CONTENTS
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09 Shaukat Tarin’s cute selfie and unnecessary shade - this week in Pakistan’s business and economics twitterverse 11 Amazon added Pakistan to its list of authorized sellers. The sellers didn’t want i
16 16 What is Reza Baqir thinking? 23 How the pandemic gave Pakistani denim a second life
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28 28 How do petrol pumps make money? 30 What’s going on with Millat? 31 Demand boosts steel prices
Profit
Publishing Editor: Babar Nizami l Joint Editor: Yousaf Nizami l Assistant Editor Abdullah Niazi Reporters: Ariba Shahid l Babar Khan Javed l Taimoor Hassan l Meiryum Ali l Shahab Omer Chief of Staff & Product Manager: Muhammad Faran Bukhari Regional Heads of Marketing: Muddasir Alam (Khi) l Zulfiqar Butt (Lhr) l Malik Israr (Isl) Layout: Ahmad Salahuddin l Photographers: Zubair Mehfooz & Imran Gillani l Business, Economic & Financial news by 'Pakistan Today' Contact: profit@pakistantoday.com.pk
Readers Say Needless to say, I see all of the people that are silent or on the defensive for someone who doesn't even care for our existence’. In a world where publications and media houses cover up harassment and abuse, I can understand why all of you are surprised. Thank you for this @BabarEnthusiast. Also, I usually do not care who blocks me and I don’t this time either. But I just thought everyone should know that I probably got blocked for agreeing to an article where a person’s tweet was quoted word for word. P.s. You made the article about you and pushed aside the actual message. Good job Apropos: Zia Chishti had it coming @AribaShahid, Twitter A well-written and balanced piece about workplace harassment in the wake of the allegations about Zia Chishti. Apropos: Zia Chishti had it coming @AliNadir, Twitter Silence should not be construed as compromised or tacit approval. I understand the behavior of men and it is disgusting, but just because other men are silent and raising kids and go about their job, it doesn’t mean that they agree. Does this mean I also have to condemn each terrorist attack by Muslims? The mathematical equation of journalism has this ethical component and moral enforcement piece to it. kudos to you. People will remember you for standing up and saying as it is. they may not like what you are saying but will regard you for saying it. Apropos: Zia Chishti had it coming @qam_f, Twitter Finally journalism has come down to this type of gutter mud slinging. @KhurramHusain you have a task to do sir. This publication should not be hostage to personal views of the writer. Your leadership will require changes in the editorial policies. Disgusted and disappointed. If the article is not taken out and a public apology is not tendered, I intend to pursue a defamation case with my full resources. It is about time journalistic norms are respected. Apropos: Zia Chishti had it coming @NajamAli2020, Twitter
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What garbage? Sue for what? They reproduced his tweet verbatim, and then opined on how it was a troublesome take. I understand It’s been three years of the PTI government, but you can’t sue journalists for telling the truth just yet. Apropos: Zia Chishti had it coming @Jaferrii, Twitter I just found out that my tweet has been used in The Friday times. If the article is not taken out and a public apology is not tendered, I intend to pursue a defamation case with my full resources.
It is about time journalistic norms are respected. I have seen tweets where people are blaming why I have blocked them over an article. They fail to recognise that not only was my name mentioned along with THE VERY LITERAL WORDS I WROTE. If this is not defamation then what is. And they retweeted it. Deserve it Apropos: Zia Chishti had it coming @LahoriElite, Twitter The testimony is extremely damning and she has evidence including emails. I’m all for giving a fair chance on principle but here what defence could he possibly raise? I’m sorry but I totally disagree with this campaign (by men) to hear the “other side” of this very serious issue. Just because he’s a successful businessman who has made people a lot of money doesn’t mean he hasn’t committed these crimes. Men in positions of power are much more likely to behave this way with impunity which you, I, and everyone in the world knows. Apropos: Zia Chishti had it coming @nidafg, Twitter Zia Chishti's guilt was established already during initial arbitration; there was a significant monetary settlement. The video testimony is about the harms of forced arbitration, the process; it is not about his guilt or innocence. Apropos: Zia Chishti had it coming @potaydur, Twitter Ariba's journalism, top notch as always. Imagine if the government promoted such analysis, insights like paying English to Urdu translators, issuing new TV licenses and financially backing the knowledge economy-long term-instead of funding brown nose mouth pieces-short term balm. Apropos: Debt reprofiling: did the Finance Ministry get it right? @IqraYusuf12, Twitter This has become my favorite page. Bite sized content that enables people on the go to get information in a tutorial format. Absolutely love it. Keep up the great work! Apropos: The world of non-fungible tokens Hasan Bukhari, Facebook Are you trying to suggest that people who are working different jobs right now should quit and start making memes all day instead? Because the idea does seem appealing!. Apropos: The world of nonfungible tokens Habib Ansari, Facebook This is a good, informative piece one in accordance with the current situation of the market. Apropos: The world of non-fungible tokens Mian Zain, Facebook
COMMENTS
IN BRIEF After continued losses that saw the PSX fall below 44,000 points, the stock exchange snapped out of its descent with the benchmark KSE-100 Index gaining 178.41 points (+0.4 percent) to close at 44,114.16 points. Overall, the market shed 2,375.25 points during the rollover week.
“Instability in the exchange rate has increased inflation and we are trying to lessen the burden from the people of low-income groups. The mini-budget will be presented next week and it will reflect the government’s commitment.” Shaukat Tarin, Minister for Finance
Terming the talent of youth unparalleled, Prime Minister Imran Khan on Thursday said international companies were welcome to establish their ventures in Pakistan. He expressed these views in a meeting with Veon Ltd. chief executive officer (CEO) Kaan Terzioglu. With an investment of $100 million as announced earlier, Indus Motor Company (IMC) is set to produce the first hybrid electric vehicle in Pakistan. IMC has said that the investment will go towards localisation of components, plant expansion and production preparation for the first hybrid electric vehicle to be manufactured at IMC plant. Continued adherence to the IMF’s Extended Fund Facility (EFF) reform agenda would increase the likelihood of achieving outcomes that would lead Pakistan to positive rating momentum, Fitch Ratings said in its ‘Reforms and Financial Support Ease Pakistan Sovereign Risks’ report.
The All Pakistan Petrol Pumps Dealers Association late Thursday called off its nationwide strike following reaching a deal with the government’s team for an increase in the dealers’ profit margin. They had initially demanded a six per cent increase in their profit margin, but the government had agreed to a 4.4pc raise. Finance Minister Shaukat Tarin will soon officially launch Pakistan’s first Professional Clearing Member (PCM) e-Clear services, an entity set up by the Central Depository Company (CDC) under the Securities & Exchange Commission of Pakistan’s (SECP) new broker regime. The launch is a major milestone in the country’s stock market that will result in leveling the playing field.
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Shaukat Tarin’s cute selfie and unnecessary shade this week in Pakistan’s business and economics twitterverse
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t was a busy week in terms of social media full of meltdowns, shocking statements, and some of the silliest discourse we have seen in a while. Despite that, we have dug through the vast mess that is the twitterverse and brought to you serious tweets about NFTs, petrol lines, selfies, and the effects of the Karachi coast. Ariba Shahid brings you all this and more in this week’s social media roundup.
Shots fired
Testing maths
No matter how messed up our economy is or has been, at least we’ve almost always been better than Argentina and Venezuela. Oh and Zimbabwe. We’ve done relatively better than them. {Editor’s note: On a serious note, if the exchange rate gets that bad, how do you even do math for your daily hisab kitab? If prices were in the billions …. even Profit’s otherwise math-sharp reporters might have a hard time figuring out their bills and discounts.}
Feeling for the underdog
Needless to say the weightage of food, rent and education in a poor man’s expenditure is more than for the rich. While being the richest is a rat race, we can’t help but feel bad for the underdog. Can’t wait for Rohail Hayatt to pipe in on this and tell us how difficult it is to be rich and famous and how much peace there is in being poor because it means having nothing. Thanks for spelling that out for us Rohail!
SOCIAL MEDIA ROUNDUP
Just throwing some unnecessary (or perhaps very necessary) shade. If you know you know.
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Best friend for life
The power of the Karachi coastline
A plummeting currency? Turkey is beating us by a mile.
It is nice seeing the IMF team explore Karachi and the rest of Pakistan. But Bilal’s tweet made us laugh. This is the same week we reached a staff level agreement. Maybe the beach did its job? Never underestimate the whimsical beauty of the ocean.
Unnecessary shade and NFTs
Three Cs of the PSX
With the holiday season around the corner, I’m stuck wondering how many kids will get NFTs this year? And how many of them will cry immediately compared to how many crypto-bros will be initially very excited but eventually crying a few months or years down the line.
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The 5 Cs of brand development? Pfft. Nah, we’ve got the 3 Cs of the PSX. We’re not going to type them here because we don’t really swear through these pages. But feel free to take a guess and make your own 3Cs!
SOCIAL MEDIA ROUNDUP
Amazon added Pakistan to its list of authorized sellers.
The sellers didn’t want it Despite the hype and the pomp, Pakistan’s addition to Amazon’s list changes little for sellers
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By Taimoor Hassan
n May this year, Pakistan was added to a list of countries authorized to sell products on Amazon. The news was met with rejoicing from the government and celebration from all quarters. Exports were going to be boosted and there was a new avenue to set up a business. However, long before the announcement people in Pakistan had already been selling products on Amazon. In fact, according to one study, despite not having a Pakistani presence, almost 70 percent of textile product dealers on Amazon sourced their products from Pakistan. These are big manufacturers however, exporters primarily of Pakistan’s textiles industry. At an individual seller level, and the charm of Amazon that anyone can sell anything and mint money, these sellers would source products from countries other than Pakistan, and set up their Amazon business through complicated steps to register businesses in coun-
tries like the United States or England through their friends that are settled in those countries. The business would be ‘based’ in these other countries, all of the products would be sourced from outside Pakistan and going through the country where the business was registered. Except that the business was run by Pakistanis but none, or very little, of the proceeds from these businesses would be coming into Pakistan. Amazon allowing Pakistan on the list was supposed to put an end to these extra loopholes. Six months down the line nothing has changed. In fact, retailers selling products through Amazon are saying that because of a combination of regulatory hell in Pakistan, a shortage of cheap saleable products, and the seeming unwillingness of Amazon to verify accounts registered in Pakistan means they will continue to sell through third countries. Understanding why Pakistan’s inclusion in the list has resulted in such a meek response requires knowing how selling works in Pakistan, and why the old system suits retailers in Pakistan better.
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The Amazon system
In 1995, Amazon.com sold its first book, which shipped from Jeff Bezos’ garage in Seattle. In 2006, Amazon.com sold a lot more than books and had sites serving seven countries, with 21 fulfillment centers around the globe totaling more than 9 million square feet of warehouse space. However, most of the products that Amazon ships are not owned by Amazon. Retailers, both large brands and individual sellers, send inventory to Amazon’s warehouses and the company takes care of the rest, including packaging the items, processing customer payments, and shipping. The supplier is very much the lifeblood of the Amazon system. While Amazon still does not have operations in Pakistan, what happened six months ago was that they allowed Pakistanis to officially be able to become Amazon retailers. Now, selling on Amazon is not easy. Just beginning requires having a sizable investment, discipline, and marketing skills. Space on Amazon is extremely competitive. That means the only way to stay competitive is to buy very specific products in bulk at cheap rates and then sell them through Amazon. That means they will have to export the product to Amazon warehouses where they will then be shipped from. In Pakistan, there are very few products that have the advantage of being cheap. For example, one of the sellers we spoke to focuses on textiles such as towels, which are cheap in Pakistan. The process essentially, as they explain, is that they buy towels directly from a factory in bulk for cheap. They then export the entire bulk to Amazon which stores them in their warehouses and sells and ships them over time. This is where the problems begin for Pakistani sellers.
The old order versus the new
B
efore May 2021, if a person wanted to sell towels via Amazon from Pakistan they had to follow a series of complicated steps. Under the new order, Amazon has allowed you to set up an account with your Pakistani address, Pakistani documents and Pakistani bank account for money transfers. Under the old order, sellers from Pakistan used to set up companies in the markets they targeted for selling. For instance, if you want to sell in the US, you would reach out to a friend requesting them to set up an Amazon account under their name with their address and their banking account details, in exchange for perhaps a partnership in business or a certain commission. All the financial matters would be dealt in the foreign market where you have the Amazon
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Product competitiveness is the overall problem in the country. Some things are beyond control but we are working on policies such as tariff rationalisation to make products competitive Aisha Moriani, joint secretary ministry of commerce
account set up and where you are selling. Amazon would pay you in your friend’s account in the US and because the establishment is foreign, taxes paid are also in the foreign country according to their rules. “You need a credit card to pay to Amazon and you need a bank or a wallet account for Amazon to reimburse you your earnings. All of that happened outside of Pakistan,” one seller says. “Once Amazon pays you, the money can be routed anywhere in the world. Except that when it is received in Pakistan, it becomes a problem.” Essentially, you as a new seller, already on a restricted budget, will be walking into a death trap where an established seller would lower down his prices to bleed you of money and drive you out. You can move in with a completely new product but then again the chances are that your competitors can do the same and drive you out because of their strengths in these categories. The safest bet, as sellers tell us, is to smartly choose products in categories that have less competition and you have the ability to source these products at lower prices. And there is no other place in the world except China from where all sorts of products can be sourced at prices lower than the rest of the world. A seller Profit spoke to also sourced the product from China said that for a Pakistani to source products from a different country, shipping it to a different country, selling there and repatriating profits to a different country comes with numerous problems.
Red taping
When you are sourcing products from China and have to make payments to suppliers there, the rules from the SBP are stringent for the outflow of foreign exchange with the payee required to go through documentary hassle of sending the money, answering the questions from the SBP as to why the money is being sent abroad, and an added restriction of having to recover the proceeds from sales within 180
days. For instance, if you as a seller source a product from China, because you are selling the sourced product in the UK or the US, you would prefer sending the products you source from China directly to the UK or the US. Because if you first ship it to Pakistan and then ship it to the UK or the US, your costs simply increase making you uncompetitive. As sellers tell us, from the SBP perspective, the products you source from China mean that the SBP thinks that your products are going to be sold in China if they are not coming into Pakistan and expects that the sales proceeds against those will have to come from China. So if you are making payments to China and the proceeds against sales of those are coming to Pakistan from the US or the UK, that is a problem with the SBP, but its hands are tied too. The FATF and anti-money laundering compliance has the SBP’s hands tied and it can not work without aggressively scrutinising the payments coming into Pakistan. On the sellers end, that is a pain which is a deterrent for sellers: they’d rather set up companies abroad, set up foreign bank accounts, and route all the payments outside of Pakistan, effectively depriving Pakistan of the remittances under eCommerce sales on Amazon. Then there is another restriction for sellers selling from Pakistan that if they send payments to say China for sourcing products, the profits have to be repatriated in 180 days. “As soon as the 180 days are near, you start getting letters and banks calling you asking where the money that was sent abroad,” a seller told Profit, choosing to remain anonymous fearing retaliation from authorities if he was quoted complaining. Products are not sold on Amazon in one go. Sellers can send a limited number of units to Amazon or they can choose to ship large numbers to save the costs of shipping again, depending on the projected sales. Sellers might sell 1,000 units per month of a product but can
ship 6-month worth of inventory, sourced from China, to save on shipping to Amazon again, in which case it is not possible to bring the money back in 180 days. Sellers are better off doing initial payment and repatriation against it once and when the payments from Amazon start coming into their foreign accounts, there is no need to be bringing that money into Pakistan and all the payments to suppliers can be taken care of outside of Pakistan. Aisha Moriani, joint secretary at the Ministry of Commerce, who was spearheading the campaign to bring Amazon into Pakistan, however, said that SBP has removed the 180-restriction for Pakistani sellers but conceded that there were still problems which were being looked into. In fact, sellers told us that setting companies abroad and doing all of the business from outside of Pakistan has further gains. Since you can not bring your accumulated wealth into Pakistan because of the problems with the SBP scrutinies, and because we have taxation problems because of which FBR hounds anyone who is able to make money, it can be a way of moving out of Pakistan. Think about it: you have money running in thousands of pounds or dollars in the UK and the US that you can only bring into Pakistan in limited amounts. That too after finding ways around the laws like setting up a bogus company and fake invoicing your friend in the UK for services through the bogus company just to receive these payments. You are better off going to the country where you are selling and continuing from there, without having to deal with the pains of operating in Pakistan. Let’s recap here. Amazon sellers in Pakistan earlier had one choice of selling in Pakistan; that is by setting up companies abroad and keeping everything outside. Now that Amazon has allowed Pakistan to set up accounts using Pakistani addresses and information, sellers still prefer to choose to do business on Amazon by setting up foreign entities and keep on doing business the old way because keeping it solely in Pakistan is not going to be helpful. In fact, it can invite trouble with authorities, with the tax-hungry FBR hounding you for life. In all of that, the claims of increasing exports on the back of selling from Amazon fall apart. It’s still a dream and will likely remain so for sometime.
How to sell on Amazon
There are many avenues of earning from Amazon. There’s affiliate marketing where someone can simply set up a blog, write reviews and promote Amazon products and earn commission each time a product is sold through the blog. Other income streams include becoming a virtual assistant to manage an account already selling on Amazon but by far the most profitable and biggest business on Amazon, and which is the purpose of an eCommerce marketplace, is where a seller can sell products on Amazon for customers to buy (think Daraz in Pakistan). It’s a whole new market out there. Amazon’s monthly aggregated website traffic data shows that 2-3 billion people visit each Amazon each month, spread across the globe. That’s a massive access to consumers for sellers and for Pakistan, it is a matter of increasing exports. And the recent addition of Pakistan to Amazon sellers list, at the face of it at least, was meant to achieve the growth in exports by allowing Pakistanis mass access to Amazon platform to make that happen. Except that the reality which is harsh is that Pakistan has
Before May 2021, if a person wanted to sell towels via Amazon from Pakistan they had to follow a series of complicated steps. Under the new order, Amazon has allowed you to set up an account with your Pakistani address, Pakistani documents and Pakistani bank account for money transfers
been an underdog in the global business stage and even after Amazon adding Pakistan to its list, there has been little encouragement among sellers to sell directly from Pakistan as long as fundamental market realities and regulations in Pakistan do not change. In Pakistan, there are only a few categories of products in which Pakistan has a competitive advantage: textiles, sports goods and surgical equipment. But if you choose a niche for yourself that is from these three, know that textiles are highly competitive on Amazon wil textile manufacturers, big on money already have formidable presence on Amazon that you’d be competing against, sports goods are a highly competitive niche and so are surgical equipment. The marketplace model is the biggest business on Amazon for sellers and sellers can sell by setting up their private label brands or opting for wholesale. Under the private label business, the seller builds a brand from scratch: designing the product, sourcing raw material, manufacturing, shipment, brand building etc. The other method is wholesale where a seller simply partners up with an existing brand in the market where she/he wants to sell and buys product on wholesale rates, followed by selling on Amazon with a margin. For instance, you can set up your own shoe brand and export shoes you designed and had custom made to Amazon, say in the US or UK. This is the private label business. Under the wholesale model, you can simply negotiate with an existing brand, say Johnson and Johnson in the US, to buy products from them at the wholesale rate and sell it on Amazon in the US.
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Pakistanis had long been selling on Amazon before the announcement. However, instead of selling directly from Pakistan, they had to go through complicated hoops to create shell businesses in countries like the United States or England and sell their products through that foreign centered business.
Where you want to be as a seller
A disclaimer before we move forward: Amazon adding Pakistan to its list does not mean that the Amazon platform is available in Pakistan. Yes, you can purchase from Amazon and they will ship it to Pakistan from say US or UK but if you want to sell on Amazon, you would be selling in countries where Amazon operates and has an official presence. So when selling, you would be shipping products to markets that Amazon operates in like the US, UK, Australia or others. When you as a seller plan to sell on Amazon, sellers say that for the private label model, ideal initial investment has to be in the vicinity of $15,000-20,000, depending on the product. The amount fluctuates in that range based on what it costs to source the product. The higher the cost of sourcing a product, the higher the initial investment and Amazon requires a minimum of 1,000 units of a product shipped to its warehouses for selling. “While investing, we have to ensure supply in the following order: 1,000 units are at Amazon and being sold, 1,000 units
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are shipped and on their way to the Amazon fulfilment center, and 1,000 units are being manufactured. So that is investment for three shipments that you need to have handy,” one seller told us, choosing to remain anonymous, because he had a little more to say about the pains and feared retaliation for speaking out. “You have to be well prepared, and when your sales are going good in a niche, you will have to double the money in that niche for a small period of time to get a quick return on your investment. Response can be overwhelming at times so you have to be prepared because if your product runs out of stock you can be done for good,” they say. “In a private label, your net margins are easily 20-25%. As volumes increase and because there is competition, you can squeeze your margins and that still gives you a good income,” he says. On the wholesale side, the margins are less but the risk is also less since you can start off with small investment but getting your hand on the products from manufacturers in foreign products can be a challenging task: they have their own requirements and then for the same products, there are many others that are also selling the same products after getting them on wholesale rates. Amazon has millions of sellers, competing with each other. Towels for instance is heavily saturated with Pakistan’s Utopia Industries dominating the niche. So as sellers tell us, to target such a niche, you either go big or you don’t. Or you go into products that you can source easily and are less competitive and
to find out which products are the best fit for you to start, you have to spend a good month or two to hunt such products and finally start off with some. In any case, however, what they also tell us is that the investment required for Amazon is not a small amount of money and not everyone is likely able to pull it off. “It’s not for someone from a low income group,” one said. “It’s for the rich,” another one said, being able to take risks with such an amount. Ministry of Commerce’s Aisha Moriani, who is the joint secretary at the commerce ministry, told us that their ministry also considers SMEs qualified for selling on Amazon and their focus to increase exports is through enabling them to sell on Amazon. Sellers’ arguments and Moriani’s statement validates that Amazon is not for everyone but the spirit to sell is more with individuals. So let’s say if you choose to set up a private label business, Aisha Moriani agreed that non-competitiveness is hampering eCommerce but is not an eCommerce problem, it is a Pakistan problem. “Product competitiveness is the overall problem in the country. Some things are beyond control but we are working on policies such as tariff rationalisation to make products competitive,” says Moriani. Sadly, however, the Ministry of Commerce’s only achievement so far has been “training 1,500 businesses how to sell on Amazon”, with the Trade and Development Authority of Pakistan (TDAP) setting up a website for such training “free of cost”. n
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What is
Reza Baqir
thinking? The State Bank Governor talks shop in this exclusive interview with Profit
COVER STORY
By Ariba Shahid and Meriyem Ali
W
hen the Covid-19 pandemic hit, countries around the world went into panic mode. Even advanced economies struggled to cope and deal with the virus. Considering Pakistan’s economic track record, citizens had prepared for the worst. And why wouldn’t they? The rupee had already depreciated massively right before the pandemic, inflation and interest rates were high, investment and output was low, and the business sentiment wasn’t too positive. Given the situation, anyone would feel things are only going to get worse. And that is when the State Bank of Pakistan (SBP) stepped in. Helmed by Governor Reza Baqir, the central bank took a series of aggressively accommodative policies, covered in detail by this magazine in the past. At the time, even the bank’s strongest detractors couldn’t help but give begrudging respect for the bank’s decisions to slash interest rates and boost jobs as much as possible in a crisis. Which makes the bank’s actions as of last week all the more interesting to follow. In the space of just five days, the bank increased the cash reserve ratio for banks, and increased the policy rate by a whopping 150 basis points. Evidently the State Bank was now rethinking the accommodative steps it undertook to keep the economy afloat. With the country no longer in survival mode, the bank could now focus on long term stability. This is no routine policy rate decision; this is a SBP with a new directional approach. In an exclusive interview with Profit, the SBP Governor Reza Baqir laid out his thought process behind the decisions, and his vision for the country’s economic health moving forward. We have categorized that interview into four distinct threads.
Monetary Policy, CRR, and Banking Liquidity
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n last week’s issue, Profit had examined the monetary policy decision, what economists have to say about it, and also the decision to increase the CRR. However, the monetary policy decision this time gives out a wider message. Essentially it is the first steps in a gradual reversal of the accommodative stance the SBP was able to take during the worst stage of the pandemic. “The monetary policy committee had been looking at when to start the process off
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moderating the significantly accommodative stance. The policy is very accommodating because real interest rates are still negative. They are even more negative than before. And in several monetary policy statements, we discussed the timing to start moderating this. Monetary policy is still supportive of growth, but the extent of their support is something that is to be moderated. We have said this repeatedly in our previous monetary policy statements. In September, we took the first step in that direction,” says Reza Baqir. Some have commented on the speed with which the accommodative stance is being moderated, but the governor attempted to provide some clarification. “The MPC expects monetary policy to remain accommodative in the near term with possible further gradual tapering of stimulus to achieve mildly positive, real interest rates over time.” This obviously leads to the main question on everyone’s mind:if the moderation was not intended to be drastic, then why did the SBP feel the need to hike the interest rates by a whopping 150 basis points? The answer to that is pretty simple. All sorts of factors - namely inflation, the current account deficit, and the USD/PKR parity had worsened beyond expectations. According to Baqir: “Between September 21 and November 19th, the developments that took place on three fronts were modestly more than what we had foreseen. We felt that there has been a significant worsening of developments on inflation and current account. [Then there was] the developments in the foreign exchange market. To date, primarily it is the rupee that has borne the brunt of the adjustment and the extent to which it was bearing the adjustment of was also a little bit more than what we had anticipated at the time of the September monetary policy.” “After reaching that conclusion we had two options, pretend that nothing has happened or decide what actions are needed to respond to those developments. We started on a series of planned steps. The first of those steps was increasing the CRR on 13 November to moderate the money supply. As a central bank we need to look at monetary activities and monetary aggregates which has been growing a little above trend and therefore we wanted to mop up some liquidity. Secondly, we brought the monetary policy committee meeting earlier than planned. Even in the press release we issued, we were very clear that the meeting has been brought forward in light of recent unforeseen events.” Investors and key stakeholders had been anxious as to why the monetary policy meeting had been held earlier than planned. The governor addressed that by saying, “Our goal was to provide clarity on that so that we
reduce at least the uncertainty. On the basis of further clarity, at least decision-makers will be able to have the information to plan. So that is why we called the meeting earlier.” Not only did the SBP call the MPC meeting earlier than scheduled, but they also announced a new calendar whereby the next meeting is in December because “the two month period proved to be quite long when the world is changing rapidly.” “What we thought was that what would be best for us to do would be to be transparent in the way the MPC was thinking about what it can and cannot commit. Forward guidance was something we had previously introduced because we wanted to convey a sense of predictability, but it is conditional on developments, also occurring broadly in line with what we anticipate. Central banks don’t have crystal balls and sometimes developments do take place, which may be a little bit more than not anticipated in those circumstances.” “I think it is best to be upfront. Now, when we give forward guidance, there were two parts of this. Originally one was, we had said that our goal is to achieve mildly positive, real interest rates. part was measured in gradual. It’s very important that we are successful in conveying our point, that the end goal is still the same. The most important part of our guidance regarding the end goal is still the same, and that has not been changed, which is ‘mildly positive, real interest rates’. In such a situation, what is the right amount of a rate increase? This is a question that all central banks have to tinker with. “If the rate increases too much, well above the hundred basis points that the markets were expecting, then that may be counterproductive, because it may signal something that we don’t want to signal. It may signal that the concerns about developments are actually very pronounced, which is not really the case. So the discussion in the MPC was to strike the right balance. And in the view of the MPC, 50 basis points more than what the market anticipated was considered to be striking the right balance in these considerations.” If so, why did the SBP choose to go with a 50 basis point increase above market expectations, rather than, say, 25 basis points? To that Baqir says, “When policy rates are in the range of 7-8%, 25 basis points are fairly small movements that may not often be seen as clear a signal as you may wish to. Moreover, you want to ensure that you are leading in terms of the signals that you want to convey to the markets, as opposed to catching up to where the markets are. In that case you also want to send a signal that is reasonably clear. And in our view, this move still keeps
In terms of the stance of monetary policy has not been tightened, just the pace at which you want to reach that in our view is faster. The reason it should be faster is because the rotation of balance of risks from growth to inflation and the current account has been a bit faster than anticipated Reza Baqir, governor of SBP
monetary policy accommodative. A 8.75% policy rate is below inflation rates whether on a backward looking basis or on a forward basis. Monetary policy is still accommodative, but we have taken a step that was bigger than we had previously anticipated to reduce that moderation.” The governor also held the view that a faster pace was necessary for the economic health of the country: “In terms of the stance of monetary policy has not been tightened, just the pace at which you want to reach that in our view is faster. The reason it should be faster is because the rotation of balance of risks from growth to inflation and the current account has been a bit faster than anticipated. Now that message has information that is positive and also contains information, which has prompted us to the fact that growth continues to be robust. Even with this policy action, we expect growth to 5% this fiscal year.” Typically, a contractionary monetary policy and a fall in liquidity often prompt one to think that growth is set to decrease. But the governor seemed determined to dispel that myth, saying: “We are not doing this at a time when the economy is slowing down, there is a fundamental difference between this phase of monetary tightening, what I would say, reduction of accommodation and the one in 2019. At that point, the economy was slowing, but there was a much bigger problem of stabilization. This is a stage of moderating, the extent of growth. This is the stage of taking steps to prevent overheating. This is the stage to get out of the history of boom-bust cycles. We have had growth before, but where we have not been very successful in sustaining growth.” “Increasing the policy rate is going to increase the minimum savings rate by 150 bps. This will encourage keeping cash. Increasing the CRR is going to encourage banks to mobilize deposits because by definition, more of their liquidity is now locked up at the central bank. Therefore when they undertake more efforts to mobilize liquidity, they will also
reduce cash because they are going to either offer better rates or undertake other measures to increase deposits which are good to reduce cash.” However, with the CRR being increased and the introduction of TSA, there are concerns from the banking sector about wiping out liquidity. However, the governor says that the TSA is being done in stages and the SBP does not see a sudden impact on the banking sector.
Demand-pull inflation - now in Pakistan
B
efore moving on to what the governor has to say about inflation, some context might be useful. Central banks around the world manage inflation using monetary policy. Econ 101 states that with higher interest rates, demand is dampened, leading to slower economic growth, and lower inflation. One could also reduce the money supply; though there is significant debate on how much money supply and inflation are correlated. Generally speaking, monetarists believe the two are closely linked, and therefore reducing the money supply will reduce demand which will bring prices down. Supply side policies can also be used to control inflation, however, these usually fall on the government instead of the central bank. Fiscal policy and wage control also impact inflation as less disposable income often leads to dampened demand which can bring down inflation. In the case of Pakistan, our inflation is primarily driven by rising commodity prices around the world. ‘Imported’ inflation can’t be tackled with ‘local’ monetary tools. And supply side issues in Pakistan, like hoarding, can’t even be addressed through monetary tools. So why is the SBP bringing a sword into a gunfight with the MPC decision to hike interest rates? That is because Pakistan’s economy is no longer restricted to supply side shocks, and is now also facing demand driven inflation.
As Baqir explains,“The drivers of inflation in our view right now are three. First are the international commodity prices. The monetary policy does not have control to bring international commodity prices down. However, the second and third reasons for inflation are reasons to use tools of the central bank.” “The second factor is domestic demand growth, which is significant. And in our history, the best measure of domestic demand growth is import growth. Even if you look at non-oil import growth, it is a very brisk.If you look at indices of fast moving consumer goods, motorcycle sales, etc are rising. Consumption by broad cross sections of society are all growing very briskly. So we know domestic demand is growing very robustly. It follows therefore that in an economy, which already is not producing enough to meet its demands faces demand side pressure.” The general principle in such a case is to increase the policy rate to curb money supply. The CRR being increased also reduces liquidity. Therefore, the MPC decision to increase policy rates in this environment makes sense. ‘The third factor, which affects the output and production, is the exchange rate. It affects inflation with the lag. The monetary policy, however, is forward looking.”
The rupee
P
reviously, the governor had been heard on multiple occasions saying if the rupee was able to withstand a global pandemic, it would be able to withstand anything. However, the recent rupee slide brings that stance into question. Before addressing the reasons behind the decline in the rupee, the governor felt it was prudent to point out different ways to look at the rupee depreciation. “The exchange rate on a peak to trough basis is what it is, but it is also important to look at it in terms of year to date which the average of the exchange rate for this calendar year is Rs 161, for the same period last calen-
COVER STORY
dar year it was Rs162. If we talk about the fiscal year, the average exchange rate for this fiscal year is Rs167 compared to Rs165 last year for the same period.” As for why it declined: “Number one is the current account development. The best way to look at it is that in May of this year is when you first see a current account deficit that’s exceeds 600 million. That is also the month when you begin to see a change in the direction of the rupee. There is greater pressure on the rupee. So that is point number one. And this comes back to why we think monetary policy actions help the outlook for inflation because monetary policy will moderate demand, moderate demand will moderate import growth. Moderating import growth will reduce the pressure on the foreign exchange and will therefore support the inflation outlook.” The second reason might be a little unexpected: it has to do our neighbour, Afghanistan “Second factor comes into play is starting in August. And that is developments related to Afghanistan because they cause additional pressure, especially in the open market. reports that foreign currency cash is being taken in large amounts to afghanistan. That adds pressure. It also adds some broader concerns and uncertainty on the part of the investor community about geopolitical developments in the country, when there is a desire to move into safe assets. In the local context that is either gold or dollar. “We took measures as far as the movement of foreign currency is concerned. There are three in particular. One is the fact that we reduced the limit of cash that can be taken to a finest done by each person from $10,000 to $1,000. We began to require biometric for any transaction at exchange companies worth more than $500 biometric is to be done. It’s done at banks so there’s no reason why biometric cannot be done at exchange companies. We have also reduced the threshold at which a transaction can be underdone at an exchange company. Beyond that threshold, one has to go through banking channels as opposed to cash. So essentially, if there is a transaction you wanted to do at an exchange company, more than $35,000, you have to do it through banking channel.” It is a healthy reminder that political problems like the Afghanistan issue have not just political repercussions for Pakistan, but also a direct impact on the rupee which drives inflation. It also has an impact on the investment climate in Pakistan especially if one is to take into account international sentiment towards the region. And the third reason, of course, was “The third factor is (was) uncertainty related to the IMF program. The fourth factor
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is self fulfilling expectations of the buyers and sellers of foreign exchange. Which is somewhat different from speculation? Speculation is a term that is not defined very clearly and different people mean different things from it. For the rupee, I want to be clear and say the movement is self-fulfilling expectations. If tomorrow, everybody comes to the view that the rupee is going to appreciate then many people will buy dollars or hold onto their dollars. The rupee as a result will appreciate. You will fulfill your expectations. Whatever you have expected is what transpired.” “If tomorrow you expect that the exchange rate is going to depreciate, then whoever has foreign currency may sell considering they’d get a better rate today than in the future. For instance, the rupee strengthened significantly from 175 to 170, after the announcement of the Saudi deposit, we certainly saw a lot more inflows into the foreign exchange market because a few days, the expectation that got created was that the Rupee has hit the trough and now it’s going to strengthen. And so you begin to see the movement in the other direction. So that is the fourth factor in our view that also has contributed to the exchange rate depreciation.”
Roshan Digital Accounts and Remittances
“O
verseas Pakistanis are tremendous asset for the country. It’s an asset that has not been as connected.” The Roshan Digital Accounts is a means to make a permanent and safe connection between overseas Pakistanis and Pakistan. “Each account is a connection,” says Baqir. The number of Roshan Digital Accounts have been growing for Pakistan, this means new connections are being made. This account opening process for overseas Pakistanis will have a long term impact because regardless of what the policy rate is, who is governor, or what’s happening in the country, overseas Pakistanis have a safe channel through which they can invest, remit, and consume. Despite that, there have been concerns of hot money through the RDA, especially considering individuals are getting cheap loans from their home countries and using that money to invest in Naya Pakistan Certificates. Pakistanis are obtaining LIBOR based leverage to invest in NPC which they may withdraw when the leverage becomes too expensive to sustain. Considering the criticism Baqir has received in the past for bringing in hot money, some analysts have been weary of the inflows. The State Bank’s stance on this, however, is interesting.
“Approximately 1000 new accounts are opening each day. Each account is a permanent connection and not all the money is being invested in Naya Pakistan Certificates only around 60- 70% is going to that. The remaining 25 -30% is actually sitting in a account balances, which is not earning that much of a rate of return, or is this being used for payments that people want to make. ‘So the right way to, think about the effective return that is being paid on the NPC is less because for every dollar that is in NPC, roughly $1.30 have come into the country so that, you know, 6.3% net of tax that is being paid is actually reduced by the factor, because more dollars that are actually coming in, because people see there are attractive savings opportunities as well.” Moreover, as for gaining cheap credit from overseas to invest in Pakistan, the governor says, “Offshore banks are catering to their clients by lending to them so that they can invest more in Pakistan. That is a decision between the bank overseas and their clients. It doesn’t involve us over here.” “This is not portfolio inflows. They have a secondary market. This is retail money and is generally quite sticky. And ultimately what we have to demonstrate is that Pakistan’s economic prospects are stable and growing because as long as that is the case, even if LIBOR is increasing, it is going to affect the return on all investments that you may consider doing if you are in overseas.” However, the governor reiterated that RDA is all about making connections, and all this is a bonus to it.
What is to come?
Y
ou don’t need to be an expert to know that the policy rate will increase over the next few months. However, with the IMF program coming into play, the uncertainty around economic reforms and plans has now been set aside. While supply side inflation still remains at the behest of international commodity markets and of course government control over prices domestically, the SBP’s decision to curb money supply and demand pull inflation may help the economy on its sustainable growth path. The SBP does not seem too aggressive with regards to austerity and is still in favor of maintaining an “accommodative” stance. However, the SBP which was widely appreciated during COVID for its more than accommodative proactive measures may now find it difficult to please the business community, as it moves towards sustainable and fundamental driven growth as opposed to consumption and import driven growth which has been encouraged in the past. n
COVER STORY
OPINION
Irfan Ahmad
A Stanford academic, Twitter, and Pakistan’s exports
and quarter inch floppy disk with my thesis saved on it. However, the importance of connectivity is something that I based my entire dissertation on. Just as an emerging startup ecosystem is dependent on connectivity, exports from emerging markets depend on connectivity with importers around the world. In 1986 I wrote: “Establishing good communication links not only for the transportation of products but also for speedy interaction between buyers and sellers in the international marketplace tends to encourage trade. A country that has an efficient international telephone network, that provides its exporters ready access to telexes and that provides an environment conducive to the growth of international courier services is likely to receive a large number of export enquiries. Importers may be willing to include in their buying itineraries those countries that do not have any visa or travel restrictions, and that have interchance encounter on Twitter with a Stanford acanationally known hotels …. A country that has a well-developed demic who lectures on entrepreneurship and venture network for the exchange of communications is, therefore, better capital sparked my interest in revisiting my PhD endowed to increase its market share of world trade.” dissertation. Trevor Loy (@trevorloy) is of the firm Ok, this was written way before WhatsApp and Zoom and belief that a startup ecosystem in any country cannot even before the internet. Most people will not know what a telex reach critical mass unless it has direct flights to and is, but in my thesis I go on to talk about the need for marketing from Silicon Valley. Being a VC himself and having advised emerging and advertising, the need for taking part in trade shows and the global startup ecosystems for more than 25 years, his view on airline importance of sending trade delegations abroad – all factors that connectivity carries weight. improve connectivity between the buyer and seller. While prices If VCs and investors from Silicon Valley can catch a direct are important, I mention that a 50% devaluation of the Pakistani flight to wherever it is in the world that you are building your startup rupee in 1982 did not make a dent on exports. Nor did it curtail ecosystem, there is a high likelihood that you have a chance in hell imports. Déjà vu in 2021? of succeeding. If you are in isolation you’ve got to be as big as China. A PhD in Economics that begins with “The Traditional There are no exceptions. View” and quickly talks about “A Bend in the River” and has a And that brings me to my 1986 PhD dissertation titled, “Inforchapter titled, “Pakistan, Bloomingdales and Calvin Klein,” is cermation Cues and the Marketing of Pakistan’s Export.” It has nothing tainly not your standard PhD fare. Of course, some “transformed to do with the startup world. The only tangential connection I can logit models” and “nonlinear three staged least square models” draw to the world of computers and startups is that I do have a five are thrown in for good measure – they wouldn’t have let me off without going through months of regression analyses that ended abruptly when my advisor hinted to me that you can beat the data until it says what you want it to say. Irfan Ahmad The concluding paragraph of my dissertation is an exhortation to the powers that be that has a PhD in Economics they have repeatedly tried devaluations and price incentives and other World Bank/IMF prescripfrom Boston University. tions, it is now time to think differently. “What perhaps remains virtually untried is a marketing He is a pioneer of digital and promotional campaign that informs people everywhere that Pakistan exists. That Pakistan marketing. Based in Dubai, can meet their import needs. And that “Made in Pakistan” is good!” he is currently involved in Thirty-five years after the publication of my dissertation, if perhaps someone were to give podcast and digital out of credence to the need for promoting Pakistan and increasing its score on connectivity, only because home ad sales. He tweets @ it was highlighted by a Stanford academic, I would be happy to give Trevor Loy all credit for helpirfanahmad ing to increase Pakistan’s exports.
We need to increase Pakistan’s exports, and it doesn’t quite matter where we approach the problem from
A
COMMENT
21
How the pandemic gave
Pakistani denim If exports are to stay high, there must be a focus on how we produce rather than how much By Shahab Omer
M
ost clothes in Pakistan are tailor-made. It is a strange phenomena of the third-world that a majority of people that would be considered not well off wear bespoke clothing. The major reason for this is cheap labour. Skilled tailors are everywhere and they do not ask for the kind of money that their skilled work deserves and should fetch in more developed countries. This means that it is cheaper to buy
TEXTILE
a second life
loose cloth and ask your local tailor to stitch it according to your measurements. Buying off the rack from brands is actually a status symbol since those clothes are more expensive. In most western countries, high-end brands particularly for things like suits often have in-house tailors, or high-end tailors often sell fabric as well. But one of the fabrics that have historically not been able to be bespoke is denim. Hard to work with and increasingly in demand, denim products like jackets and jeans need special craftsmen. The journey of denim began in 1873, when Levi Strauss and Jacob
Davis obtained a U.S. patent on the process of putting rivets in men’s work pants for the very first time. Tough yet comfortable to move around in, denim was first used for clothes worn by workers because of its high durability. Then it became widely popular in the 1930s when Hollywood started making cowboy movies in which actors wore jeans.And from that point onwards denim clothing spread along with globalization. Denim also happens to be one of the fabrics that Pakistan is good at producing. The manufacturing of denim garments is a complex, difficult and lengthy task that is
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Companies that export anything from Pakistan need a Certificate of Origin and if you look at the statistics of the last few months, they are increasing exponentially. The potential of the textile sector is not hidden from anyone and in my view our textile exports will be sustainable Mian Noman Kabir, president LCCI
performed step by step. It is an art that has been perfected by hundreds of small and large factories in Pakistan, which produce worldclass denim garments. That is why Pakistani denim is popular everywhere, including in European countries. In fact, in July 2021, Pakistan exported denim clothing worth $38 million to the United States and these figures were released by none other than the US Office of Textiles and Apparel. And while Pakistan has managed to increase its denim exports by such huge numbers, there is still some doubt as to whether this level of exports can be maintained.
Rising exports
O
ne of the main things you hear from almost every sector is the need to increase exports and decrease imports to improve the balance of payments. Producers like to export products because they get a better price and it is also in the government’s interest, so the success of denim this last year is a win. Interestingly, the volume of exports was 140 percent higher than in July 2020 last year. This was also part of a larger trend in the region and beyond. According to the data, denim exports from Mexico increased by 58 percent during the same period, while exports by Bangladesh increased by 24 percent. The data also shows that among Asian countries that supply textiles and garments to the US, Pakistan’s exports to the US have increased by 62.16 percent to $188.94 million. Similarly, Bangladesh’s exports increased by 42.82 per cent to $362.38 million during the period, while imports from China increased by 13.28 per cent to $192.49 million. Bilal Chaudhry, who deals in local and imported readymade garments in Karachi, Faisalabad and Lahore, believes that this time Pakistan’s denim has dominated not only international but also local markets - which are often not hotspots for world-class denim since these products are very expensive. However, with the increasing exports this year, there has also been a massive increase in export leftovers
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which people are now buying. Bilal claims that earlier the clothes available on the market were of a subpar quality. All of the good denim products would be exported and we would be left with lower quality items. “You could not find good clothes here because many shopkeepers display clothes that are not fit to be worn. If the fabric is of good quality then the sewing will be inferior and if the sewing is good then the quality of the fabric will be very poor,” he explains. “Since earlier exports of readymade garments from Pakistan were not high, export leftovers were rarely seen in the market and even if one had them available, the defects of this garment were clearly visible.” This is where the pandemic might have actually helped local denim producers. Until the lockdowns were first imposed, the denim market was dominated by brands like Levis. When the Covid lockdown was imposed business was severely affected, but online sales remained high. At this point, sellers started importing denim from China, Bangladesh, and Turkey. They were imported at reasonable prices and sold hand in hand. This is where there was a twist in fate. Around the time that Pakistan began recovering from Covid and lockdowns were being lifted, countries like Bangladesh and Turkey, from whom we had been importing before, went into lockdowns of their own and started looking towards Pakistan for denim. It was also at this point that the US demand started to look towards Pakistan for denim. “Pakistan filled the gap for a while and that is why our exports rose. All of these orders were completed by Pakistan and our exports rose,” says Bilal. “At the same time there was also a huge amount of export leftovers which then appeared in the local market and began giving the big brands a serious run for their money.” It was a simple process. Suddenly there were a lot of high-quality denim products available on the market for cheap. Earlier, small retailers would buy low-quality products from factories and would not cater to the same segment that would be buying clothes from places like Levis. However with export leftovers, suddenly these small retailers were selling the
same quality of products for cheaper. Since these small retailers often operate in the same markets as large brands, they began undercutting the sales of these brands on the local market as well. “Take the example of a single pair of jeans. Earlier, the best quality pair of jeans from a local factory would be available for Rs 400 to Rs 700 to the retailer. However, even the best quality available to us was not what is considered ‘export quality.’ We were not playing in the same league as the large brand names. Now there are plenty of factories that have thousands of denim export leftovers and their quality is high and can compete with places like Levis. Everything in the country is becoming more expensive but denim products have actually risen in quality and fallen in terms of price.” Earlier, when the non-export quality pants were available for Rs 400 to Rs 700 from factories, retailers are now buying export-leftovers for Rs 250 to Rs 500 from the factories and selling them between Rs 800 to Rs 1200, which leaves both customers and retailers very happy. In fact, the denim products that these retailers imported back when Pakistan was under lockdown is sitting in warehouses collecting dust since it is of the same quality but significantly more expensive. “Since the cost of a pair of jeans that we import costs us about Rs 900, selling it at Rs 1,200 is not a very lucrative deal. Similarly, denim jackets were easily available in our local markets. Some of the big brands had these jackets available and their price was not affordable to everyone. Right now, denim jackets in the market are only between Rs 1500 to 2500. People used to buy used denim jackets from Landa Bazaar and were happy to wear used jackets but now the new ones are easily available in the local market at cheaper prices. Similarly, the markets are full of denim shorts and they are selling for only between Rs 300 to Rs 500. And all of these export leftovers
Despite the Covid-19 pandemic during the last fiscal year 2020-21, Pakistan’s textile sector showed significant growth and the volume of textile exports increased to $15.4 billion Abdur Rehman Nasir, chairman APTMA
are branded products from brands like Levis, Zara man, Lee, Gucci, True Religion, Polo and Diesel. Now ask yourself how the rush in the markets will not increase,” says Bilal.
Is this sustainable?
R
ight now the government has set a target of doubling textile exports by 2025 and has announced a new policy with billions of rupees in subsidies. It has not been officially announced since it is still pending in cabinet for approval. The problem is that the government does this with everything. It sets ambitious targets and sets itself up to fail because those targets can either not be met or are the wrong way to go. Take the example of cotton, where . The government keeps setting ambitious ‘targets’ but never meets them because it does nearly nothing to actually help farmers achieve those Soviet-style macroeconomic goals. Currently, there is not really an issue of Pakistan’s cotton production or exports falling, the problem is of failing to meet targets. The example is also pertinent because denim is made using almost all-cotton. The recently approved long term textile policy 2020-25 has laid down a clear vision for how much Pakistan hopes to be exporting by the end of this decade. Under the plan, textile exports should be up to $25.3 billion by the end of 2025, and depending on the success of these five years, at $50 billion by the end of 2030. For this, the country needs to increase not just the amount of cotton it produces, but also the quality of the cotton crop. Currently, Pakistani cotton is considered second grade, and if the crop quality is improved there would be greater demand at a greater price which would be a big boost towards meeting export targets. More importantly, by improving the crop, the entire textile industry will benefit since the quality of all products will improve at the source. Pakistan has been missing its export targets since last year. In 2019, the production target for cotton had been 15 million cotton bales, and only 10.2 million bales were produced. The reason behind this, again, is that the government places very little emphasis on how the cotton is grown. Factors like climate
change, lack of proper research by local research institutes, and no cotton policy, and the loss of cotton production areas to other cash crops have all played a role in this, which is why it is so important to focus on techniques to grow more and better quality cotton. Similarly, if Pakistan is to keep up the increased denim exports and production it must focus on how it is producing and to what end. The new policy is ambitious, and aside from the silly targets it sets, under this policy, electricity and gas tariffs will be reduced. In addition to long-term financing for the textile industry and increasing access to new markets, it is also proposed to increase the efficiency of human resource development. However, Abdul Rahim Nasir, chairman of the All Pakistan Textile Mills Association (APTMA), believes that the new textile policy will create 100 new textile industries in Pakistan, adding 20 billion annually to the sector’s exports and it will also increase exports as well as create hundreds of new jobs. According to the chairman, exports of the textile sector increased by 23 per cent during the last financial year and the volume of exports increased to $15.4 billion from $12 billion. Similarly, the total exports of the textile sector during July and August 2021 was recorded at $2.93 billion as against $2.28 billion in July-August 2020. Despite the Covid-19 pandemic during the last fiscal year 2020-21, Pakistan’s textile sector showed significant growth and the volume of textile exports increased to $15.4 billion. Earlier, in December 2020, the federal government had set a target of $20.86 billion for textile and apparel exports over the next five years. The federal Ministry of Commerce had set a textile export target of $13.6 billion for fiscal year 2020-21, but the total volume of textile and apparel exports increased to &15.4 billion at the end of the year. Mian Noman Kabir, President, Lahore Chambers of Commerce and Industry (LCCI), informed Profit that the number of export oriented companies is undoubtedly increasing and Pakistan’s textile sector is also increasing its exports significantly. “Companies that export anything from Pakistan need a Certificate of Origin and if you look at the statistics of the last few months, they are increasing exponen-
tially. The potential of the textile sector is not hidden from anyone and in my view our textile exports will be sustainable,” he said. The thing to think about here is that last year the Covid-19 caused problems to all sectors around the world, but it proved to be beneficial for Pakistan’s declining textile industry. Due to the severe lockdown in India and Bangladesh compared to Pakistan, their export sector, especially the textile sector, was badly affected, which the global markets had started placing orders to Pakistani traders to fill the gap and according to the latest data, Pakistan’s textile exports, especially denim fabrics, have also increased significantly. But the question is, how sustainable is this export situation? A look at the data obtained by the All Pakistan Textile Mills Association (APTMA) reveals that textile exports in 2020 were $11.67 billion that was $770 million less than 2019. These figures contradict all government claims that the textile industry has fully recovered and that it is becoming increasingly difficult for Pakistan to meet global orders. Because these figures prove that textile exports are gradually declining. Yes, the textile sector was less affected by the lockdown during Covid-19 pandemic than other sectors, which cannot be attributed to improvement. In addition, no official figures have been released to gauge what percentage of the industry is operating. What does it mean to work at full capacity? If there has been a 50 per cent increase in the working of industries, then there should have been a 50 per cent increase in exports, which is not visible and this fact is also admitted by a number of APTMA members. Pakistan’s neighbor India exports $36 billion worth of textiles annually, three times more than Pakistan. If we compare Pakistan with Bangladesh in terms of area, population, resources and economy, its textile exports are more than $34 billion. Due to the energy crisis and the poor peace situation in the last fifteen years, Pakistan’s textile industries have rapidly migrated to Bangladesh and India. The secret
TEXTILE
behind the growth of textiles in Bangladesh and India is that electricity rates for industries there are half that of Pakistan. Uninterrupted and free water is provided and affordable labor is also available. Due to Bangladesh being underdeveloped, tariffs are also discounted in international markets. In this way, Bangladesh and India produce goods at 20 percent less cost than Pakistan, which is also available in international markets at cheaper prices than Pakistan. That is why buyers prefer Bangladeshi and Indian products instead of expensive Pakistani goods. Many industrialists in the textile sector believe that there is a lack of branding and innovation in textiles as in every other sector in Pakistan. Since most of the textile industry’s goods are consumed in the local markets, no attention is paid to producing world-class goods. Compared to Bangladesh and India, we have only a few multinational brands of textiles and garments that is why we have almost no foreign investment in the export sector. According to statistics, the textile sector accounts for 46 per cent of Pakistan’s manufacturing services, employing 1.5 million people. The development of this sector is directly linked to the production of cotton. Until a few years ago, Pakistan was ranked fourth with 1.5 million bales a year but now the production is limited to 700,000 bales. The situation of cotton has deteriorated to such an extent that the cot-
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ton exporting country is now forced to import on which additional capital is spent. Factors leading to a decline in cotton production include climate change, agricultural interventions such as the high cost of seeds, sprays, fertilizers and water, as well as the government’s inattention. Cotton production per acre in Pakistan is much lower than other countries in the world due to lack of research and development. Farmers do not have access to cotton seeds that can produce good yields while resisting climate
change and diseases. Research by agricultural research institutes and universities is limited to paperwork only and that is why most varieties fail in the field at a temperature of 38 degrees Celsius. Cotton is not part of the agricultural emergency program, nor is there a minimum support price for this important crop. In contrast, subsidies and minimum support prices are announced for the sugarcane crop, which is why cotton growers are increasingly moving towards sugarcane. If we really want the sustainable export of the textile sector, we have to take revolutionary steps to revive the cotton industry as well as the textile industry. In this regard, APTMA Secretary General Punjab Raza Baqir informed Profit that although it is not the job of APTMA to improve the production of cotton or its condition, a cotton foundation has been established by APTMA. “Cotton experts have been appointed for this foundation and we are also in talks with the Punjab government to lease us lands where seed development work can be done. In fact, the exports of Pakistan’s textile industry have flourished because of the Covid-19 Pandemic because in Pakistan, there was a smart lockdown and our sector continued to operate but the most important thing is that the new clients that our exporters have now should be given good services and rates so that our exports can be sustainable in the future.” “The role of the government is very important because 40 per cent of the cost of production comes from energy which is not variable. The other problem is freight at the moment because the sudden increase in demand after the Covid-19 lockdown has created a severe shortage of containers all over the world and where they are available, their price has increased five times. This is an issue that affects both exports and imports, but this situation is temporary and will hopefully improve in two to three months,” he concluded. n
TEXTILE
How do
petrol pumps
make money?
After all of the hullabaloo surrounding the increase in margins, how does the petrol pump business model even work?
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By Ariba Shahid f you’ve been to a petrol pump in Pakistan chances are that you’ve seen a lad working at the pump holding a large wad of cash. As a kid you probably thought that the guy is rich, as an adult you come to realize, the guy probably earns the equivalent of 5 litres of fuel (at current prices) in a day – basically peanuts. But this story isn’t about unfair wages, it has more to do with how fuel pumps earn money.
There are various components that help determine the price of fuel in the country. Dealership margins are the margins a dealer (a pump owner in this case) gets. These used to be in the form of percentages but have been fixed per liter. The past week, thousands of Pakistanis were stuck in line at fuel pumps in hopes of getting fuel. They couldn’t because the petrol pumps were on strike. The only way one could get fuel was if they managed to find a company operated pump, which are a tiny fraction compared to dealer owned pumps. For an understanding of this, let’s take Karachi as an example where there are only 20 company operated (only PSO and Shell, Gas and Oil Pakistan Ltd (GO), Hascol Petroleum Ltd) pumps, whereas the approximate remaining 480 are dealer operated or belonging to companies that participated in the strike. The Pakistan Petroleum Dealers Association (PPDA) had announced they would go on a strike from Thursday till an indefinite period to demand an increase in the margin on the sale of petroleum products. Energy Minister Hammad Azhar reacted to the petrol strike, saying that the government will not accept “illegitimate demands” by certain petroleum dealers. “The government will not hike prices of petroleum products by Rs9 per litre to appease a few companies,” he said. Petrol pumps used to earn Rs3.91 per litre on petrol and Rs3.30 per litre on diesel. profit made by petrol pumps per litre was 2.75% which the Pakistan Petroleum Dealers Association (PPDA) had demanded be increased to 6%. If this demand was met, the profit made by pumps on petrol would be Rs8.75 per litre and Rs8.5 on diesel. However, instead, the government negotiated with the dealers and they would now charge Rs 4.90 per liter on petrol. Essentially, an enhancement of 99 paisa in the existing margin of petrol and 83 paisa in the existing margin of high speed diesel. In a statement, the Petroleum Division said, “The proposal for a 25pc increase in the margin of dealers will cover all delays in the revision of margin in the past and would also help dealers in mitigating the impact of inflation.” In 2016 the ECC decided that margins will be revised annually by the amount of average CPI. Period for this average change in 2019, however the rule remained the same. Despite that, over the past five years, the margin was only revised four times for petrol and three times for diesel. There have been threats of strikes every time. The last revision in margins took place in April 2021 which was after a delay of 9 months for Petrol. The government, over the past few months has
been delaying the revision stating that the PIDE study would be used as a gauge to revise margins. The study, however, is completed yet the government was still not keen to revise rates. In addition, if you link this to the fuel shortage of June 2020, the government’s relation witl fuel pumps isn’t that great to begin with. While inflation remains a concern and with rising fuel prices internationally the government feels compelled to make the fuel pump owners wait, the fact is, the government needed to be more prudent and deal with the sitation better.
The components of petrol price
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he price of petrol has various components that combine together and are totaled to reach the ex-depot price, or the price the consumer sees at gas stations. The base price is the imported price, in the case of oil imports, or the ex-refinery price in the case of domestic oil production. On top of that, there are retailer and freight costs which include the inland freight equalisation margin, OMC profit margins (what PSO, Shell, etc. earn), and dealer commissions (what the petrol pump owners get to make). Lastly, comes the taxation which includes general sales tax and the petroleum development levy. The ex-refinery price is the price at which refineries can sell their fuel to OMCs and the price at which importers can sell distillates within Pakistan. One of the first additions that happens to this initial pricing are the commissions that retailers and dealers receive. The next significant addition is the Inland Freight Equalization Margin (IEFM), which is the cost of inland movement incurred by a refinery for the transportation of crude oil from the source to the refinery. It also includes the cost incurred by an OMC while transporting the finished product to various depots across the country. This basically includes all transport costs within the company. The purpose of this margin is to establish and maintain parity in the prices of fuel throughout the country. The money collected from this margin goes on to create a pool. The government then uses this money from the pool to provide indirect subsidies to Pakistanis to ensure the same price of fuel is found throughout the country. Basically, if this subsidy did not exist, petrol prices would be cheaper in Karachi and more expensive in almost every other part of the country, and especially expensive in Gilgit-Baltistan and Balochistan. After all of these pricing tools, we
finally come to taxes, because the last two additions to the price the consumer sees at the gas station are the general sales tax (GST) and the petroleum development levy. The GST, as of late, is set at 0% to pass relief on to consumers in light of rising fuel prices globally. However, in the past it was set at 17%. Keeping in mind that it is a ratio rather than an absolute number, it varies with a change in the price of petrol. The levy, on the other hand, is a surcharge and set as an absolute rupee amount per litre, though the government does vary how much it charges under this tax relatively frequently. It is used as an instrument to bring about stability in the price of petrol by offsetting the impact of drastically changing import prices and costs associated with fuel. The levy, however, is often seen as a political and fiscal tool to either pass on ‘relief’ to consumers during an election year or to generate more revenue in other years. Previously, the levy was priced at Rs15 per litre but it has now been raised to Rs30 per litre. This means that when the government wants to pass on relief to consumers it could keep a levy of zero rupees or some low number. Essentially, this means that after all the costs are added, the government could increase the price of fuel up to Rs30.
How do petrol pumps earn?
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etrol pumps can be company owned or dealer owned. Dealer owned petrol pumps are where an individual buys a “franchise” of a petrol pump, follows all legal procedures and sells fuel on behalf of an OMC. They earn through the dealership margin. Petrol pumps earn based on how much fuel they sell. Some pumps also earn on the sale of lubricants and other services such as tyre puncture stations, car wash and service area, stores, etc. As per Shell Pakistan’s website, “Your income will depend on the type and number of stations you run and their locations, but you can look forward to potential earnings of between PKR 2,500,000 and PKR 3,500,000 per annum from year one (for a single site), with the opportunity for additional earnings if you exceed targets and control your costs.” While these figures are not guaranteed, if you choose to open a fuel station, the company you sign with will provide the fuel and training. In return for your investment and the time you’re putting in to run the fuel station, you’ll get your margin and possibly a bonus or remuneration against meeting sales targets. While fuel prices do add to the inflation of a country, it is important to note that inflation and cost of doing business has also increased for pump owners. n
ENERGY
What’s going on with Millat?
After a very good year by its own standards, things are a little cloudy
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illat Tractors had a very good year even by its own standards. The company’s unconsolidated net profit after tax stood at Rs5.78 billion in fiscal year 2021, which was an astonishing growth of 169% year-on-year. And already in the first quarter of 2022, its earnings grew by 16% yearon-year to Rs1.3 billion. To help place these numbers in context, it helps to have some context on the tractor industry in Pakistan. According to the Pakistan Economic Survey of 2020-2021, there are only 634,000 tractors operating in Pakistan. This, however, is a significant increase from when there were only 35,700 tractors in 1975, 157,300 tractors in 1985, 252,000 tractors in 1994, and
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401,700 tractors in 2004. Granted, this is an improvement from the decades before, this still means that the penetration of tractors in Pakistan is only 0.09 horsepower per hectare of cultivable land. Compare that to the required power of 1.4 horsepower per acre. How important is agriculture to Pakistan? The sector contributes 18.5% to the country’s gross domestic product (GDP) and employs 38.5% of the national labour force. Even our state emblem is made up of four crops: jute, cotton, wheat, and tea. Yet for a country that prides itself on its agricultural base, we do not have enough of the one machine one really needs: a tractor. According to the Pakistan Economic Survey of 2019-2020, there are only 634,000 tractors operating in Pakistan. This, however, is a significant increase from when
As a result, this has led to cheap tractors when compared to tractors around the world, but is still unaffordable for the majority of farmers in Pakistam there were only 35,700 tractors in 1975, 157,300 tractors in 1985, 252,000 tractors in 1994, and 401,700 tractors in 2004. Granted, this is an improvement from
the decades before, this still means that the penetration of tractors in Pakistan is only 0.9 horsepower per hectare of cultivable land. Compare that to the required power of 1.4 horsepower per acre, meaning there is a shortfall of 0.5 horsepower per hectare. Now, from July 2018 to March 2019, the total tractors’ production in the country stood at 37,399. Of that, a substantial 64% was produced by one company alone: Millat Tractors. Still, tractors account for 7% of largescale manufacturing in Pakistan. The actual structure of the tractor market is somewhat oligopolistic. Millat Tractors has a 70% market share, and a production capacity of 40,000; while Al Ghazi Tractors has a 29% market share, and a production capacity of 30,000. Millat has always had a bit of a headstart when it came to tractors. Started in 1964 in Lahore, it is the authorized manufacturer of the American Massey Ferguson tractor in Pakistan. The company was nationalized in 1972, and made a part of the Pakistan Tractor Corporation (PTC). The PTC started an indigenisation programme in 1980, and got Millat Tractors on board to set up engine assembly plants in Pakistan. To this day, that programme has been successful: the tractor industry has achieved 95% of localisation in production. As a result, this has led to cheap tractors when compared to tractors around the world, but is still unaffordable for the majority of farmers in Pakistan. As has been previously locally reported, most farmers find it difficult to invest in a tractor given that the average size of their farm is quite small for the purchase of a tractor to make sense. In addition, rates on loans from banks have not been generous in previous years, thus deterring more farmers from owning their own tractor. And yet, that was not the case in 2021. According to the Pakistan Economic Survey of 2020-2021, total tractor production jumped 57.5% from 23,266 in 2020, to 36,653 in 2021. “The production increase was largely due to an improved liquidity position of farmers,” the survey said. And the numbers were reflected in Millat Tractors as well. In fiscal year 2021, the company sold 35,527 tractors, depicting a growth of 70% year-on-year. And in the first four months of fiscal year 2022, the company sold more than 10,700 tractors, growing by 5% year-on-year. Among the total sold volumes, around 45% of the contribution was from bigger tractors (more than 60HP) while around 55% of the contribution was from smaller tractors (less than 60HP). In a recent analyst briefing meeting, Millat Tractors said the affordability of the farmers this year is higher than previous years due to bumper yields in crops. This in turn may ignite another wave of tractor sales in
How important is agriculture to Pakistan? The sector contributes 18.5% to the country’s gross domestic product (GDP) and employs 38.5% of the national labour force. Even our state emblem is made up of four crops: jute, cotton, wheat, and tea. Yet for a country that prides itself on its agricultural base, we do not have enough of the one machine one really needs: a tractor upcoming months. To capitalize on the growing market, the company plans to increase its product range by introducing 100HP tractors for bigger farm sizes. Still, the picture is not all rosy. For instance, the company expects export sales to remain under pressure in fiscal year 2022 as trade activities with Afghanistan are currently under a halt. Then, the tractor industry is currently being charged a GST of 5% which may increase to 17% in the near future to meet the conditions of IMF. This may adversely impact the volumes of Millat. A hike in interest rates is also expected to slow down the demand for tractors in the coming months.
And while the localization level of Millat currently stands at 92%, the company is still exposed to foreign exchange risk since the base raw materials of the localized parts are mostly imported. Still, Millat is banking on its early investment in Hyundai Nishat Motors. The company currently has an 18% stake in Hyundai, with an investment of Rs1.3 billion. The company’s management said it expected fruitful results from this strategic investment when the Hyundai brand matures in Pakistan. The global shortage of semiconductor chips, however, is currently hindering the growth of the company. n
Demand boosts steel prices
Mughal Steel in particular seeks to benefit
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ts a great time to be in the steel and copper sector: prices are rising at ridiculous rates. In a note sent to clients on November 26, investment analyst Mohsin Ali noted that increased demand was having repercussions, both internationally and locally. International scrap and copper prices increased by 11% since October 2021 to currently hover around $488 per ton and $9,932 per ton respectively compared to the fiscal year to date average of $473 per ton and $9,485 per ton. Much of this increase is because of a power shortage and supply concerns which caused smelters to go offline from Chile to China. However, there are concerns over future metal supply cuts may still linger where uncertainty on new recycling restrictions in Malaysia have caused the scrap
market to tighten considerably, increasing dependence on refined metal as global demand started to pick up ahead of the winter season. Still, Ali also noted that impressive Chinese export growth in October had counterbalanced some of the pressure mounting on Chinese local manufacturers because of the enormous power shortage, supply-side disruptions and reappearance of Covid-19 cases in China. “Moving forward, strong Chinese exports in October 21 and booming global demand ahead of winter holiday season could keep industrial metal prices upward in the short run,” said Ali. He also said that the $1 trillion infrastructural bill had been passed by US Congress in November 2021 which was bound to keep copper and other metal prices on a upward trajectory in the medium term.
AGRICULTURE
Meanwhile, closer to home, local rebar prices increased by 9.7% month-on-month to Rs195-197,000 per ton in November 2021. There are three reasons for this: strong retail demand in the construction sector, in both north and south; higher freight cost; and the rupee’s devaluation of 2% since October 2021. The lower price competition in the local market, due to high retail demand, have also provided room for local rebar manufacturers to pass on cost swiftly. This was reflected in the first quarter of 2022 financial results of more steel players. Both Mughal Steel and Amreli Steel performed well, up 4.8% in November 2021, compared the KSE-100 rise of 0.6% in November 2021. “Likewise, we expect earnings to remain robust in the near term as, higher rebar prices and pricing power benefits local manufacturers in passing through the input cost, translating
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into better margins,” said Ali. Out of all the steel players, Mughal Steel in particular stood out. Its topline registered a growth of 81% year-on-year to Rs14 billion in the first quarter of fiscal year 2022. Similarly, its topline grew 65% to Rs44.9 billion in fiscal year 2021. Most of this was because of the 40% year-on-year increase in local rebar prices in the first quarter of fiscal year 2022, and 45% year-on-year increase in copper price in fiscal year 2021. Mughal Steels re-rolling capacity for rebars increased to 430,000 tons in fiscal year 2021 against 150,000 tons in fiscal year 2020. The company’s billet capacity stood at 419,000 tons in 2021 and increased by 79,000 tons in FY21. In a recent analyst briefing, the company’s management said that the uptick in construction demand is expected to continue which will stim-
ulate long steel demand, which is expected to increase by up to 7% in fiscal year 2022. This would mean the ferrous demand for Mughal would increase by 25% year-on-year in fiscal year 2022. The management also said that international scrap prices has helped graded steel in gaining more market share as compare to ungraded steel because of lower price delta and higher retail demand. The company is also well placed, since it able to bulk buy its raw material to hedne against rising freight and raw material prices. This will mean its gross margins should be stable. And when it comes to copper, the company again has an advantage, having established a brand name. It is able to sell its products to a mere 3% discount to the benchmark LME index in contrast to the average discount of 8-10%.
STEEL
Put me out of my misery once and for all, says Hammad to Shahzeb while handing him Glock
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By The Dependent
ederal Minister for Energy Hammad Azhar urged TV news show host Shahzeb Khanzada on Saturday to end the former’s life. “I can’t bear going on your show again and you-know-who says I must,” he said to Shahzeb, while intercepting him outside his home when he was taking his early evening walk. “Take this, and be careful, it’s loaded,” he said,
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while handing over a Glock pistol to Khanzada. “Just make it quick.” “The alternative is something I can’t bear anymore,” he pleaded to Khanzada. “The clips are going to go viral, patwaris are going to stitch those clips with my own statements made on your program. That is, if your own producers don’t do it already.” “And of late, even the party support base doesn’t defend me anymore,” he said. “Please, I beg you, finish me,” said a teary-eyed, shivering Azhar. “No,” said a cold-eyes Khanzada. “You’re coming on my show.”
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Youth should be encouraged to take murder blame for employer who will then leave them fortune after killing himself, say personal
finance experts
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By The Dependent
he youth of the country should be encouraged by the public and private sectors to admit to murder by their employers who will, in turn, leave them their property by signing a legal document before blowing their brains out with a Glock. These were the views of a panel of personal finance experts that convened at a seminar at a local hotel on Tuesday. “We know that with rising inflation, it is tough to make ends meet,” said Saleem Hassan, an accountant and
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personal finance Instagram influencer. “Jobs are hard to come by and if one is lucky enough to even get even a good job, the salaried class isn’t really living it up. Even if you do earn a decent living, forget about savings.” “Business could be another option, but how to start a business without startup capital. Or even experience?” “Therefore, the best way to earn a living and, indeed, achieve some savings, is to plead guilty to murder on behalf of your wealthy employer, even though he had not asked the youth to do so and had, in fact, sent over a good lawyer to help the youth out of the police lock-up,” he said.
“The indebted employer, of course, will not forget this and will remember to sign over everything to said youth right before bumping themselves off.” “I agree with this completely,” said Fatima Chaudhry, a Snack video dance/ personal-finance influencer. “That way, when the youth gets out of jail – which is basically nothing worse than reading some Jaun Ailia and Khaled Husseini in a well-lit cell – they can go to the ridiculously large mansion that is now theirs, in a convoy of SUVs.” “It’s really just about the only viable and believable way for the permanent underclass of this country to punch up.”
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