Profit E-Magazine Issue 259

CON TENTS

08

08 Crash and burn: How and why Pakistan's stock market collapsed twice, in a span of three years

14

14 Crude awakening: The economics of oil and why Russia isn’t a feasible option

21 A cotton comeback? Don’t bet on it

24

24 After two years on cruise control, MG has decided to shift gears

28 Art tourism: A catalyst for economic growth and cultural exchange in Pakistan

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

Crash and burn: How and why Pakistan’s stock market collapsed twice, in a span

of three

years

The crash of 2005 and market freeze of 2008 are a prime example of bad decision making and even worse regulation by those in charge

By Zain Naeem

The stock market crashes of 2005 and 2008 were an example of the markets doing all that they could in their own favour at the expense of the investors and getting away with it scot free as they had captured the board of Karachi Stock Exchange and, by extension, the SECP. The

lessons that had been learned in the crash of 2000 (read article published in an earlier issue of Profit titled “Anatomy of a stock market crash) had been forgotten and as the markets were rallying again, it was felt that there were checks and balances which would protect from another crash.

Sadly, that was not the case.

What was seen was a perfect example of how the big market players looked to game the system for their own personal gains and

when things did get out of hand, they protected themselves and evaded any accountability or punishment. SECP also played its part in the crisis by sleeping at the wheel while the crisis was approaching, letting the market players act on behalf of the whole market and in the end put in a few paltry actions which were reactive at best and ineffective at worst. It was the capture of the KSE and the motive of profitability which characterized the crisis primarily.

Adeel Zafar, a prominent investor and former broker at Lahore Stock Exchange, states that “SECP has failed to provide a level playing field on a consistent basis to the investors and brokers against the big market players. Due to this, the small investors have always been let down.”

The lead up to the crash of 2005

The period leading up to the crash saw a major bull run as the macroeconomic conditions of the country were improving. The time before the crash

was fueled by badla financing in conjunction with the futures market. With the low level of investment required in the futures market and use of badla financing, the ability to leverage the position grew exponentially. The positive sentiment prevailing in the market was expected to continue and it was predicted that the macroeconomic trend will trickle into the capital markets.

Before we begin, an explainer (skip if you already know this)

Futures trading

A basic understanding of future markets is required to understand what happened as future markets in tandem with the badla market, played a huge role in this crash. Futures trading is when an individual makes a commitment in advance that at the end of the month they will either buy a share or sell it. For example,

now with the use of fewer funds by buying it in the future when he will be able to procure the payment. There is also an opportunity for the buyer to sell at a later date which will be against the purchase he has made and the sale will be met with the purchase carried out. He can do this when the price of the future market has increased and he is willing to book a profit. The incentive for the seller is that the price quoted in the future market is mostly above the one being quoted in the regular market (a premium is attached) and if the seller feels that he is making a significant enough profit, he can sell shares in the future. The seller also has an opportunity to close out his sales position earlier if the share falls in value and the seller feels he has made a considerable enough profit to allow him to close out his position.

The rot of the crisis seeps in

According to the investigation carried out by SECP, it was seen that the big players had created a nexus amongst themselves to perpetuate the bull market. With rumors circulating in the market regarding a new reserve discovery from OGDCL and privatization of PTCL, the conditions were primed for manipulation.

The market was already being artificially maintained at unsustainable levels and rumors like these made sure the positive sentiment never left the markets. Most of the volumes being traded in the exchange were between a few brokers who kept trading amongst themselves in order to post higher volumes. An estimate is that 0.1% of the investors in the market were responsible for 98% of the trades. This was facilitated by brokers having trading accounts with other brokers. During a day, a scrip would be cycled through the accounts of several brokers which would give a false sense that huge volumes had been traded which was synthetic rather than organic. In its report, the task force states that Worldwide Securities (Pvt) Limited traded over Rs. 115 billion worth of shares in the month of March which accounted for 6% of the total value of trade carried out for six of the leading securities being traded for the whole month.

saw an increase in remittances, low interest rates and above average corporate results which were reflected in the form of stellar IPOs being carried out in the capital markets. From December 2004 to March 2005, the KSE index rose by 65% from 6,218 to 10,303 and value traded at the markets skyrocketed from Rs. 20 billion per day to Rs. 50-100 billion a day. As there had been no action taken against badla or carry over trades after 2000; the market rise

suppose the month is currently June. A trader can sell shares in the futures market where he makes a commitment that at the end of July, he will deliver the shares to the one who is buying the futures contract from him right now. The futures market is a derivative market and allows for an individual to buy a share in the future by not putting up the whole payment in one go and allows him to delay his payment until the settlement of the trade is carried out on a future date. The incentive for the buyer is that he is getting a position in a stock right

This created a bubble in the market which was being pumped through continuous and excessive funding being carried out and the market bubble growing further. Once the funds dry up, the bubble cannot grow anymore and starts to shrink as prices fall. Someone who has bought shares on borrowed money has to earn a return where they can pay back the interest on the borrowing and make a profit. When prices fall, they end up making a loss and will have to pay interest on their borrowing leading to a further loss.

In addition to that, as demand for funds was high and supply fell, it was seen that the borrowing rates, which had been capped by KSE at around 18%, were actually around 100%

in LSE. Investigation carried out after the crisis claimed that many of the financiers, who were providing funds to the market, started to remove much of this funding. Between March 7th and 15th, a total of Rs 5.7 billion or 17% of the financing was withdrawn.

The reason for the withdrawal of funds was that many of the financiers had carried out short selling in the futures market and it was in their interest for the market to fall. They wanted the prices to fall to earn a profit and by deflating the bubble, they were able to cause the market to fall. This precipitated into a market crash as the market started to fall without any stop in sight.Such a crash means that the investors who have entered the market seeing a bull run end up making a loss.

On the other hand, the bigger players of the market end up making a gain on both occasions at the expense of small investors. When the market is going through a bull run, they are able to earn a relatively risk free return as investors borrow from them. Once the bubble bursts and the shares begin to slide, they are able to take a short position in the futures market and are able to earn a profit as prices fall.

Actions taken by KSE during the crisis

Once it was understood that the markets were going to fall substantially, KSE looked to address the situation themselves while the SECP gave legitimacy to any actions being carried out. In order to protect themselves, the KSE stepped in and all that was said was that risk management controls had to be strengthened to avoid any default. These claims were unfounded

and the exposures and deposits would have countered any adverse situation. The KSE put in the controls based on their own decision making process rather than providing rationale and reasoning for these decisions. No record of meetings and telephonic conversations was provided to the SECP initially and later to the task force. There was a feeling that these records would solidify the claim that KSE was working as an alliance to earn profits while creating havoc for the investing community.

Recommendations of the task force

As brokers were making the rules for themselves as they were part of the board of KSE, the task force recommended structural reforms to be carried out which included demutualization

of all the exchanges. Demutualization would result in enhanced governance and transparency at the stock exchanges and greater balance between interests of various stakeholders by clear segregation of commercial and regulatory functions and separation of trading rights and ownership rights This would have lessened the influence of the brokers who wanted a problematic status quo to persist.

In addition to this, it was suggested that proprietary trading would be regulated and brokerage houses could not trade through other brokerage houses to pump up the volumes. Trading was also regulated as brokers could not front run their clients and put them at a disadvantage. Front running is when brokers have important information and they use it before disclosing it to their clients. SECP was asked to carry out regular audits and set fines for breaches in line with the offense of the brokers. Badla financing was again seen as a huge evil and it was suggested to phase out carry over trades as they were unregulated and open to manipulation.

Role of SECP

The SECP had a distanced approach to the crisis where it gave out directives and carried out meetings with the major actors in the market but did little to nothing to make sure these directives were enforced. The monitoring and surveillance wing which had been set up failed at its first hurdle as it was not able to supervise the markets properly and allowed the crisis to happen. A robust surveillance system would have looked at the volumes being

traded in the market and the constant increase in prices should have raised some alarm at the SECP.

SECP failed to take cognizance of any such irrational trading activity. In terms of the actions taken by KSE, the SECP did little to hold them accountable to the decision making process that it had used. No records backing the decision-making were asked for by the SECP and as KSE took actions as they seemed fit. The SECP did not carry out an independent review on the circumstances being presented to it. The SECP took guidance from KSE and went along with whatever justification had been concocted by the brokers and eventually the board of KSE.

SECP had also failed to regularize the research reports that were issued by the brokers essentially. An example of this was when on 11th January 2005, Al-Falah Securities claimed that they had sources inside PTCL which were telling them the revenues of the company would increase. In simple words, this was tantamount to insider information being sold in the garb of research and was against the rules.

The small investors left unprotected yet again

The regulatory body failed to meet the needs and demands of the investing community yet again because of their self-serving hamfisted approach doing their job, or lack thereof. Since the crash of 2000, the market players had developed mutual funds, proprietary trading, extensive use of badla financing and investing in the futures market. All these spheres of the market could have been checked on but SECP left a regulato-

ry vacuum. Some foresight at the initial stages of development of these tools mirroring other developed markets around the world could have helped. SECP could have carried out case studies and researches and developed a regulatory framework. On the contrary, the SECP again went with their approach of falling in a ditch rather than spotting the ditch beforehand to learn from mistakes made by others. As brokerage houses ventured into these areas, they identified the loopholes and then took advantage of them.

While the crisis was going on, the SECP again looked to the KSE to provide the information and guidance in order to develop a direction in addressing the crisis. SECP should have taken the lead by carrying out an independent investigation while the crisis was going on in order to check whether the information being given to it was true and backed by economic reality. SECP failed to carry out any such investigation during the crisis and assigned a task force after the crisis to find the causes for the crisis. This achieves little to alleviate the fears of investors who have lost their investment and damages investor confidence in the market. SECP should also have been more stringent on the accountability aspect by asking the KSE to provide proof based on which they made their decisions and punish the culprits of the crisis.

The market freeze of 2008

The market freeze of 2008 was unique in the context of not only Pakistan’s capital market but for the capital markets around the world. It was not

the crash itself which was seen to be the problem but the measures taken in order to curb the bleeding which hampered the investors’ confidence and trust in the markets. The scars of the freeze are still present in the investment community to this day. The move carried out can be encapsulated in the statement given to Dawn on 9th of January 2012 by Simon Cox of Hong Kong based Emerging Markets Stock Invest Fund, in respect to what eh KSE did, that “I have gone through the record of stock exchanges and never since the oldest stock exchange in the world at Amsterdam was established in 1602, I could locate an example where a stock exchange had ever blocked the exit in violation of basic principles of free market mechanism.”

Foreign portfolio investment fell as a result of this and Pakistan was removed from the MSCI Emerging Markets Index due to the deterioration of basic equity market operations caused by the imposition of the floor and virtual shutdown of the Pakistani equity market. Later when Pakistan applied to be included in the MSCI Frontier Markets Index, MSCI stated that it needed an assurance that a measure like the market freeze carried out in 2008 would not be repeated for their proposal to be considered. The exclusion from Emerging Market index to Frontier Market index was a downgrade in itself which shows the impact that the decision had on Pakistan.

The bears are here to stay

The period leading up to the stock market crash started in April of 2008 which was characterized by political and economic uncertainty. On the economic front, foreign reserves were falling, rupee was depreciating, credit agencies were downgrading the debt rating and the final nail in the coffin was the State Bank of Pakistan increasing the policy rate by 150 basis points to 15%. The depreciation in the currency was causing capital flight and foreign portfolio investment in the market kept falling, leading to a decrease in the KSE index.

The start of the slide saw the index lose 554 points in April which led to a loss of Rs. 156.21 billion in terms of the market capitalization. In addition to the economic conditions, there were fears that the government would impose a Capital Gains Tax in the market to address its revenue deficit. This saw the market slide further by 2,992 points in May leading to a further depletion of Rs. 888.57 billion in

market capitalization for the month. The negative sentiment sustained at the KSE for a prolonged period of time and saw a member of KSE default on May 26th. With the SECP and KSE taking steps to strengthen the risk management systems, it was felt that adequate measures had been carried out to protect the system from the default of one member. Still, there was a feeling of unease in the market that a bigger crisis was looming.

Circuit breakers revised

Initially, the KSE carried out small fixes in order to address the situation in the market itself. As the markets kept sliding, the KSE revised the circuit breakers which were -5% to +5% and changed them to -1% and +10%. A scrip could have fallen or risen by 5% before a circuit breaker was triggered and trading in the scrip was stopped. The revision meant that a scrip could only fall by 1% but increase by 10% before trading in the scrip was halted. This was a cosmetic change carried out for a short term relief but limited the ability to trade freely. It would actually have been better to carry out some bloodletting to allow the markets to fall to the levels which could be justified economically. The circuit breakers impacted the volumes which were hovering around 240 million shares on a daily basis in 2007 and fell to around 20 million shares per day which was a 10 year low for the market. Additional measures put in place prohibited short sale and a proposal was in the works to set up a Market Stabilization Fund of Rs. 30 billion in order to cushion the fall being seen in

the market.

This would have stabilized the markets and given some impetus for buying to be carried out. By putting controls on the downside in the market, it was evident that rather than make the markets efficient, the KSE and SECP were looking to move the market in a single direction which goes against its role as a regulator.

The crisis takes shape

The impending crisis which was foreseen in May was finally realized when August saw the index fall by 1,376 and broke the psychological barrier of 10,000 touching 9,853 points on August 4th. As explained earlier, when a bubble is building, investors are expecting that the share prices will keep increasing. As they are confident of prices increasing, they start to buy more shares and use these shares as collateral against the borrowing. Once the bubble bursts, the share prices crash. This means that the investors who had borrowed need to put up more collateral as their previous collateral has lost value. When prices keep falling, there is a risk that borrowers’ collateral will run out and the borrowers will start to default.

The board of KSE was now getting prepared for a full blown crisis and held a meeting on 5th August. They had to decide whether to close the market, delay the opening or freeze the market totally. As the situation was becoming critical, the Board of KSE took the lead and decided in a meeting held with the members on 27th August to place a floor in the market. This was backed

by 100 of the 103 members who attended this meeting. The market floor meant that shares could be traded within a narrow band and could not be traded at a price lower than the floor price set at the prices seen on 27th August. The wisdom and rationale of this decision was later clarified and justified at different forums. It was argued that such a drastic measure was taken to galvanize the government to step in and correct the situation prevalent in the market. It failed to do so. The measure was not meant to last more than a few weeks but as the measure failed pathetically, the market saw a freeze for four months.

KSE takes the lead

The decision that was taken by the KSE was approved by majority and later the Board ratified this decision. It is important to note here that all five broker directors of the Board wanted to impose the floor while the three non-member directors opposed it. One of the SECP’s nominated director’s position was vacant while another one was on leave. If these non-directors had voted with the other SECP appointed brokers, the tie would have been broken by the Chairman of the Board who was against this imposition.

This might never have led to the imposition of the floor taking place. Imposition of a floor meant that local and foreign investors could not easily sell their positions. This not only impacts the current investors but also creates doubt in the mind of prospective investors who fear that such a drastic measure could be carried out again. Before this, there was no other example in the 400 year history of the world where a market was frozen. Even today, the damage is being felt where investors fear that an ad hoc decision like the one which was carried out then could be done again.

The Board of KSE informed SECP regarding the decision made by itself and stated that they would be placing a floor in the market. When the other exchanges were provided this information, LSE responded by opposing such a measure as it would have long term repercussions on investor confidence. Mr. Nadeem Ejaz, who was the Director at Lahore Stock Exchange, remembers his role during that time where he was given an option by SECP to do what they saw fit for their exchange while the SECP was going to ratify the decision made by the KSE. “When we implored the SECP to consider the ramifications of the decision, we were told to only consider the interest of LSE rather than dictate the SECP on how to take care of the situation” he said.

Considering that such a decision was going to be taken by the KSE, the other exchanges also looked to put the same action in place rather than create a distortion in the market

and to maintain the uniformity. The investigation carried out afterwards states that the decision was made in haste, the approval of the other markets was not meaningful as they were strong armed into such a decision. The minutes of a KSE Board meeting held on October 25th mirror this sentiment as one of the board members stated that “if the floor had never been imposed, a limited number of members’ default would have occurred. However, with the passage of time the financial position of a large number of brokers has gotten worse and they are on the verge of default leading to a collapse of the entire system.” The floor was finally removed on 15th December 2008 when the KSE received the directive from SECP. The period after the removal saw a drastic fall in prices as the market fell from 9,187 on December 15th to 5,751 at the closing of January 1st 2009.

Impact of the imposition of the floor

The damage that was felt by the foreign investors was that they had little trust in the market, there was distortion in terms of price discovery and they faced restriction in entering and exiting the market. They also had to look for alternate sources of liquidity as they could not sell their holdings and had to face illiquidity in terms of being able to sell their positions.

These investors had to rely on off market transactions where many of the foreign investors ended up selling their positions at huge losses and discounts. There was a distress sale of MCB at 55% and PSO at 60% carried out by two foreign hedge funds which was carried out through the off market.

This meant that they sold their shares at prices 45% and 40% less than the prevailing price respectively, in order to sell their shares and leave the market. As large foreign investors were able to liquidate their position, this also created anxiety in the mind of investors who were too small to sell their positions and saw such a deep discount being applied to some of their own holdings.

As the market was frozen, many of the brokerage houses also started to use their client’s holding and assets to fulfill their own settlement and margin financing obligations. This was a breach of the trust the clients had placed with the broker as the broker was using the assets of the clients without their knowledge or approval. The total implications and impact of the crisis are still ongoing as many brokers defaulted since the market freeze of 2008. They were left vulnerable due to the market freeze being put into place and in the period since the freeze, many of them have defaulted their clients and fled from the market as a result.

The emotional and psychological wounds of the freeze are still felt to this day. n

Crude awakening: The economics of oil and why Russia isn’t a feasible option

Not all oil is equal, and not every barrel is as profitable as we think

By Daniyal Ahmad

hat pops in your mind when you blurt out the word “Russia”? For the average Pakistani, it unleashes a kaleidoscope of images — our tangled history with it, the frigid climate, a certain beverage that may leave you with a headache the next morning — but for the past year and a half, it has been known exclusively for one thing in Pakistan: oil. Oil that we could get for a steal, oil that would be our salvation. But recent news out of Pakistan Refinery Limited has raised an issue regarding oil that we hadn’t really fathomed before: Russian crude is not the miracle we had dreamed of. It churns out less gasoline per barrel than other sources. So, what’s the catch?

Oil itself is not a simple substance. Mind-blowing, right? It’s not something that we really meditate on. At most in our daily lives the decision boils down to whether we want petrol or diesel at a pump. The thing is; it is a different liquid depending on where it’s dug up. It has a myriad of dimensions, intricacies, and forms.

Just like the Akmal brothers — Kamran, Umar, and Adnan — who are all cricketers but showcase different talents and tactics. Or the different Muslim Leagues — Muslim League (N), Muslim League (Q), Muslim League (F), Muslim League (Z), and the Awami Muslim League — who are all political parties but pursue divergent ambitions and doctrines. Oil has its own variations, and not all oil is created equal.

Oil 101

Petroleum — colloquially referred to as crude oil or simply oil — is a naturally occurring, yellowish-black liquid mixture composed of hydrocarbon deposits and other organic materials. It is formed from the remains of ancient flora and fauna that lived millions of years ago. However, crude oil is not homogeneous; it is a heterogeneous amalgamation of hydrocarbons and other organic materials that vary in their physical and chemical properties. These properties determine how crude oils are classified, processed, refined, and valued in the market.

One of the most crucial properties of crude oil is its density, which is measured by the American Petroleum Institute gravity (API gravity). API gravity is a measure of how heavy or light a crude oil is compared to water. If the API gravity is higher than 10, it means that the crude oil is lighter than water and will float on it. Conversely, if the

API gravity is lower than 10, it means that the crude oil is heavier than water and will sink in it.

WThe higher the API gravity, the lighter the crude oil — and the more valuable it is. Light crude oils have more light hydrocarbons, which are easier to refine into high-value products such as petrol and diesel. Heavy crude oils have more heavy hydrocarbons, which require more complex and costly processing to produce high-value products, which makes light crude oil more preferable for refineries.

The other critical property of crude oil is its sulphur content, which measures how sour or sweet a crude oil is. Sulphur is an impurity that makes crude oil corrosive and harmful to the environment. The higher the sulphur content, the sourer the crude oil — and the less desirable it is. Sweet crude oils have less than 0.5% sulphur content, while sour crude oils have more than 0.5% sulphur content. Sweet crude oils are easier to refine and produce less pollution than sour crude oils.

At one end of the spectrum lies sweet light crude oil — the holy grail of petroleum — while at the other end lies heavy sour crude oil with some medium grades somewhere in between. Sweet light crude oil has a lower liquid density compared to water and a lower sulphur content while heavy sour crude oil has a higher liquid density compared to water and a higher sulphur content.

Looking inside the barrel

Fractional distillation — a term that may seem esoteric to the uninitiated, yet it is the cornerstone of our modern world. This process is the alchemical magic that transforms crude oil into the myriad petroleum products we depend on daily. From the petrol or diesel that powers our vehicles, to the gas oil fuelling machinery and furnaces, jet fuel for aircraft, and even the domestic and commercial heating oil that provides warmth to our homes and workplaces — all are gifts of fractional distillation.

This process is the inaugural step in refining crude oil, and it is often regarded as the primary separation process. It performs the initial rough separation of the various fuels. For our discussion, this is also the only part relevant to the scope of our discourse.

So, what exactly does fractional distillation do to crude oil? In layman’s terms, it boils the crude, allowing us to extract different distillates at their respective boiling points.

Distillates are the oil derivatives procured from the fractional distillation process of crude oil. They serve as energy sources and chemicals in a plethora of machinery and fuel applications. They are categorised into three key areas: light distillates, middle distillates, and heavy distillates. These terms are predicated on the boiling point of the products — light distillates have the lowest boiling point whilst heavy distillates have the highest.

The products with the lowest boiling points are extracted from the top of the fractional distillation column and the heaviest at the bottom. Thus, as oil is refined in the fractional distillation column, products are extracted in order of light, medium, and heavy distillates.

Light distillates — often referred to as ‘top of the barrel’ — have the lowest boiling point. These are primarily utilised as fuels and encompass gasoline or ‘petrol’, liquified petroleum gas, and naphtha.

Transitioning to middle distillates, these have a medium-level boiling point and include an array of fuels used to power everyday vehicles, aeroplanes, and industrial engines such as rolling stock and heavy machinery. Kerosene, jet fuel, and diesel are byproducts of middle distillate.

The light and sweet variety is preferred over its heavy and sour counterpart due to the amount of processing necessary to remove impurities for refinement into fuels such as gasoline and diesel. However, being that light and sweet crude is of a higher quality than its counterpart, it will likely cost you a premium.

So, how much do you get for the premium you might pay?

Lastly, we arrive at heavy distillates. These are often ‘cracked’ into more utilitarian products through a process involving extreme heat, pressure, and the use of a catalyst to break down the long hydrocarbon chains. Byproducts of heavy distillates include furnace oil — names also used interchangeably include fuel oil, heavy oil, marine fuel, marine heavy fuel oil, bunker oil, bunker fuel — and asphalt/

bitumen.

Reports by the International Energy Agency elucidate the intrinsic yields of diverse types of crude oil — irrespective of their specific concoction. For instance, Light Sweet crudes such as West Texas Intermediate, Louisiana Light Sweet, and Brent typically yield 3% gases, 32% light distillate, 30% medium distillate, and 35% heavy distillate.

In contrast, Medium Sour crudes like Mars and Arab Medium generally yield 2% gases, 24% light distillate, 26% medium distillate, and a substantial 48% heavy distillate. Lastly, Heavy Sour crude blends such as Maya and Western Canadian Select yield on average per barrel a mere 1% gases, 15% light distillate, 21% medium distillate, and a staggering 63% heavy distillate. However, these are inherent yields. Actual yields will vary depending on the refinery itself. This is something we will get back to.

The gases, due to their proportion in relation to the distillates, renders them somewhat inconsequential. However, they are the initial extracts, albeit the least significant, from

a barrel of crude oil. This category encompasses ethane, propane, butane, and natural gas, along with ethylene, propylene, and butylene. These gases serve as the fundamental ingredients in the production of an array of chemicals, plastic commodities, and synthetic rubber.

They have versatile applications such as heating, cooking, and transportation. They also function as additives for petrol and blending agents for crude oil derivatives. However, their proportion in relation to the distillates renders them somewhat inconsequential.

Now back to the distillates. The meat of the crude. What do these distillates signify for a refinery in terms of its profitability?

Refinery economics

The financial dynamics of a refinery are intrinsically tied to the Gross Refinery Margin (GRM) — a term that, in its simplest form, represents the disparity between the aggregate value of petroleum products birthed by a refinery and the cost of crude oil.

Consider this scenario: a refinery reaps $140 from the sale of products refined from a single barrel of crude oil, which itself costs $130. The resulting gross refinery margin is thus $10 per barrel. To bolster profitability, refineries continually tweak their product mix to optimise earnings. Fuel oil, for instance, is a low to negative margin product for local refineries. Despite being produced at a loss, it is offset by profits from higher margin products such as petrol and diesel.

Estimates, as of last summer, suggest that local refineries enjoy a margin of $48 per barrel on gasoline — a figure that towers 6.4 times higher than the five-year average. Similarly, the margin on Diesel stands at approximately $58 per barrel — 4.7 times greater than its five-year average. Similarly, the average refinery margins per barrel for gasoline and diesel oscillated within the range of $7.5 and $12.4 respectively. Profit has covered the topic in greater detail for those interested.

Read more: A primer on refinery margins

An industry insider — wishing to remain anonymous — explained the matter to Profit

It’s a complex amalgamation of factors. There’s an elevated shipping cost. There are also higher financial charges due to the convoluted payment process which involves multiple currency conversions

Ammar Khan, Independent economic analyst

as well.

“The lower the furnace oil content in the crude, the better. An abundance of light or middle distillates is preferable — these are the simplest to refine into more profitable products,” our source expounded.

“Diesel, kerosene, and jet fuel — these are the game-changers. They have the potential to easily yield a profit margin of $10-$15 above the crude oil price. The commercial viability of petrol fluctuates with the seasons. At times, it will generate a profit above the cost of the crude oil used for its refinement; at other times, it will merely break even. Furnace oil, on the other hand, is sold at a loss — below the cost of the crude oil purchased for refinement and distillate extraction,” they articulated.

Now that we have a basic understanding of crude itself, let’s dive into the varieties Pakistan imports. And more importantly, why it imports what it does.

Pakistan, and its crude blends

Until June 2022, the lion’s share of oil imports hailed from the UAE, accounting for a substantial 56%, followed by Saudi Arabia at 34%, and Kuwait trailing at 4%. These import statistics were provided by the Trade and Development Authority of Pakistan. Regrettably, data beyond this period remains elusive.

The latest entrant to this list is Russian

crude, imported earlier this year. Profit delved into the myriad crude blends identifiable through their respective assays. A crude oil assay, in essence, is a chemical evaluation of crude oil feedstocks conducted by petroleum testing laboratories. To put it simply, it’s akin to dissecting a barrel of crude based on the distillates mentioned earlier.

The crude blends under scrutiny included Murban (UAE), Upper Zakhum (UAE), Das (UAE), Qatar Marine, Al Shaheen (Qatar), Oman blend, Arab Light (Saudi Arabia), and Urals (Russia).

We also looked at additional Russian blends such as Sokol, ESPO Export, Vityas, and Siberian Light. These were once considered potential imports. Regrettably, our investigation could not extend to Kuwaiti blends or the UAE-based Umm Lulu blend due to the unavailability of their assays.

Moreover, we also incorporated Qatari blends into our analysis as we were informed that refineries have used them in the past according to our aforementioned source. This exploration underscores the importance of understanding the composition and characteristics of these diverse crude blends.

The conclusions drawn are as clear as daylight, and ostensibly straightforward. The superior the calibre of the crude oil, based on the aforementioned attributes, the greater the anticipated distillate yield. Moreover, within the crude oil categories, distinct types exhibit variation based on their inherent properties.

It’s crucial to underscore that the yields Profit discovered can still fluctuate significantly depending on the specific refinery where they are processed and the configuration of that refinery.

So, we now know the crude that Pakistan imports. We also know the relative quality of it. However, there can be no debate pertaining to crude in Pakistan currently without addressing the elephant in the room: Russian crude is cheap despite being bad.

So, why is Russian crude so problematic?

Pakistan’s tryst with the Russians

“Russian crude serves as a prime exemplar of a yield inferior to that of Arabian crudes,” elucidates Zahid Mir, Managing Director and CEO of Pakistan Refinery Limited. The magnitude of this disparity? “It varies from refinery to refinery, contingent upon the technology and facilities each possesses,” Mir expounds. To clarify, our discourse is confined to the Urals blend, because that is the one that we got.

Nonetheless, if you have read till this point in the piece then this is simple knowledge for you. The apparent solution to this conundrum would be to procure one of the lighter Russian blends, correct? Alas, our financial constraints prevent us from doing so, given that our choice of the Urals blend was dictated by its cost-effectiveness. A cursory examination reveals that other Russian blends are also trading at a discount relative to our Arab blends, at least for the time being.

As of the week commencing 14th August, a barrel of Russian Urals is trading at a discount of $15-$20 against a barrel of Murban and Arab Light respectively. The differential narrows to $10-$12 when comparing the two Arab blends to the Russian Sokol and ESPO. This begs the question: why aren’t Pakistani refineries importing barrels of Russian crude en masse given these substantial discounts? Even if we were to entertain the argument that

Pakistani refineries predominantly utilise Middle Eastern crude due to its close proximity which translates into shorter distances, reduced freight costs and easier access.

The commercial viability of a certain crude depends upon the yields any refinery can achieve and the landed cost of that particular crude

Zahid Mir, Managing Director and CEO of Pakistan Refinery Limited

the Urals blend is more challenging to process, surely the lighter blends could find a place in the distillation process?

However, the market price for barrels only tells half the story. “It’s a complex amalgamation of factors. There’s an elevated shipping cost. There are also higher financial charges due to the convoluted payment process which involves multiple currency conversions: Pakistani Rupees into US dollars, then into Chinese Yuan, and finally into Russian Rubles,” elucidates Ammar Khan, an independent economic analyst.

“For a typical oil letter of credit, you have the liberty to settle it with any bank offering competitive rates. For this one, you’re confined to 1-2 Chinese banks who will levy a premium for their services,” Khan adds. How much does this erode from the discount? While Profit was unable to procure an exact figure, it’s evidently substantial enough to deter mass import of barrels of Urals blend.

“Pakistani refineries predominantly utilise Middle Eastern crude due to its close proximity which translates into shorter distances, reduced freight costs and easier access. The commercial viability of a certain crude depends upon the yields any refinery can achieve and the landed cost of that particular crude,” Mir supplements.

“Russian crude is an example where the yields are inferior to Arabian crudes; however, it is commercially more viable because the lower landed price more than compensates for the difference in yield value,” Mir adds.

Mir’s response provides a fitting conclusion when considered in conjunction with Khan’s statements. There are profits to

be reaped; however, these gains are obscured by the aforementioned additional friction. If these gains were truly accessible, why would Pakistan need to negotiate preferential rates with Russia in the first place?

As entities driven by profit maximisation, refineries are likely to import barrels when opportunities present themselves. This is particularly evident when we consider that

one refinery previously sampled Qatari crude independently.

If we are not to move beyond the bi-partisan buffoonery of the last 18 months, then our diplomatic corps might need to instead familiarise themselves with the liquid we mentioned at the outset. However, at least now we understand what constitutes a barrel of crude and why we import Arabian crude.n

A cotton comeback? Don’t bet on it.

Cotton growers are expecting a bumper crop and high prices this year. It is only an anomaly

By Abdullah Niazi

It seems that the fortunes of the cotton crop are turning this year. After posting record-low output in the previous year farmers and ginners are expecting a bumper crop. And on top of that, the commodities market outlook for cotton is looking up after the government assured farmers that a support price of Rs 8500 per maund (around 40 KG).

This marks a serious turn in luck for white lint which for the past two decades has been taking blow after blow. But why exactly is cotton’s future bright? Over the years the crop has only made way for more profitable cash crops such as sugarcane. Farmers have abandoned it in droves because cotton seeds in Pakistan are largely uncompetitive compared to cotton producing countries in the rest of the world. And because of these weak and inefficient seeds that have not seen any genetic modification since

AGRICULTURE

2005, the cotton crop is also very susceptible to disease and climate change — two linked factors that have wiped out entire farms over the years. The reason behind the better outlook this year is that early in August, the Trading Corporation of Pakistan (TCP) entered the cotton market to stabilize the white lint prices. TCP announced it would purchase one million bales of lint to stabilize the market so that the growers may get the minimum rate of Rs8,500 per maund as promised by the government at the outset of the sowing season to woo the farmers back to the crop.

And that is where the problem starts and the problem ends. The government had promised a support price to cotton growers and TCP had to step in when the value of harvested cotton fell below that support price. Since then, there have been some developments on the agricultural front that have also bolstered cotton. However, this is another example of a temporary upwards blip that took place circumstantially.

Once the pride of Southern Punjab and Sindh, the once thriving Kapas belt of the country is now left to relive its glory days through anomalies such as this year. But how did we get here?

This year’s situation

This is what happened this year. For some time now, Pakistan’s local textile industry has been relying on imported cotton. This is a bit counterintuitive since textiles is the country’s largest export oriented sector. So for the sector to first import its raw materials, then process them and export them dents bottom-lines. In comparison, if Pakistani cotton was up to the mark then there would be a situation where profit margins would be much higher.

The relationship between cotton and the textile industry has often been tumultuous, and this year was also another example of that. Up until around 2008 cotton was a major cash-crop in Pakistan. In fact, in 2005, cotton became one

of the only crops in Pakistan for which GMO seeds were introduced. According to a 2021 report of the International Food Policy Research Institute (IFPRI), raw cotton consumption grew at an annual growth rate of 7% between 1982 and 2008 to reach 15.6 million bales in 2007-08 in Pakistan.

This was largely because cotton ginners would buy raw cotton and provide it to the textile mills which were always hungry for more. However, between 2007-08 Pakistan was hit by the global recession. The textile industry faced challenges due to high energy costs, rupee depre-

ciation vis-à-vis the US $ and other currencies, and a high cost of doing business. As a result, there was a reduction in the number of textile mills operating in the country from about 450 units in 2009 to 400 units in 2019. This decrease has simultaneously seen the domestic demand for cotton dip in the country.

Farmers and the textile industry, up until the 2008 financial crisis, had been dependent on each other. Farmers would produce the crop without the fear that demand would fall, and the government did not need to announce a support price either. But when mills started shutting

down, suddenly there was more cotton and not enough buyers. After a harsh couple of years, farmers also began going back on cotton and its price fell, resulting in production decreasing. As a result, exports were also affected.

Two decades ago, Pakistan’s cotton was in demand globally. However over those 20 years, countries such as Bangladesh, Vietnam and Cambodia have all used better growing techniques to get ahead of Pakistan. In 2003, when Pakistan’s textile exports were $8.3 billion, Vietnam’s textile exports were $3.87 billion, Bangladesh’s were at $5.5 billion. Now Vietnam is at $36.68 billion and Bangladesh is at $40.96 billion, while Pakistan is struggling to hit $25.3 billion in 2020.

So what happened this year? Essentially, the United States was hit with a low production year. Cotton production in the US in 2022-23 is forecast to fall by 3.7 million bales from the previous marketing year (MY) to 13.8 million bales, the lowest production level in seven years. This will result in US cotton exports for MY 2022-23 to fall at 12.5 million bales, down by 100,000 bales from the previous month’s forecast and 14 per cent lower than MY 2021-22, according to the US department of agriculture (USDA).

US Cotton was facing the same issues as Pakistan — high temperatures and drought in Texas, where 40 percent of US cotton production occurs, have slashed production and exportable supplies. As a result global trade is down by nearly a million bales from the previous month’s forecast.

The perfect storm

It is a case of things falling exactly in place. On the one hand US expected output fell significantly. Overall cotton prices improved in the domestic market as textile

millers and spinners showed their interest in buying during the last week, while the quality of lint reaching ginning factories also got relatively better due to the end of rains in the cotton belt resulting in reduced moisture in phutti (raw cotton). The buying interest was reinforced by reports that the TCP had prepared a strategy to purchase one million bales and had appointed agents in various cotton districts for the purpose.

In Sindh, the price of lint was reported between Rs17,800 and Rs18,200 per 40kg, and of phutti was Rs7,800 to Rs8,300; in Punjab Rs17,900-Rs18,500 and Rs7,600-Rs9,000; in Balochistan, the price of cotton ranged between Rs17,800 and Rs17,900 and of phutti between Rs7,700 and Rs8,300. The committee of the Karachi Cotton Association increased the spot rate by Rs200 per 40kg to Rs18,235.

Karachi Cotton Brokers Forum chairman Naseem Usman says that cotton prices in the international market have increased on reports that the US cotton production will remain about 2.5 million bales less than the estimates. The New York cotton futures rate stood at 87.89 US cents per pound.

On top of this Pakistan also saw a great agricultural boon. In a good omen to crop output in both current and next cropping season, the country’s two major reservoirs — Tarbela and Mangla — rose to full capacity for the first time in years. Originally, it had been projected that there would be a serious shortage of water in the country. The Kharif season had started in April with 37pc anticipated water shortage with 27pc shortage in early Kharif and about 10pc in late Kharif.

In a stroke of good fortune, the Eastern rivers — Ravi, Beas and Sutlej — flowed with sufficient waters after a gap of more than a decade. Enough water is now available in the system downstream of these rivers, reducing the need for discharges from Mangla dam. The Indian reservoirs on Sutlej and Beas are now again nearing maximum levels at Bhakra and Pong storages.

Earlier this month the government announced that or the first time in over halfa-decade history, the country’s three reservoirs — Mangla, Tarbela dams and Chashma Barrage — attained their maximum capacity on a single day putting total water storage at the highest 13.443 million acre-feet. This has raised hopes for a bumper crop in the coming year according to officials of the Indus River System Authority (Irsa).

The larger problem

Of course this does not solve the larger issue. Years when things fall in place will come and go. A year ago 2022 had proven good for cotton growers as well. Back then the cotton crop that was sown in Pakistan in 2021 and was

harvested in 2022 benefited from a peculiarity of international trade caused by Covid-19 that resulted in a bumper crop of cotton.

When the pandemic hit, everything changed and the local industry found that importing cotton was no longer an option. International cotton prices (in rupee terms) during the last year have gone up by almost 30% — from PKR 12,606 on July 1, 2021, to PKR 18,259 by mid-February this year. The ever-dwindling value of the rupee not only doubled the impact of import for Pakistani millers but also made it next to impossible to calculate the final cost of production, rendering import commercially non-feasible for the industry.

On top of this, there were shipping concerns. A report in Dawn from March 2022 chronicled how it takes more than 120 days to ship cotton to Pakistan these days, against the 30-day hiatus in pre-Covid times. These circumstances deflated the textile industry’s claim that it could thrive, even survive, on imported cotton and forced it to value local crops, thus setting the stage for the cotton revival in the country.

Similarly this year it was the falling fortunes of US cotton that helped Pakistan’s cotton growers. The reality is that cotton has overall seen a serious decline in the country. The story of cotton in Pakistan has been that of an opportunity squandered. Between 2005 and 2020, Pakistan’s production of cotton declined by nearly 35%, from nearly 14 million bales in 2005 to just over 9 million bales in

2020.It further fell to 5.6 million bales in 2021, before making a brief recovery at 7.7 million bales in 2022, and has now fallen to a paltry 4.9 million bales in 2023. This marks an overall decline of 65% in the past 18 years.

The data speaks for itself. Zoom in to cotton production over the past few years and it is a sordid tale. As recently as 2017, Pakistan’s cotton production was high, clocking in at over 10 million bales for the year. The output actually rose by a million bales to 11 million in 2018, before settling again at just over 9 million bales in 2019. The next two years saw a decline. In 2020, only 8 million bales were recorded before a sharp fall to 5.6 million bales in 2021.

Farmers over the past decade have abandoned cotton in favour of more profitable crops like sugarcane. In 1991, cotton was grown on around 6.6 million acres of land all over Pakistan. It grew to a peak area-under-cultivation level of 7.9 million acres in 2005 but stood at a mere 6.2 million in 2020 showing a serious downward trajectory. Changing climatic conditions have made the cotton seed in Pakistan less resistant and more likely to fail — which means growing it has become a bad business decision for a number of agriculturalists.

As the core issues of the cotton crop remain unaddressed, farmers will continue to abandon this crop and instead grow richer products such as sugarcane which are short term cash crops but bad for agriculture and the climate in the long-run. n

After two years on cruise control, has decided to shift gears MG

With new investment and new policies, the 4th biggest auto company of Pakistan is ready to turn over a new leaf

Partner Content

If there is one thing that the recent Russia-Ukraine war has shown us, it is that the crude oil market is not one to be relied upon. As soon as the first rocket touched the landmass of Kyiv, the oil market shot up, foreseeing a rise in demand and a shortage in supply given Russia’s exit from the market on international sanctions.

This is not the first time this has happened, and it is definitely not the last time it is happening. In fact, the rise in price was nothing compared to the OPEC crisis of the early 70s. One thing that has changed since the 70s however, is the reliance of the world on fossil fuels and crude oil. Technology has taken the world to a point where petrol and

diesel cars are becoming almost obsolete. Alternative energy vehicles are not only being encouraged but also incentivised in some parts of the world.

Sadly Pakistan is at a point where electric vehicles, unlike other countries, are not as prevalent. But not for long as the 4th largest assembler of cars in Pakistan has decided to put forth its step in local assembly of Plug-in Hybrid vehicles (PHEVs) and fully electric vehicles.

Background and history

Around 4 years ago the Pakistani car market was a completely oligopolistic one. 3 companies reigned supreme while it was difficult for

others to enter. Newer models were scarce and innovation was completely absent.

Come 2019 newer players started entering the market but the situation did not change much. Then in 2021, came Morris Garages, (MG), with its all new MG HS. As it entered the Pakistani market. The sleek, powerful and elegant compact SUV, took the Pakistani market by a storm and within a year it could be seen everywhere on the roads.

But what is MG?

Founded by William Morris and Cecil Kimber, in 1924, MG quickly gained renown for crafting high-performance sports cars. It began with the iconic MG M-Type in the late 1920s, setting records and winning races, marking MG’s early breakthrough.

MG’s zenith arrived in the 1930s with the T-Series models – TA, TB, TC, and TD. These

roadsters embodied speed and style, earning global admiration. The MG T-Series became a quintessential symbol of driving pleasure and to this day are revered as a masterpiece of engineering.

Through the ‘60s and ‘70s, MG’s ownership changed hands, aligning with corporations like British Motor Corporation. The MG MGB emerged as a best-seller, defining the era’s sports cars.

MG’s 21st-century revival began in the hands of SAIC Motor in 2007. Models like the MG3, MG ZS, and MG GS merged technology and design while honouring MG’s performance heritage.

With a history spanning almost a century, MG’s journey is an inspiring narrative of passion and engineering prowess. As MG makes its mark in Pakistan, it brings with it a legacy that reshaped the automotive landscape, infusing modernity with a storied heritage. MG Pakistan’s vehicles not only drive roads; they drive the legacy forward into a future of automotive excellence.

Available Cars

While the global arsenal of MG has a number of cars, its Pakistan subsidiary is not far behind. Not only has MG broken the age-old tradition of introducing older versions in Pakistan but it has also made sure that its current portfolio is diverse in terms of fuel usage and drive efficiency.

While only having 4 cars out in the market, MG covers the full spectrum of different fuels that are used to drive cars.

After the successful run of MG HS (Essence) throughout 2021 and 2022, its other petrol C-SUV MG ZS has also come out amongst high hopes. But these are not all.

Come 2023 MG has introduced MG HS P-HEV and MG ZS EV into the market making it the first Pakistani brand to introduce P-HEVS in the market.

An explanation of alternative fuel vehicles

We all know what EVs are capable of. Synonymous to a cell phone its battery packs store charge the electric motor inside the car operates tha tyres, bypassing any fuel emissions.

But what are Hybrid Electrical Vehicles and Plug-in Hybrid Vehicles?

A hybrid is a car that’s both efficient and eco-friendly. These vehicles combine a traditional gasoline engine with an electric motor, creating a dynamic duo that works together seamlessly. When you start your HEV, it pri-

marily runs on the gasoline engine. But as you drive at slower speeds or when you come to a stop, the electric motor takes over, providing a boost and conserving fuel.

The magic lies in the way these two power sources collaborate. The gasoline engine charges the battery that powers the electric motor, and the electric motor assists the gasoline engine during acceleration. The result is improved fuel efficiency and reduced emissions, making HEVs an excellent choice for city driving and stop-and-go traffic.

Similar to HEVs, PHEVs feature both a gasoline engine and an electric motor. However, the real star here is the larger battery that can be charged externally.

PHEVs are like chameleons – they can operate in different modes depending on your needs. When fully charged, they can run purely on electricity for a certain distance, often referred to as an “all-electric range.” This feature is a game-changer for daily commutes, as you can potentially complete your trips without using a drop of gasoline. But, what’s even more exciting is that when the battery is depleted, the gasoline engine automatically kicks in, extending the driving range. This flexibility makes PHEVs ideal for both short trips and longer journeys.

How PHEV Engines Operate: The engine operation in PHEVs is a dance of efficiency. When you start your PHEV, it generally runs in all-electric mode if there’s enough charge. The electric motor powers the vehicle silently and without emissions. As you accelerate, the electric motor provides instant torque, giving you a smooth and responsive driving experience.

Now, when you’re driving beyond the all-electric range or need more power, the

gasoline engine takes over. But here’s the interesting part: the gasoline engine doesn’t directly power the wheels. Instead, it acts as a generator, producing electricity that charges the battery or directly powers the electric motor. This setup ensures that even when the gasoline engine is running, the wheels are still being driven by the electric motor, reducing overall fuel consumption and emissions.

In essence, PHEVs are the bridge between the world of gasoline and electricity. They offer the convenience of charging at home, emission-free city driving on battery power, and the reassurance of extended range with the gasoline engine. This versatility makes PHEVs an attractive option for those looking to reduce their carbon footprint while maintaining the flexibility of gasoline power.

Plant and Facilities

Other players in Pakistan’s auto market are also making moves towards hybrid technology. Sazgar Engineering has introduced the first locally assembled hybrid Haval 6, while Indus Motor Company (IMC) is set to launch the Toyota Cross with hybrid capabilities. Furthermore, Honda Atlas Cars Limited recently revealed plans to introduce hybrid vehicles to the Pakistani market. However MG is the first to actually materialise its plans of HEV and PHEV assembly inside Pakistan.

Currently the 4th biggest assembly unit of Morris Garages worldwide, MG’s facility in Lahore called the JW SEZ Auto Park, is capable of producing at least 2000 cars every month. However, due to recent supply chain disruptions these numbers have been much lower.

Talking to Profit, a spokesperson of the company ensured that not only are the MG HS Essence units being assembled as CKDs (Completely Knocked Down) in Pakistan but the after sales and service network ensures the availability of parts all across Pakistan.

MG’s Vision

The spokesperson shared insights with Profit during a recent tour of the company’s assembly plant in Lahore. He revealed that MG is charting a course to introduce locally assembled Plug-in Hybrid Electric Vehicles (PHEVs) by 2024, marking an investment of approximately 50 million Chinese yuan, equivalent to around $7 million.

The spokesperson highlighted MG’s anticipation of the Pakistani government’s formulation of a policy that favours electric vehicles (EVs). He emphasised that MG, with robust policy backing, could play a pivotal role in steering Pakistan toward embracing new energy vehicles (NEVs), ultimately contributing to a reduction in the nation’s fuel import expenses. He acknowledged that MG’s expansion plans for EV production hinge on favourable policy support and assured that the current manufacturing facility in Lahore’s JW SEZ Auto Park boasts sufficient space to accommodate this envisioned growth.

It is important to note here that currently the indigenous production of EVs has not begun. And because of import restrictions

posed by the government, CBU units of MG’s PHEVs have made their way to the roads rather slowly. Once the inflow of CBU units is reinstated, the company plans on localising the assembly process.

The company spokesperson advocated strongly against Pakistan trailing in EV adoption. He cited instances like Turkey’s Togg and Saudi Arabia’s Ceer, the pioneer electric vehicle brands in their respective countries, as examples of forward-thinking strides.

Clarifying the company’s position on hybrid electric vehicles, he said that these vehicles receive more advantageous treatment in terms of general sales tax compared to electric vehicles – 8.5 percent for HEVs versus 25 percent for EVs. He pointed out that this anomaly is unique to Pakistan, resulting in higher prices for EVs, primarily due to batteries constituting the costliest component of NEVs.

Plans for the Future

MG’s aspirations extend beyond hybrids. The brand plans to diversify its portfolio by introducing the 1,600cc MG GT sedan, aiming to tap into Pakistan’s sedan market, which MG indicated holds a substantial 45 percent market share.

In pursuit of competitiveness, MG’s strategy entails localised production of high-value components and exploration of potential export avenues. Economic challenges, such as high interest rates and currency

depreciation, have led MG’s production to be limited to 400 units of SUVs per month, compared to a capacity of around 2,100. However, despite these challenges, the spokesperson underscored the company’s optimism about Pakistan’s automotive potential and affirmed that no staff member has been laid off since the company’s inception in 2021, with the current employee count reaching 400.

With majority shareholder Shanghai Motor International Limited demonstrating longterm commitment to the Pakistani market, MG Pakistan’s presence signifies a substantial $100 million investment, positioning it as the fourth knock-down (KD) plant in MG’s global network.

Company’s senior management has stressed that Pakistan’s automotive sector must foster global partnerships to manufacture high-value and high-tech auto parts, ultimately transforming into a significant player in the international vehicle export market.

MG is confident that as the shift towards EVs gains momentum, infrastructure development will eventually align with this transformative shift in mobility preferences. Afterall, the future is here now and the longer we wait to adopt, the farther behind we will remain. The example of MG’s adoption of alternative energy is one that not only puts competition into thinking but will make profitable gains for the company. All while remaining cognizant of the environmental challenges that are faced by our world. n

Art tourism: A catalyst for economic growth and cultural exchange in Pakistan

Pakistan’s tourism potential and the economic activity it can generate remains insufficiently explored. Is art the answer?

By Saneela Jawad

Tourism has been a contributing factor in Pakistan’s economy. According to the World Travel & Tourism Council’s Pakistan 2020 Annual Report cited in the International Journal of Engineering Applied Sciences and Technology article (2022), the country’s tourism sector contributes more than 5.9% of GDP. Travel and tourism support a total

of 6.2% jobs in the economy, with significantly more opportunities and potential undiscovered. Similarly, art tourism has gained popularity over the years and is still one form of tourism that has potential and needs to be explored further and its impact on the economy can be significant. The cultural industry, including art, film, music, and fashion, represents a trillion-dollar market globally. Pakistani artists, designers, and cultural creators can contribute to this industry, bringing foreign exchange and revenue to the country.

According to an article published in the Journal of Social Sciences Review (JSSR) in 2022, the global tourism industry generated USD 1.7 trillion in exports in 2018, with 1.5 billion visitors (tourists) in 2019. However, the COVID-19 pandemic of 2020 caused a drastic decline, resulting in 700 million fewer visitors and a loss of USD 730 billion in trade earnings by August 2020.

Pakistan, with diverse cultures, historical sites, and natural attractions, had over two million foreign visitors before the pandemic, particularly in the northern regions. In December 2020, tourism revenue decreased to USD 765 million from the previous year’s USD 992 million (JSSR, 2022). The pandemic led to a 75% drop in overseas travel, causing a significant negative impact on employment and GDP. In 2019, 5 million tourists visited KPK alone, whereas the overall number of foreign tourists in the country was 1.225 million (JSSR, 2022).

What is Art Tourism?

Art tourism, as explained by Amad Mian of Dastaangoi Gallery, is traveling to a particular destination not just for the place, but the artists. It is the travel and exploration of various art forms, cultural heritage, museums, galleries, and other creative experiences in different destinations. From showing them the beautiful landscapes of Gilgit-Baltistan to the history of textiles, understanding the artists and the place will get the tourists to engage the most.

“It involves attracting artists from around the world to explore a destination’s culture, heritage, and landscapes, thereby creating a bridge between artists and the place,” he told Profit.

This kind of tourism brings a lot of opportunities for the country including increased revenue from the infusion of money into the local economy benefiting various businesses and supporting jobs and livelihoods in the tourism and hospitality sectors which in turn leads to increased employment. It also allows the government to put in more

effort to preserve cultural heritage and pay more attention to infrastructure development. According to the JSS article, tourism is crucial for Pakistan’s economy, contributing 5.9% of GDP and supporting 4 million jobs in 2019.

Role of Art Tourism and its Impact on the Economy

Art tourism plays a vital role in promoting shared culture and heritage by fostering cross-cultural engagement and understanding. The residency program offered by Dastaangoi bring international artists to countries like Pakistan enable them to experience the local culture, leading to the discovery of similarities and differences that enrich artistic perspectives. The resulting conversations and relationships break down barriers and stereotypes, contributing to unity and appreciation of diverse cultures.

The economic benefits of investing in heritage and culture for art tourism are multifaceted. Firstly, art tourism stimulates the tourism industry, attracting a diverse range of visitors, both domestic and international. These tourists contribute to local economies by spending on accommodation, food, transportation, and souvenirs, thereby fostering local business growth and generating employment opportunities. Secondly, investing in cultural heritage enhances the overall image of a destination, attracting more visitors and encouraging longer stays. Cultural events and art exhibitions often become popular on social media, further amplifying the destination’s appeal. Over time, sustained interest in the cultural and artistic offerings of a location can lead to long-term economic growth and sustainable development within the community.

It is no secret that art itself is a universal language that transcends linguistic and cultural barriers. Visual language is particularly powerful, as it can convey complex ideas and emotions effectively, similar to the saying “a picture is worth a thousand words”. This has been especially evident during the pandemic, where visual communication, including ani-

mations and memes, played a crucial role in conveying information and ideas to diverse audiences.

Art plays a crucial role in bridging divisions in an increasingly polarised world, providing a secure and inclusive platform for dialogue and exchange. Through diverse artistic expressions, a deeper comprehension of various perspectives is fostered, promoting mutual respect and stronger global unity. Additionally, artistic mediums like poetry serve as accomplishments in cultivating understanding and connection. They facilitate the creation of secure environments for meaningful discussions, enabling genuine intersections of ideas and perspectives, further contributing to the enrichment of human connections and achievements.

Having said that, investing in heritage and culture offers significant economic benefits. Drawing parallels with India, Amad said, “Heritage sites can be transformed into revenue-generating tourist attractions, boosting the tourism industry. Promoting and conserving heritage and culture not only benefit local communities and expatriates but also attract global interest and curiosity, thus stimulating the economy.”

Furthermore, while talking to Profit, contemporary artist and Dean at Beaconhouse National University (BNU) Visual Arts & Design Department, Rashid Rana reiterated the point and said that just like countries and corporations have brand images, improving Pakistan’s image is an essential part of promoting art tourism in the country.

“It is essential for attracting investment, tourism, and positive sentiment. Visual elements and cultural expressions play a significant role in shaping this perception,” he stated.

In addition to that, artist Rabeya Jalil, an art professor at National College of Arts (NCA), one of the oldest and most prestigious art schools of the country based in Lahore

LB01 and LB02 served as vital platforms uniting local and international artists, fostering cross-cultural dialogues on diverse themes. These events had a multi-fold impact on the economy

Qudsia Rahim, LBF Executive Director

said, “Just as people visit iconic museums like the Louvre or the Metropolitan Museum of Art to learn about the history and culture of a region, showcasing local artists and heritage sites allows visitors to gain insights into Pakistan’s rich history and contemporary identity.”

Thus, hosting events like LBF, and establishing cultural centres, museums, and institutions that showcase Pakistan’s art, history, and heritage is crucial.

“These centres serve as gateways for international visitors to learn about the country’s identity, fostering global connections and economic benefits,” Rabeya said.

Promotion through Art Events

Since their inception in 2013, the notfor-profit Lahore Biennale Foundation seeks to provide critical sites for experimentation in the visual arts. LBF focuses on the many stages of production, display and reception of contemporary art in diverse forms. It understands inclusivity, collaboration, and public engagement as being central to its vision and is committed to developing the potential of art as an agent of social transformation. While talking to Profit, LBF Executive Director Qudsia Rahim said, “LBF’s core objective is to facilitate the envisioning and realisation of a more public-centric art sphere. Economic growth is a consequential outcome, not our primary goal. Our aim is to establish an art infrastructure that catalyses the activation of local socio-economic institutions.”

With events like LBF, the display of international art at heritage sites creates a captivating blend of cultural experiences that can attract a renewed influx of tourism. This integration offers visitors a unique and dynamic experience that appeals to a diverse range of interests. The infusion of contemporary creativity and fresh perspectives adds value to heritage sites, making them more appealing and likely to attract a larger number of visitors seeking an immersive cultural experience.

LBF’s initiatives like the Youth Forum

and Green School Certification Program promote inclusivity and environmental consciousness, creating a more informed and engaged community. Qudsia further told us about these initiatives stating that grants and awards validate artists’ contributions, leading to increased visibility and potential collaborations. International exchanges foster creativity and cultural understanding, aligning with the foundation’s mission to support artistic development and cultural exchange. The broader economic impact of these programs is substantial, driving growth in the art industry, attracting corporate and institutional investment, and positively impacting various sectors of the economy.

“LB01 and LB02 served as vital platforms uniting local and international artists, fostering cross-cultural dialogues on diverse themes. These events had a multi-fold impact on the economy,” Qudsia maintained.

Both Biennale drew domestic and international visitors, elevating tourism revenue, benefiting local businesses, hotels, and transportation. Moreover, this exposure to global art collectors and curators created new opportunities for Pakistani artists, boosting sales and recognition. Thus, enhancing the city’s image as a cultural hotspot and bolstering its attraction for tourism, thereby contributing to economic growth.

Through initiatives that promote cultural exchange and artistic collaboration, such as Dastaangoi’s artist residencies, the goal is to transform negative perceptions and emphasise the inherent beauty and cultural richness of Pakistan. According to Amad, these residency programs for artists which can be “instrumental in promoting tourism and benefiting local artists to gain exposure and recognition on an international scale”. These contribute to economic growth by creating jobs, boosting artisan crafts, and generating revenue from art sales.

According to Rashid Rana, contemporary art has seen significant growth and recognition globally over the past two decades. His work at Dubai Expo 2020 was a major example of how there is untapped potential for leveraging art tourism for a broader positive impact. “Pakistan’s participation in interna-

tional events like the Expo shows missed opportunities for enhancing the country’s brand perception,” he told Profit.

Moreso, Qudsia stated that LBF’s significant economic impact is evident in diverse sectors. Participating artists in previous editions of the Lahore Biennale have seen substantial price increases, reflecting global demand for Pakistani art. The event has boosted local emerging artists’ visibility and prospects. New galleries, including virtual ones, contribute to a thriving art ecosystem.

The Biennale’s influence extends to corporate and institutional investments like HBL’s Art Department and the State of the Arts Museum by the State Bank of Pakistan. Prestigious institutions seek Pakistani art due to international interest. Art’s presence on TV and in publications benefits sectors like hospitality, crafts, and restaurants.

Government’s role in promoting tourism

Art’s power to bring people together, address critical issues, and promote dialogue is undeniable. Thus, the government’s role in promoting tourism is crucial, primarily through ensuring stability, safety, and infrastructure. Stability and a positive geopolitical image are essential to attract international visitors, artists and investors to the country. A lack of vision and investment from the government limits the impact that art and culture could have on the country’s image and economy. To fully realise these benefits, consistent efforts are required to overcome the aforementioned challenges by enhancing infrastructure, and ensuring stability. By doing so, a country can tap into its rich cultural heritage, attract global interest, and create a lasting positive impact. When managed sustainably, art tourism can be a win-win for both visitors and the local communities. n

Pakistan’s participation in international events like the Expo shows missed opportunities for enhancing the country’s brand perception

Rashid Rana, Artist