every security system used should undergo a risk analysis to identify potential attacks and asset types to determine which areas and tools are critical.

This assessment allows companies to rank their application’s tools from high to low risk in terms of value and impact if compromised and invest in security accordingly,” they explained.

The incident with Bykea attracted a lot of attention, but fortunately, no serious damage was done other than harm to their reputation. However, we must take this incident as a wake-up call because firebase hacks and internal leaks are not uncommon and can pose more severe privacy, security, and safety concerns.

All sources in this article agreed that a policy shift and government involvement are necessary for ensuring data integrity in the country. n

“Firebase code hacks are especially treacherous because they can access and manipulate the database, plunder user data, or disrupt the functioning of the application. Internal leaks can also result in the exposure of sensitive data, intellectual property theft, or compromise the security of the system”

Fakhra Haq, IT expert

By Zain Naeem

In order to study any crisis, it is important to note what happened leading up to the crisis, what was done once the crisis was going on and steps taken in its aftermath to prevent it from happening again in the future. In a market like Pakistan, where capital market participants look to control and exploit the system in their favour, it is important that a regulatory body like the SECP looks to protect the interest of smaller investors who typically enter the market mostly with their life savings to invest and expect that when they do invest, the SECP will look to protect them from the sharks present in the system. The stock market crash of 2000 shows that SECP was not well-equipped and did not have a capable enough staff to be able to foresee the coming crisis.

In addition to that, they did nothing substantial or material while the crisis was going on and put in no considerable guardrails once the crisis ended to prevent another one from happening. Their lack of action and inability meant that the smaller investors lost their life savings in the market and later lost confidence in the market which would take years to recover.

Priming the charge

The first crash that can be considered as a case against SECP took place on the 30th of May 2000. The period leading up to the crisis, according to SECP’s own findings, saw massive trading taking place where speculators were taking huge positions in certain scrips. Brokers and speculators started to use these holdings as collateral in banks, raise additional funds and speculate further by increasing their holdings. As the speculators were able to corner the market to an extent, they started to raise the prices which meant their holdings were gaining value and

they could borrow more as their collateral was rising in value as well. Banks and Karachi Stock Exchange had little guidance or processes in place to monitor the risk management that they needed to have put in place. They were using their old, archaic and antiquated measures which meant that as long as their collateral was sustaining its value and could cover the losses in the future, they kept lending more.

Speculators always look to favour a company which they feel is ripe for manipulation and in this regard, Adamjee Insurance (ACIL) and Bank of Punjab (BOP) saw their trading volumes and prices skyrocket which could not be explained by the fundamentals. Most of the times the speculators look to corner a certain share, they look to create hype around it. The human mind is wired in a manner where it starts to see patterns where there aren’t any and attempts to rationalize everything. As the small investors started to see higher volumes and prices, they rationalized it believing in rumors of a positive development which would be announced soon. This is termed as dehan or the trend being seen. Based on this dehan, small investors started to pour their own savings into the same companies expecting to make a profit. The speculators feed on this market sentiment and capitalize on it by actually perpetuating any such rumors in the market.

In terms of the buying being carried out, speculators were able to leverage their buying by utilizing the process of carry over trade. This is a mechanism in which a financier will put up the funds for the shares while the speculator promises to pay back the financier with interest at a later date once they are able to sell their shares at a profit. In local lingo it is termed as badla. At one point, the carry over trade of AICL was more than its net free float available in the market, which means that a majority of its actual value was made up of essentially nothing; pure speculation.

While all this was going on, SECP was not expected to intervene and take any cor-

rective measures. Rather any such steps were carried out on an ad-hoc basis by banks or the Karachi Stock Exchange. In fact, the SECP has been found sleeping at the wheel more times than it would like to remember.

This judgment can be made based on the fact that within 10 years of its establishment, SECP saw 3 different crises in the Karachi Stock Exchange and it failed to provide the framework and infrastructure to deal with these. The result was the destruction of trust of the investing community as small investors always bore the burden of the loss while the big market players got to reap the benefits.

Detonation

As the market was heating up, the KSE decided to put additional risk management tools by raising the margin requirements against the collateral taken out which had to be funded by the speculators and in turn the financiers. This was done in conjunction with a downgrade in the risk profile of the stocks which meant that the pledged stocks had lower collateral value than before and needed to be reinforced before additional trading could be carried out. This was a knee jerk reaction and a solution of the last resort which the Karachi Stock Exchange had the power to do.

The SECP had given powers to the KSE and the banks to set their own risk management systems on a case-by-case basis. This was a measure to protect the markets from a meltdown and to protect the market from a default taking place. Even though it was a step taken in line with its risk management controls, at its core, the measure taken by KSE proved to be disastrous. As liquidity in the market dried up, the markets began to fall, leading to a death spiral. As more liquidity was taken away from the market and used to back margin financing needs, the markets kept falling, leading to a fall in prices which needed additional funding leading to a vicious spiral and the inevitable

Regulators, by definition, must regulate, actively and effectively. When they don’t, it’s a case of ‘when the cat’s away, the mice will play’.

stock market crash of 2000. The crash caused a settlement crisis and markets had to be closed in the end of May and start of June culminating in the default of one broker in Karachi and suspension of four brokers in Lahore.

The aftermath

Following the crash, investor confidence had taken a serious hit as the steady fall of the market and its subsequent temporary closure hurt investor sentiment. Measures were then taken to discourage such activity from taking place again. Exposure limits of brokers were increased to make sure their risk management could be brought in line with the volumes the market was trading. Additionally, net capital balance was used to determine how much brokers could hold in terms of their trading capacity while settlement period was decreased from 5 days to 3 days to minimize the risk of settlement default and short selling was limited to a smaller operating window.

Till now all exchanges were operating based on their own rules and regulations. Up until 2000, SECP had no division carrying out surveillance and monitoring but one was set up following the crash. Lastly, an investor complaint cell was set up to address any queries and complaints of clients but it seems this was a step taken far too late as the investors had little interest once they had lost their money.

SECP failings leading to the crisis

It is clear and evident by the reaction to the crisis at the SECP that more could have been done and should have been done. The fact that KSE had to take action, when they saw the market overheating to such an extent, shows that SECP did little to nothing to protect the markets from themselves. As there was no formal monitoring wing at the SECP, they had no mechanism in place to see how the market was overheating on a daily basis.

KSE was only able to take extreme measures when it was too late, that too in a haphazard manner. A monitoring wing at the SECP, being setup before the crisis hit, could have taken notice of the trading activity taking place in the market. The volumes and prices of the scrips are recorded on a daily basis, quoted and published. The first red flag should have been the jump in volumes which had taken place and the value of trading which was seen on a daily basis.

The acceleration of the crisis was perpetuated by the fact that most of the volume seen in the market was in a few companies which should have been noted as well. The constant rise in prices and volume without any change in the economic fundamentals of the compa-

Capital markets around the world are set up in order to allow companies and financial institutions to raise funds and capital while allowing for investors to invest in the products that they seem fit for investing. They are able to provide a marketplace where buyers and sellers are matched and are able to function as the middlemen in the process. As their function is to maximize profit and utility, the task of regulation falls at the feet of a quasi-government organization. Its job is to ascertain that markets perform in an efficient manner while making sure that the investing community is protected and shielded from predatory and unfair practices. Securities and Exchange Commission of Pakistan (SECP) was set up as a licensing, monitoring and regulating body in 1999 tasked to facilitate the corporate sector and the capital markets of the country. Effective enforcement of regulations would have ensured that markets performed smoothly and efficiently for the benefit of the community and country on the whole. The case for SECP has actually been opposite where it has looked to interfere as little as possible. SECP has made the necessary regulations and put them into place but has not always looked to monitor and enforce the laws and regulations it has formulated. This approach to be reactionary rather than be proactive means that by the time SECP steps in, investors have already lost their money or hold shares which are virtually worthless. Even after the blame has been placed and the culprit has been identified, the actions taken are no more than a slap on the wrist. Lastly, the steps taken to protect the market are not effective enough and the participants in the market are again able to find loopholes in the laws to take advantage again starting the manipulation cycle again.

nies should also have been noticed as rationale of the rise could not have been justified. If that had been done, trading activity could have been brought into check. This could have acted as a release valve which could have taken away pressure being built up in the system from the artificial rally. By addressing the narrative around the price rise, the rumors or fuel for the dehan could also have been addressed which would have helped investors spot the economic reality of the rise and sell their shares once the rumor was debunked as being baseless.

Lack of action in crisis mode

The measures that could have been put in place before the crisis perhaps could not have been foreseen earlier and SECP can be given the benefit of the doubt in that case as it was a young and immature body at that point. This cannot be said for the reaction of the SECP once the crisis had taken place. Once there was a likelihood of a default, SECP could have contacted the KSE in order to determine the value of clients who stood to lose in the situation and protect the clients from a loss on their investment. This could have been carried out by developing a fund or a protection mechanism which would have meant that even if a broker had defaulted, the investors could have recouped part of their losses which could have dampened the damage. T

The overheating in the market was not caused by smaller investors and they should not have been punished when the whole system came tumbling down. This was a failure for the SECP as it sat on the sidelines and let the KSE take the corrective measures they saw fit. None of the measures being taken by

the KSE were scrutinized or independently studied and they were given total control of the situation. The board of the KSE, with such sweeping authority and power became self-serving, looking after its interests and members of the board, while investors were left to fend for themselves.

Insufficient accountability

Following the crash the SECP introduced procedural and regulatory changes in teh system but dropped the ball yet again when it came to punishing those responsible for the debacle. Their approach was only putting in measures which could make sure that a market crash like the one seen in 2000 could never take place again. The parties who were the culprits of the crash, namely the financiers and speculators, were also allowed to escape any with little to no punishment being dealt out. A brokerage house being run by a market expert having an experience of more than 30 years will find ways to circumvent laws and regulations. The SECP was never meant to be flexible and quick in its responses to the everyday changing corporate sector and that shows in their inefficiencies to provide helpful feedback during the crisis. The role of the regulatory body is to be the voice for the powerless in the market and to make sure they are protected but SECP showed that it was not up to the task

The primary reason for the crisis taking place was the badla market which was used to perpetuate and damage the market. In the aftermath of the crisis, the SECP did not take any substantive action against it, leaving the stock market vulnerable to other similar episodes of volatility and mayhem. n