CONTENTS
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10 Working from home and underseas Pakistanis - his week in Pakistan’s business and economics twitterverse 14 Another donation fund, this time for Afghanistan 15 Mari shareholders have an exceptional year
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18 How far will the tremors of Sialkot travel? 22 How Daraz used cricket as a customer acquisition strategy 26 Too much growth? Uzair Younus
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27 The adult in the room Mushtaq Khan
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28 Inflation ripples reach the banks 29 The calm before the storm
Profit
31 Will the SBP continue to be strung along by “greedy” banks?
Publishing Editor: Babar Nizami l Editor: Khurram Husain lJoint Editor: Yousaf Nizami l Assistant Editor: Abdullah Niazi Reporters: Ariba Shahid l Babar Khan Javed l Taimoor Hassan l Meiryum Ali l Shahab Omer Chief of Staff & Product Manager: Muhammad Faran Bukhari Regional Heads of Marketing: Muddasir Alam (Khi) l Zulfiqar Butt (Lhr) l Malik Israr (Isl) Layout: Ahmad Salahuddin l Photographers: Zubair Mehfooz & Imran Gillani l Business, Economic & Financial news by 'Pakistan Today' Contact: profit@pakistantoday.com.pk
Editorial The costs of extremism
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any are wondering whether the tragedy that shook Sialkot on December 3 will be a “wake up call” for the country due to its shocking nature. The sad part is that it is not the first, nor is it likely to be the last, time such a tragedy has occurred and left the country shocked and reeling. It is time to get beyond shock and horror and realize that extremism is seeping dangerously into the fabric of society and the minds of ordinary citizens. The fact that the tragedy occurred in a large factory, involved workers and their manager who was a foreign national, and the company has contracts with some of the largest brands in the world magnified its impact beyond the immediate. The fallout of the incident can well land on every exporter in the country. It is high time to realize that the effects of extremism not only give us unimaginable human tragedies, but also do lasting damage to the ability to conduct normal business. This is not to detract from the human side of the tragedy. It is simply to point out that the costs go far beyond into areas like exports and foreign investment as well. As such the economic damage compounds the human tragedy and the price paid by the country is enduring, multifaceted, and non reimburseable. The events of Sialkot erupted out of nowhere and like a flash of lightening, illuminated the powder keg of hatred and ignorance that is bubbling in our society. This has to be tackled. It would be unimaginable folly to restrict our response to shock and vengeance. And tackling this menace involves one act first and foremost: the power centers of our country must disengage from all extremist elements and publicly denounce and shun them for good. There have been numerous episodes in the past when a tragedy borne of extremism has been met with uproar from society, denunciations from high officials followed by arrests and charges under the Anti Terrorism Act, only for the matter to die down and the detainees released again. This is how we got to this situation today. This story must not repeat itself, and the disengagement must be swift, thorough and non reversible. A country that lives on borrowed money to fuel its consumptive habits, finance its investment and pay its public sector bills cannot play rough and loose with its business environment. Fanning the flames of extremism to score short term political points or pursue
individual ambitions only causes the country to sink further into the quagmire of economic stagnation and debt. This serves nobody’s interests, not even the extremists. But is anybody listening? Is anybody even aware that the costs of these incidents travel far and wide and reverberate around the world? Those in power will be keen to put the whole situation behind them very soon once the furor dies down. But the perception that has been created, of Pakistan as a powder keg waiting to detonate, will be baked into the minds of all those with whom we seek to do business. And without that business Pakistan will become even more dependent on aid and debt than it already is. Surely this is not something that anybody, even the most short sighted among us, could possibly desire. Extremism must be shunned, once and for all. And the message must go out loud and clear, that extremists will find no safe harbor in this country any longer. Nothing short of this will be enough to roll back some of the damage that such tragedies do.
Monetary policy jitters
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he State Bank has a choice tomorrow to exercise some of that independence that it has been asking for all year. The business community is already mobilized to demand no further rate hikes, but given the inflation numbers and the growth in the money supply that the central bank itself acknowledged in its last monetary policy statement, there does not appear to be any choice. Tuesday the monetary policy committee will meet, less than a month after it took us all by surprise by hiking the discount rate by 150 basis points in one go, and repeating the commitment that the goal is to have “mildly positive real interest rates”. The market seems to be anticipating a 100bps hike again, and industry is anxious about the impact this will have on their cash flows. A “mildly positive” real interest rate would easily be in the double digits given how inflation is shaping up so far, even though the year end projection has not yet been changed from 9 per cent monthly average. But given the deterioration in the current account as well as the mounting pressure on the exchange rate, the central bank has its hands full when considering how fast the rate hikes should be administered. In the infamous hikes of 2018 and 2019, they raised rates by almost 6 percentage points in around six months so a precedent for sharp rises already exists. The case for a sharp hike is already in place, in the last monetary policy statement, and a precedent also exists. The only debate, it seems, that needs to be had is whether the move should be swift or gradual. Either way the direction is difficult to debate. The state bank now has an opportunity to demonstrate that it is worthy of the independence that it has been demanding, and the best way to do this is to make the decision in a manner that is transparently independent. The job of curating the money supply and maintaining stability in the price level and the external account is a far more important one than nurturing growth at this time. There will be strong pressures brought to bear on the central bank, by government as well as big business, to go slow or perhaps to not go at all, towards the goal of “mildly positive real interest rates.” How well they stand their ground in the face of these pressures will be the test to decide whether or not they are worthy of further independence.
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Readers Say Useless shareholder activism here. There are many rubbish companies at PSX which warrant more attention. Compared to those basket cases, SEPL is a much better managed and well run company. I’ll address three different aspects that this article has mentioned. Dividend Ratio: All you need to do is look at countless textile companies. They have had massive growth over the past years and yet their payout ratios are negligible. The cash returns to investors in the textile sector is minute despite all the expansion and persistent government support. Revaluation: This is at the discretion of the management and is not necessary under accounting standards. If the management is being conservative and maintaining an equity buffer for the future, then what is the issue? It is just like many banks that do not take FSV benefits which are available to them. It is a conservative business strategy but it is a strategy nonetheless. This doesn’t mean they are decreasing the shareholders value. Expansion: SEPL operated at 82% capacity utilization with sizable capacity left (assuming extended capacity of 5,000tons). Annual report 2021 has highlighted that the company is studying expansion. There is ample evidence that the company has planned for expansion and will bring it at a time appropriate for the company. There are a number of companies that have bought machinery under TERF and their capacity utilization remains negligible. They planned long term at the expense of the short term, causing high depreciation expense in PnL. At the end of the day, it all depends on the vision of the management. If they believe that the expansion should take place at an appropriate time, we should believe them and look at the precedent that the company has set - that of a continued expansion of facilities. SEPL remains one of the best governed companies at PSX with rising shareholder interest. Apropos: The SBP has failed to manage its own investments. How can it manage Pakistan’s? Adnan Syed, Website
facebook.com/Profitpk twitter.com/Profitpk linkedin.com/showcase/13251020 profit.com.pk profit@pakistantoday.com.pk
HOW TO CONTACT
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I fully agree with your assessment, minority shareholders rights are grossly violated. Companies issue shares to the public to raise money, but once they receive the amount, they completely forget minority shareholders. They employ different kinds of methods. The controlling or majority shareholders live a lavish life which is paid through different expenses shown on the financials of the company, and at the end of the day the final account of the company shows a loss, with no dividend to the minority shareholders. Some companies do show a profit, but
the payout of the dividend is a small percentage of the actual profit which is spent and written off as expenses. I welcome this article, and would fully support any step that would help the minority shareholders. One suggestion that comes to my mind is that as a small shareholder you own a small part of the company, the profit of your share completely belongs to you, and you should decide what should be done to your rightful profit. If you think that by retaining it in the company it would earn more, than most investors would probably leave a part of the profit with the company, but as in majority of the companies the retained profits does not produce any future value, then it’s the right of the shareholder to take all of the profit and use it where he thinks it’s right for him to do so. Apropos: The SBP has failed to manage its own investments. How can it manage Pakistan’s? Syed Imran Ali Shah, Website Excellent piece, surely the fault lines also exist among the corporate governance practices. Apropos: The SBP has failed to manage its own investments. How can it manage Pakistan’s? Muhammad Khurram Shabir, Website Rebuttal: 1) No one has asked the company to make a housing society on the land! This property is of industrial use and if valuation of this property is significantly higher and if the planned expansion is expected to be done somewhere in Punjab then this land can be monetized. This is the entire idea of revaluing property so management knows that there can be alternate uses and it optimizes its balance sheet. Moreover, investors should know the current value of the balance sheet hence revaluation is done for that too (either for lenders or for shareholders etc). 2) If the SBP was asking other companies during uncertain times to expand and giving lower funding rate even then looking at the response of SEPL it seems they did not have the confidence to do that? Would the economies have been closed indefinitely? It is during these times that expansions are done and strong management makes sure value is created. Everyone can expand in a bullish environment but to take benefit in a bearish environment is what differentiates between management quality and how value creation works. 3) Why doesn't the company increase its dividend payout when it doesn't know where to deploy the extra cash? Or is it not optimally investing the cash? A higher dividend payout also doesn't mean cash conversion will go down since payout will still be less than 100%. Apropos: The SBP has failed to manage its own investments. How can it manage Pakistan’s? Suleman Maniya, Website
COMMENTS
IN BRIEF The National Electric Power Regulatory Authority (Nepra) on Thursday formally allowed ex-Wapda distribution companies (Discos) to charge their consumers an additional fuel cost of Rs4.74 per unit during the current billing month to mop up about Rs60 billion additional funds.
“Pakistan’s economy did not overheat as commonly believed but faced challenges due to international commodity prices that are now coming down. This ease in the prices of global commodities will minimise external sector vulnerability of the country in the next three to four months.” Shaukat Tarin, Adviser to the Prime Minister on Finance, speaking at a PBC event in Islamabad on Friday
$700 million:
Ride-hailing giant Uber is in the process of raising an investment north of $700 million for Careem, which the company intends to use to scale the payments and delivery business under the Careem superapp. Sources have even said that. Japan’s Softbank is in the process of evaluating Careem for investment, said a source. TRG Pakistan in a notice to the PSX announced the appointment of Hasnain Aslam as CEO of the holding company in place of Zia Chishti, who had stepped down as CEO on November 29th over allegations of sexual misconduct. The company’s board also allowed allocation of its liquid assets to shareholders, saying that they amounted to USD 120 million, plus approximately 5.4 million shares of its listed portfolio company, Ibex Limited.
The FBR suspended its new property valuations less than a week after it issued them after hue and cry was raised by various stakeholders including real estate agents and town developers from across the country. The complainants claimed that the FBR had in many places inflated property values.
Budgetary borrowing has more than doubled in the past five months, reaching a high or Rs 104 billion - a change of 108% since the beginning of the fiscal year in July. The government borrowed Rs50bn in the same period of last fiscal year but the fiscal deficit remained high at 7.5% of GDP.
Pakistan has seen more money flow into its nascent technology sector during 2021 than in the previous six years combined, reported Bloomberg on Friday. Funding for Pakistani startups this year has crossed $300 million, after a funding frenzy in the country’s startup scene.
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Working from home and underseas Pakistanis this week in Pakistan’s business and economics twitterverse
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he main gripe we have to pick this week has to do with working from home. It has been good for some people, it has been not so good for others, and the general consensus seems to be that a hybrid model works best. However, the one thing that is almost a certainty is that work from home is here to stay now that everyone has realised it is very easily possible. The only question is, how far should companies go to make it a comfortable experience for their employees? But that isn’t all, because cheap shares, bad website design, and the greatness of overseas Pakistanis was once again on the tip of everyone’s keyboard this week. Ariba Shahid brings you all this and more in this week’s social media roundup
Underseas know your place
Work from home
I am very clumsy and wonder if my employer will compensate me for the number of times I’ve tripped while getting up to pick my laptop up. Very seriously speaking (which is rare in this section of the magazine so pay attention) there is a great need to make sure that work from home conditions are feasible, productive and most importantly comfortable. Since this may be a situation that exists for a while, companies must ensure things like their employees being compensated for internet, being provided devices, and even desks and chairs. If the home is truly to become a place of work and not a sanctuary, the least employers can do is ensure it is a comfortable one provided by them.
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No matter what contribution you make, it won’t be enough because you’re not bringing in remittances. Remember, no matter what you do, you will never be as good as those poor, long-suffering, sacrificial lambs that are overseas Pakistanis. Us underseas don’t understand what they give up to live their lives in a free society. Of course they deserve nothing but our appreciation in return, and the acknowledgement that they are and always will be better than us. That is the least we can do.
Growing debt
Tweets speak louder than words
Governance policy in a nutshell. We’re just going to leave this here for you to comment on I think the capital letters on the graph make it scarier. The debt is growing, are you prepared? On a different note, if the graph continues to climb the way that it has been climbing, how will all of this even fit on one plane? Already it seems as if the 1970s all the way up to the 1990s there was absolutely no debt at all. The reality is that the increase has been so drastic that the visual representation of the data is not comprehensible on an ocular level.
Easier access
Chicken or egg?
What comes first, the chicken or the egg? For those that follow news about the economy, we phrase the question differently and ask: what comes first, the market or the SBP? Lately it seems like the SBP is following the markets. The markets are calling the shots and the SBP is trying to keep up the best it can. Thirteen percent or nothing. That’s it, that’s the tweet.
The CDC is pivotal for the growth of Capital markets in Pakistan. Accessing CDC shouldn’t be this difficult. Besides, it may seem like a silly complaint, but it is a really, really, annoying little tick in the system. Would not recommend.
{Editor’s note: We sincerely hope that since these meetings do take place there is at least tea and a decent spread to go with it. Nothing too heavy like samosas or jalebi, but perhaps some crackers, a cheese board, possibly a charcuterie board, and a hummus and pita station if they really want to go out of their way. The meeting isn’t doing much, might as well make it a party, no?}
SOCIAL MEDIA ROUNDUP
Another donation fund, this time for Afghanistan Afghanistan needs humanitarian aid, but sanctions are proving to be a hindrance in transferring funds
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he government seems to be gearing up to launch another call for donations after the Dam Fund. This time the stated purpose of the fund will be “to provide humanitarian assistance to Afghanistan.” “It has been decided to establish/open with immediate effect a Fund to be known as ‘Afghanistan Relief Fund’ to provide humanitarian assistance to Afghanistan” said a statement uploaded to the finance ministry website on Wednesday, December 8th. A network of accounts will be opened in the State Bank, the National Bank of Pakistan and all scheduled banks. “The fund may receive donations from both domestic and international donors and contributions from abroad which will be received at all the branches of above referred banks” the statement said. “In other foreign countries the contributions will be received at Pakistan missions and remitted to the State Bank of Pakistan which would prescribe necessary procedures for their accounting.” While Afghanistan desperately needs humanitarian assistance, a serious hurdle in sending these funds to Afghanistan are the continued US sanctions that remain in force against key members of the Taliban movement. As a result of these sanctions, banks around the world are not willing to transfer funds to Afghanistan, a fact that has hampered the flow of humanitarian assistance. “However, U.S. and other foreign banks tend to be hyper-risk
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averse and to stop many electronic transfers to Afghan banks, for fear of running afoul of sanctions” writes William Byrd in a commentary on how to facilitate Afghan relief efforts published by the United States Institute of Peace in November. “The solution is for the U.S. Treasury to provide written assurances (“comfort letters” or “safe harbor” documents) to U.S. and other foreign banks that they won’t be prosecuted or fined for inadvertent, small sanctions violations in transactions with specified Afghan banks.” In September, the United Nations had raised $1.2 billion for humanitarian assistance for Afghanistan. “The funding will throw a lifeline to Afghans who lack those services… [to those]…who face the risk of acute malnutrition; to the many women and girls who could lose their access to reproductive health services, and much more” the Emergency Relief Coordinator, and head of the UN humanitarian affairs office, OCHA said in a statement at the time. Diplomatic sources tell Profit that the matter of sanctions hampering humanitarian efforts for Afghanistan has been raised with the United States through diplomatic channels. Relief agencies like the United Nations are facing difficulty in transferring funds to the country due to the extreme reluctance of banks to process money transfers to Afghanistan due to the sanctions. When asked how the funds raised for the relief fund being set up by the finance ministry will overcome these difficulties, the sources say the funds donated will be used to procure humanitarian supplies locally in Pakistan and transfer them to Afghanistan overland. “Relief goods - food, medicines and shelter - will be acquired and sent to Afghanistan” one of the sources told Profit in response to a
However, the U.S. and other foreign banks tend to be hyper-risk averse and to stop many electronic transfers to Afghan banks, for fear of running afoul of sanctions William Byrd, development economist
question about how these donations are to be utilized. But there are no answers to how the distribution of the goods will take place and how needs will be assessed to determine who should get how much. In the past the government threw its weight behind another donation driven effort to raise funds for building a dam. That effort pulled in barely Rs11 billion in an aggressive marketing campaign that lasted around one year. That campaign included appeals to people telling them that contributing to the fund was a religious obligation, as well as suggestions that criticising the dam fund could be considered an act of treason. It is not clear how aggressive the government intends to get this time with the new Afghanistan Relief Fund, or what sort of targets it is pursuing. n
AID FUNDS
Mari shareholders have an exceptional year With high sales and the lifting of its dividend distribution cap, things are looking up for Mari
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ari Petroleum has managed to outdo itself. According to its latest annual report, the 2021 fiscal year has been exceptional to say the least. The company recorded its highest sales at about Rs73 billion. While that is only a leisurely increase of 1.4% from the previous year, it is still impressive considering the dicey economic environment created due to the global pandemic. In fiscal year 2021 the company also clocked its highest net profit margin, standing at 43.1% of sales, or an increase of 3.7% from the previous year to Rs31.4 billion. Furthermore, its gross profit rose by 19% from Rs50.6 billion in 2020, to Rs60.2 billion in 2021 - its highest recorded gross profit yet. And that isn’t even the best news. In a recent decision, the Economic Coordination Committee of the Cabinet approved the lifting of Mari’s dividend distribution cap in February 2021, allowing the company to determine dividend payout in accordance with applicable laws and internal funding constraints. This was a welcome change for all shareholders who had been urging for higher payouts considering Mari’s success, and the new management of the company did not disappoint, doling out a hefty Rs141 dividend per share. It is a sharp contrast from the years between 2015 and 2020, when the average dividend per share had been Rs 5.68.
POWER
It is another feather in the cap of an already successful history. To recall: Mari Petroleum’s genesis was as the Mari Gas Field, which was originally owned by Pakistan Stanvac Petroleum Project, a joint venture formed in 1954 between the Government of Pakistan (with a 49% share) and Esso Eastern Incorporated (a 51% share). The Pakistan Stanvac Petroleum Project first discovered gas in 1957, while production from the field started in 1967. The company changed form, when in 1983, Esso Eastern sold its entire share to the Fauji Foundation. The company was converted into a publicly listed company in 1984, where
Fauji Foundation had 40% shares, the Government of Pakistan had a 40% share, and the Oil and Gas Development Company owned 20% (today, the Government of Pakistan has an 18.4% share, while the other two shareholding remains the same). Initially, the company only operated as a gas production company. But in 2001, the company was granted a license for exploration of oil and gas in addition to production activities. The name of the company was also changed from “Mari Gas Company Limited” to “Mari Petroleum Company Limited in 2012, to reflect its diversified business operations and expanded activities. It became a fully integrated exploration and production (E&P) company in 2013, when it set up its own 3D seismic data acquisition unit and processing centre, instead of outsourcing their work to other E&P companies. The government was keeping note, and extended the Mari lease twice, in 2014 and again in 2019. These incremental steps, and then revamping in the last decade, have paid off. Essentially, the company is now in control of the country’s largest gas reservoir (in terms of remaining reserves), the Mari Gas Field near Daharki, Sindh. It is Pakistan’s second-largest gas producer, with a 21% market share, and the second-largest reserves base.
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Mari has a unique position in Pakistan’s exploration and production (E&P) industry, with the largest devoted client base, which is predominantly made up of fertilizer manufacturers which use natural gas as a feedstock. Mari Field’s gas has a chemical composition that makes it perfect for urea production. As a result, natural gas provided by Mari accounts for more than 90% of urea production in the country. Mari has been on an upward trend for the past nine years, recording higher sales, gross profits, and net profits from the previous year, indicating a strong market position. Its net profit has risen from Rs5,650 million in 2015, to Rs30,313 million in 2020 (in fact, 2020’s profit is nearly double that of 2018’s). And it bumped up production in fiscal year 2021, though net sales were impacted by decreased pricing. If prices had remained the same, net sales would have stood at Rs77 billion; as it stands now however, net sales stand at Rs73 billion. Still, it was, by its own calculations, able to add an additional Rs2 billion to net profit. Furthermore, due to enhanced cost controls and treasury management, net profit as a percentage of net sales has steadily increased from 28 % in 2015-16 to 43 % in 2020-21. However, there are some trouble spots: for one, Mari Petroleum relies heavily on the Mari field for its primary source of income. The company’s future strategic vision and actions aim to address this weakness, by accumulating more development and production leases essentially avoiding putting all its eggs in one basket. For this purpose, Mari is investing heavily in further exploration as well as securing more development and production leases. As of now critical finds of Iqbal 1 in Mari field and Togh Bala-1 in Kohat Block highlight the company’s exploration progress; exploratory drilling in three key blocks, Bannu West, Karak, and Kalchas, has also begun. To meet its medium- to long-term objectives, the Mari has expanded its exploration portfolio by adding four new exploration blocks this year, including two operated and two non-operated blocks granted in a recently completed bid round. In addition, a farm-in with MOL Pakistan for their operated Margalla Block was finalised after the financial year ended and is awaiting permission from the Pakistani government. Mari also acquired a 20% equity interest in National Resources Limited, a company whose primary line of business is to undertake mineral mining projects in Balochistan. However, the uncertainties of the post-pandemic reality still loom overhead. Low prices and the possible impact on operations owing to both international and local constraints due to the pandemic have been the company’s main risks and uncertainties in recent times. These extraordinary risks, when combined with the normal risks and uncertainties that exist in the E&P sector, such as
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security concerns that limit access to exploration and development areas, and fluctuating prices, could pose significant risks and uncertainties to the company. There is also a lack of
significant gas finds in Pakistan over the last decade, which has resulted in a steep fall in the country’s discovered hydrocarbon resources, and could pose a risk to Mari. n
POWER
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COVER STORY
By Shahab Omer
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n December 3rd, Ashfaq Awan was stunned by the news that his former manager Priyantha Kumara Diyawadanage had been murdered in a mob lynching, and his body burnt and desecrated. “I worked at Rajco Industries under Mr Priyantha four years ago, and I’m not exaggerating when I say his expertise in industrial engineering and textiles changed the way Rajco and a large portion of the industry in Sialkot work,” he said. For Awan, Priyantha was not just a boss but a mentor - a man that he says “taught me not just work but settled my life in so many ways. I will forever be grateful.” Priyantha was not the only Sri Lankan factory manager working in Sialkot. Over the years, as Sialkot has developed and grown its industry an influx of foreign workers have come into the city as quality managers for export oriented manufacturing. While the grisly incident has been followed by wide ranging condemnation from all over the country, Sialkot as a city is now coming to terms with the aftermath. While there have been no reports of sanctions or cancellation of orders by foreign buyers so far, there have been incidents of buyers taunting local manufacturers over the incident and factory owners being concerned about the possibility of orders to Europe being canceled. Complicating the picture is the fact that the heinous murder, that has drawn worldwide attention, happened in the heart of the productive process of a large company with many foreign buyers, in a city whose business community has vast international networks. A stream of foreign visitors circulates through the city on a regular basis.It is for this reason that Sialkot’s business community has banded together to build an international airport in their city with their own resources, as well as an international airline. They are keen to present their city in the best possible light. COVER Only STORY a day before the incident, for example, Belgium’s ambassador to Pakistan was in the city as a guest of the Sialkot Chamber of Commerce and Industry, welcomed by Sheikh Zohaib Rafique, the Senior Vice President of the chamber, to “ensure dedicated efforts to further improve two-way trade under the light of the GSP+ status” according to a press release issued on that day. Besides trade, the discussions with the Belgian ambassador also focussed on technology transfer and exploration of joint ventures with Belgian companies, especially with the upcoming Sialkot Industrial Zone
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being built in the city. But Priyantha’s murder the very next day cast a dark shadow on all these efforts. While it is still to be seen the sort of long term impact this has on the city and its industry, its business community is attempting to come together and save face. Two days after the ambassador’s visit, Zohaib Rafique had to call on the government “to ensure a transparent and swift investigation and make an example out of this case” according to a statement released by the chamber. And another statement issued the next day by Mian Imran Akbar, the President of Sialkot’s chamber said “December 3, 2021 would go down as a dark day in the history of the bustling city of Sialkot” and described the perpetrators of the lynching as “the worst of humanity”. The statement ascribed the incident to a “personal vendetta on part of some laborers in the garb of alleged religious tilt”. To understand better the impact that the incident will have on business and industry in Sialkot, and whether this will result in any consequences for Pakistan’s exports, it is important to look at how the textile industry in Sialkot is structured and what the exact response has been.
The Sialkot equation
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ajco Industries, according to one source in the Sialkot Chamber of Commerce, is the largest setup of sportswear production in the city. Their size and skill is enough that in the recently concluded ICC T20 World Cup, the uniforms of the Pakistan cricket team were manufactured by Rajco Industries. As one of the largest producers of sportswear, Rajco has a lot of foreign clients including large brands. “Their biggest client was Fila, an Italian brand that was sold to the United States in 2003” one senior member of the Sialkot Chamber tells Profit. “Rajco has had a very good relationship with Fila for many years and has been exporting directly to their European and American markets”. “They had other very large brandname buyers as well in a number of different countries” he continues. “Their production capacity is quite high, and in such a situation it is very easy to end up compromising on quality. That is why Priyantha was hired in the first place.” Priyantha Kumara had been working at Rajco Industries as a Quality Control Manager. Large fashion-wear brands - Fila, Nike, Adidas,- need places where their clothes could be manufactured cheaply without compromising on quality. Over the years, Pakistan, India, and Bangladesh’s textile industries have filled this role, getting
massive orders from these brands. With cheap labour, raw materials, and very little regard for working conditions the Indian subcontinent fit the bill perfectly. However, large brands have very specific criteria for the clothes they want to sell, which means even if there are small inconsistencies or imperceptible flaws in the clothes like a wonky stitch or a mismatched button, they land up in the rejected pile. While these rejected clothes then end up spawning an export leftover business, a large number of rejected clothes means delayed orders for the buyers in foreign countries. For this reason, when signing a contract, these buyers make it a point to ensure that the quality control of the manufacturer they are buying from is rigorous. And from a quality control point of view, Sri Lankan managers are famous in the textile industry. Sri Lanka has a highly developed stitching industry, one of the most complex and mistake-prone processes in the garments and sportswear, which is why a lot of factories prefer having experienced Sri Lankan managers to monitor their quality control standards. “There is a large stitching industry in Sri Lanka, with lots of companies that have billion dollar plus exports” says Zia Alamdar who owns the Faisalabad based Fashion and Trends Pvt Ltd. “Our top three exporters haven’t been able to touch one billion between them”. He himself has a Sri Lankan manager to oversee his operations whom he hired from one of his buyers. “They used to send him to do quality and compliance audits,” he says. “So I asked them why not just let me put him on my payroll and he can monitor the production process directly?” These managers are generally known for being hard workers, with a mellow temperament and connect easily with Pakistani workers. They also bring considerable expertise in their field with the ability to teach their employees the necessary skills to make sure that they have very few flaws in their products. In fact, a lot of business schools in Sri Lanka have specific courses for textile management and countries like Pakistan and Bangladesh, where large scale textile manufacturing is a major export product, become attractive employment opportunities for them. Factories also prefer hiring Sri Lankan managers not just because of their skills and the per-unit productivity increase that they bring, but also because when they are pitching to a prospective client they can tout their managers as a reason for why their production unit should be chosen. In fact, as one source tells us, in a lot of cases foreign clients often request that manufacturers
bring in Sri Lankan managers to keep an eye on quality. Because of this, there is a significant number of managers from Sri Lanka in Pakistan’s textile industry, especially in garments and stitching, that are responsible for quality control. These managers are then always employees of the local company with packages of around $2000 to $3000, but they are very much there as quality inspectors for the sake of the foreign clients. “Priyantha was an employee of Rajco. It is not clear whether he was a contractual employee or that he was actually Fila or Nike’s (another company that had dealings with Rajco) representative at Rajco. However, while he was working as a quality control manager, he was hired and paid by Rajco and had been working there for many years”, says a textile exporter from Sialkot that had dealings with Rajco and Priyantha. “There are many technicalities in the sportswear business. Large brands often reject products on the slightest stitch being a little crooked or the colour of a particular shirt not perfectly matching the color gradient. Priyantha was an expert in this field, he had studied from abroad and had been to many countries on training workshops related to this,” says the earlier mentioned member of the Sialkot chamber. “Priyantha had all the right expertise and most importantly was qualified and knew all of the latest technology very well.” He was not the only one. As mentioned before, these Sri Lankan managers are considered trustworthy and give these industries a significant boost in both the managerial and technical spheres. The use of these managers has been one of the things that has helped Pakistani exports and the textile industry. They have also often been pointmen for foreign buyers, which is why and for such a heinous crime to happen to one of them makes things even worse from a business perspective.
The business community’s response
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n the days following the brutal murder, other than the heroics of Malik Adnan who tried to save Priyantha from the mob, the only other significant gesture has come from the business community of Sialkot. A number of industry leaders banded together to announce that they had collected $100,000 for the family of Priyantha Kumara, and committed to send the family, the salary that he was earning on a monthly basis, forever. The gesture does little in the way of repairing the loss that Priyantha’s family is
facing. However, it is a gesture that shows the business community of Sialkot is trying, and that they do not want this to spell the death of their industry. The businessmen of Sialkot are already famous for their cooperation with each other, and the creation of an international airport and AirSial to boot has been proof of what they can achieve when they work together, which is often. However, the current fear is that the murder will result in foreign buyers, particularly Europeans, either pulling out from existing contracts or not entertaining Pakistani pitches in the future. Pakistan is already at a disadvantage when it comes to exports. The country’s largest export is easily textiles, and even in that it regularly lags behind. Pakistan’s competitive advantage is low, and mostly comes from cheap labour and easily available raw materials. But despite cheap labour, the production cost of making things here is higher than other countries like Bangladesh, Turkey, Vietnam, Taiwan and India, which makes it difficult to compete in the foreign market. Power tariffs are high in Pakistan which means exporters and manufacturers face high electricity bills which then results in them cutting costs by compromising on quality. This also means that manufacturers are hesitant to introduce and use technology, which also leaves Pakistan behind in the race. This means that the import bill does not go down and the export bill does not go up. On top of all that, the murder of Priyantha Kumar might mean that European buyers in particular could become more wary of placing orders from Pakistan. The public in these regions does not want to be buying from brands that could possibly be responsible for human rights violations. And the concern has already seeped into the industry’s narrative. Following this incident, there have been rumors that some international companies have hinted to Sialkot companies that they may not be able to work with them in future but these rumors have not been confirmed by any exporter yet though many exporters fear that sometime in the future they may face such problems. Muahmmad Salman who is the owner of Aslaons International and deals in the export of sportswear and fashion wear informed Profit about the concerns and reservations of exporters after the Sialkot tragic incident that exporters who work for European countries may face a big challenge in the coming days. “In fact, Europe is already a market for our exporters from where work orders are hard to come by. In such a scenario, the Sialkot incident could affect our reputation
and in future we have to be prepared for such a situation. Before this incident some of our clients had come to Sialkot and were our guests. They were also touring the city and roaming freely here but after this incident all of a sudden they stopped their activities and stopped going out. Now they may go back in a few days. I am not saying that these clients will take back their orders from us but this incident must have affected them,” he said. “No member of our association has complained so far, but this may not be the case for long,” says Chaudhry Muhammad Arshad, the former chairman of Pakistan Sports Goods Manufacturers & Exporters Association. He believes that the incident was extremely wrong and heinous, and that instead of the perpetrators and fanatical elements, it might be the exporters who will have to bear the brunt of the incident. “Right now in the future we may have to suffer the consequences of this incident in the form of losing our clients and access to new markets,” he added. Mehboob Hussain, who is the owner of Saith Leather Industry which mainly deals in welding gloves, working gloves and leather, says the incident has already impacted his relationship with his clients. “Although my clients are very old and my relationship with them is very deep, still one of my Arab clients taunted me that you people are burning foreigners alive in Pakistan” he tells Profit. “The reaction from the Middle East may yet be very slight” he adds. “The major reaction will come from the European side. Getting business from that region is very hard as their terms are very strict and on top of that, the recent incident will bring an immense impact on export orders.” Incidents of political posters being put up in factory premises occur all the time, some business owners tell Profit. “We also have some problems sometimes with workers putting up posters and stickers for which we have appointed a masjid committee which includes an Imam masjid, our GM, our factory lawyer and so on” says Alamdar from Faisalabad. He says such acts usually pick up around certain religious occasions like Eid Milad un Nabi or when religious conferences are being held in the city. Removing them becomes a sensitive issue, especially if the posters contain images or words of a religious nature. Factory owners are finding the issue becoming increasingly sensitive especially when foreign buyers have to be brought to the premises for inspections and headlines have already been swirling around protests or riots. Keeping factory premises clear of political and religious posters and graffiti is turning into a challenge. n
COVER STORY
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By Ariba Shahid
he Daraz mobile app was terrible. Customer reviews were bad, it had a low rating on different app stores, and even though it should be easier to shop through a mobile app than through a website a vast majority of Daraz sales continued to come through people logging in on their computers. This was a problem for Daraz, and while they have not been open about the exact numbers, it was enough of a problem that Daraz was seriously workshopping and troubleshooting their app. Much has been said about Pakistan’s eCommerce potential and shopping online has increased since the pandemic. In FebruaryPakistan’s e-commerce market size posted a growth of over 35 per cent in the first quarter of the fiscal year 2021 to Rs96 billion compared to Rs71bn over the corresponding period of last year. This is only a fraction of the projected potential that the eCommerce industry might have in Pakistan. And Daraz, from the very beginning, has both been a frontrunner and a gamechanger for eCommerce in Pakistan. In 2018, when Chinese eCommerce giant Alibaba acquired the Daraz Group for an estimated $150 to $200 million, it became clear that this was a game where big money was involved. Which is why it was natural for Daraz to want a better mobile app. What did they do? They used the ICC T20 World Cup as a crutch and it worked out brilliantly for them. You see Daraz had a serious problem with customer acquisition for their app. People simply had no incentive to download the app. Which is why Daraz decided that even though it had nothing to do with their product or with being an online eCommerce platform, it would add an option on their app to live stream the matches of the cricket world cup. This was a smart move. Pakistan’s first match in the world cup was against India, a competition that is famous for being the most watched sporting event in the world. While rumours have circled in the past that 1 billion people tune in to watch the matches,
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in reality things are different. The estimated viewership for the 2017 Champions Trophy final was around 400 million. The group game in the same tournament was watched by 324 million people, slightly more than the 313 million that watched the group game in the 2015 World Cup. The 2011 World Cup semi-final remains the second-most watched cricket game in history, with 495 million viewers. Daraz was betting on a good audience. Of course, most people were still going to watch on television, but there were going to be plenty of people with smartphones and internet connections stuck at work, at school, at a wedding, or anywhere else that wanted to watch the match. With no livestream link available on youtube, the easiest way was to download the Daraz app and start watching. Daraz has not revealed how much money it spent on acquiring the livestream and how much they spent on marketing. What we can assume is that it was a pretty big amount of money. Luckily for them, it worked out. Pakistan won the game against India, for the first time in World Cup history, launching a wave of popular support and a surge in viewership. The following matches were closely watched and Daraz has now said that it has made up for its investment. The exact results? Their monthly average users more than doubled, and ever since the end of the tournament the Daraz app has continued to see higher downloads. As matches continued to be streamed, Daraz continued to have its app downloaded and acquired customers. The only question is, with the world cup over now, what is stopping people from deleting the Daraz app? And while their customer acquisition strategy might have worked, how is Daraz planning on retaining those customers?
The ethos
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araz is essentially an online mall. It owns space, it does not own products. All of the things they sell are posted by Daraz sellers and Daraz simply provides a platform. Even shipping is provided by multiple different partners, depending on who the seller chooses for their products. And while it might be an online mall, a lot of Daraz’s best ideas are inspired by classic brick and mortar malls. Including the idea to use the cricket world cup to acquire customers. Think of it this way. Almost every time you go to a mall you’ll notice mall activations or BTL activities. Sometimes they’re sponsored by brands, sometimes by the mall management itself. Why? So you are lured into the mall and then spend more time there. Malls are theoretically designed to make you spend more money. The layouts are confusing so you get lost and walk through more of the mall than you had intended to, especially because the more stores
you visit, the more you’re likely to spend. This is also why the food courts are on the top floor so you stop by stores as you make your way up. Malls rarely have general seating areas. If you want to sit, you’ll either have to sit in a store or the food court. This again drives you to spend more. Clustering similar shopping categories also helps push sales as while you may resist one store, do you have the strength to resist more? To mess with you more, you’ll also find that malls do not really have clocks so that you lose a sense of time. Basically, the longer they keep you around, the more likely you are to spend. Lastly, have you ever wondered why malls have activations, BTL activities, concerts, book signings, and events? The purpose is to lure you into the mall. Once you’re there, you’re likely to stick around and potentially shop. This is shoppertainment. Essentially all this is done to prop up footfall which is used as a metric to gauge purchasing opportunities that present themselves. Not everyone that enters the mall ends up buying something, however, the more people that enter, the higher probability of making a sale. Shoppertainment isn’t a new concept. The term popped up in the early 1990s, however, the concept has existed for decades. It is the provision of entertainment or leisure facilities within a store or mall as a marketing strategy. This is done to attract customers. However, with the world going digital through the use of ecommerce, one wonders how ecommerce sites can lure in customers through entertainment. This is where Daraz entered.
How they played it
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s we’ve mentioned before, Daraz has had it pretty good since it started off in Pakistan. However, while ecommerce may be the future for some people, some prefer old school shopping primarily because of the shopping experience. With ecommerce, it is generally very straightforward, you either log onto an app or a webpage to buy something you want and look for it, or you glance through all the options like a window shopper and buy something if it catches your eye. The only way to compete with the segment of the market that prefers old school shopping is to make sure the app is easy to use, the payments process is seamless, and the returns are hassle free. However, shoppertainment has existed in the ecommerce world too. Before we talk about how Daraz has made a major move in shoppertainment let’s take Shopee as an example. Shopee is a Singaporean multinational technology company which mainly focuses on ecommerce. It was launched in 2015 and now serves consumers and sellers throughout
Southeast and East Asia along with several countries in Europe and Latin America. Shopee used shoppertainment to increase their traffic and enhance engagement in their platform. The app can be used to stream events, play in-app interactive gains, and participate in live giveaways as well. In Singapore, Shopee reported that users have spent 40% more time in-app and on live streams by brands and sellers, increasing by 40 times while regionally it increased 70 times. Similarly, in Indonesia, the usage of live streaming towards the second quarter of 2020 got the app 30 million viewing hours. Moreover, usage of in-app games rose too, with Singaporean users playing 60 million times while users in Indonesia playing 10 billion times. So what really is Daraz doing? Usually when you’re making a marketing campaign you decide who your target audience is and design your campaign according to that. However, what do you do when you are trying to target practically all smartphone users in the country? Cricket is a common factor for nearly all Pakistanis. While the toxic love-hate relationship is beyond the scope of the article, the basic fact is that an extraordinarily proportion of Pakistanis watch cricket. It is also interesting to note that while Daraz is using Cricket to bring in customers, Cricket has also been used as a political and diplomatic tool in the past as well. For instance between India and Pakistan by Zia Ul Haq in 1987, Pervez Musharraf in 2005, and Yousuf Raza Gilani in 2011. Keeping in mind the major role cricket plays in our society, Daraz decided to use cricket to lure in customers and make a bigger pivot towards the shoppertainment sphere. “Basically, all you need is a Smartphone with the Daraz app to watch the ICC Men’s T20 World Cup. You don’t even need to make an account to access the streaming. That is how accessible we wanted to make cricket,” says Wali Khan, a sports marketer serving as Head of Sports Strategy, Marketing and Entertainment at Daraz Asia. “We are not using this as a way to drive sales. We just want to make the shopping experience better. We’ve added a fantasy league option too to make customers feel more engaged and involved.” But what about since the world cup has ended? Well, the app continued the streaming service for the Pakistan vs Bangladesh series too. This means you don’t need to be near a tv screen or spend hours finding the right streaming link to watch the match.
The numbers
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he number of streamers exceeded all our expectations. Our team back in China kept having to increase our bandwidth be-
ECOMMERCE
cause the numbers kept growing,” says Khan. “Pakistan and India is a match that even people that are not cricket fans watch. We got the most traffic on that day. The Pakistan vs New Zealand match attracted a lot of traffic too. However, even with regular pool matches, the traffic has been beyond expectation. We were the only ones to stream the practice matches/ warm up matches too. That gave us an edge and had people streaming before the world cup even began.” Overall, during the course of the world cup, the Daraz app saw more than 350 million views of the cricket match through its platform. Before the tournament, the app had 6.7 million active users and since then that number has increased by more than double. With a 118% increase in active users, the app now has nearly 15 million users signed up. On average, the downloads for the app have increased by a lot. Before the streaming began, the average was 63,000 daily downloads and after it began that went up to 320,000 daily downloads.
What’s the catch?
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owever, to bring cricket to a phone near you, Daraz had to cough up 2 million rupees. However, why would Daraz merely spend that much just to get you the rights to watch cricket on your phone? While this seems like shoppertainment, it is also a customer acquisition cost (CAC). The customer acquisition cost is the marketing costs, broadly defined (advertising, but also costs of promotional giveaways, etc.), and divided by the number of customers the company is able to add. This is the money a business spends in order to acquire new customers or to encourage them to use their platform. In the case of the cricket streaming, Daraz was able to get more people to download their app and stream matches. While they made no compulsion to sign up or shop to be able to access the cricket matches, the app is playing on the odds that once someone is on the app, they will be likely to make a purchase. Just like malls feel once you’re in a mall, the longer you stay you’ll be making a purchase. However, “burning” VC or parent company money through customer acquisition costs isn’t always the best move. This is because you cannot really guarantee the fact that the customer will stay after the promotion, deal or incentive is taken back. Essentially, if CAC does not bring in average revenue per customer (ARPU) or add to the lifetime value of a customer (LTV), the business decision isn’t as fruitful as one would have hoped. Usually in the case of ecommerce platforms, they are able to bring in customers through their deals, vouchers and incentives. The customers do not stay and switch between
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Overall, during the course of the world cup, the Daraz app saw more than 350 million views of the cricket match through its platform. Before the tournament, the app had 6.7 million active users and since then that number has increased by more than double apps based on where they get the best deal in terms of money spent. The decision to use cricket streaming as a customer acquisition cost is actually a smart move by Daraz. They are spending money on bringing more new users onto the app and getting existing users to use the app more. However, the cost is recovered through ad revenue. While speaking to Profit as the World Cup was ongoing, Ammar _ CMO Daraz said, “We’re at breakeven in terms of our streaming.” One would assume that as the matches increased and Daraz was able to convince marketers through user stats, they may have even entered profit territory, something which their core business is years away from. Let us take a hypothetical example to illustrate this. Assume you’re a shopkeeper in Hyderi Market, Karachi. You love cricket, but don’t have a TV screen at your shop yet you don’t want to miss a second. You also don’t want to listen to the commentary over the radio; you want to see the live action. You heard you can watch the match on Daraz for free, so you download the app and watch. You keep the app on your phone even after the match because you want to have it handy for the next time there’s a cricket match. Moreover, you may even end up making an account and actually exploring the products they have on offer. You might even end up making a purchase. The Daraz App isn’t considered the best app in terms of UX. Not many are fans because of the cluttered layout and confusing process. However, if you’re using the app for the first time for the cricket streaming, you’re bound to have a positive sentiment towards the app. Therefore, your shopping experience may be better than someone that is using the app for the first time to shop. This is using positive sentiments to build a better relationship.
The future of Shoppertainment on Daraz
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n the past we’ve written about startups spending large sums on CAC and realizing it’s unsustainable. We used Careem as an example and how Careem took a step back and worked on customer retention. While we do not think that Daraz will start pulling back on CAC, we do feel that it will now be spending more on CAC that actually does not cost them as much and helps improve
the customer experience. This shows that they are thinking beyond discounts, vouchers and sales. However, regardless of how much you spend on CAC and how creative you get, in the ecommerce world, everything ends up falling back to customer experience. The app and website layout and design have faced their fair share of criticism. Moreover, Daraz has had problems with fraudulent deliveries. The move to shoppertainment at this time is something to keep your eye one. It is because, in the first quarter of 2021, Daraz is rebranding itself. Sources in Singapore and Pakistan say that you shouldn’t expect a facelift for the app, but a drastic change that will “revamp and redesign” the shopping experience. The move into shoppertainment, however, opens the door for more possibilities. Football fans often have to go stream to stream to figure out how to watch their match. The streams don’t always work well. Khan said, “It is a possibility that we may even go into football streaming, possibly even a web series too.” “I’m sure football fans would appreciate that,” said Khan. However, the possibilities do not stop there. Earlier this year, Netflix created a shipping site that allows it to bring in cash through sales of items from shows and movies. This is not merchandise; you can literally buy things used in the show from the Netflix store for a few shows. This is a way for the streaming giant that does not rely on commercials to generate greater revenue. While this has not been introduced on Netflix in Pakistan, it is an exciting idea. How many times have you seen a TV show or movie and wanted something the characters were wearing or using. Think about it, imagine how cool your OOTD (Outfit of the Day) snaps would have been if you were able to buy Gossip Girl outfits while watching the show without the unnecessary hassle of finding the brand or a dress that looks similar. The ability to shop directly and seamlessly makes this service seem like we’re living in the future. Sources in Singapore have revealed that Daraz may be looking into this through a potential web series where you can buy things used in the series on the app. This is a step up from influencer marketing whereby bloggers endorse or use products and people go search for them and buy them online. n
ECOMMERCE
OPINION
Uzair Younus
Too much growth?
indicate is that a 5 percent growth rate is basically the level at which the economy begins to start skidding off the track. Some may argue that this is not entirely true, because the external sector challenges are largely the result of rising international commodity prices, including oil. This exogenous shock, which was unforeseen just a few months ago, is creating external sector risks, causing the rupee to depreciate and forcing policymakers to make tough choices. While this is a fair point, it does not do much to answer the uring his visit to Washington in mid-October, Shaukat broader question: what have policymakers done over the past few Tarin had publicly stated that the issue with Pakiyears to increase the resiliency of the economy to these exogenous stan’s economy in the present moment was too much shocks? growth. He argued that the proverbial foot had to The answer: not much. Which is why so many economic be taken off the accelerator to sustain this economic watchers on social media are hoping and praying that the recent recovery and that this is what the government and the decline in oil prices continues, as this is the only way out of the central bank were planning to do. State Bank Governor Dr. Reza Baqir, near-term challenges facing the economy. who was also in Washington at the time, made similar comments, indiBut this pushback ignores the grim reality that this govcating that the central bank had taken proactive measures to stimulate ernment has, in so many ways, fueled the current crisis that we growth at the onset of the pandemic and was now ready to act in order are witnessing today. The core of the government’s economic to consolidate growth. policy has revolved around a construction amnesty scheme, the The subsequent policy actions taken by Pakistan’s economic longest-ever such scheme in the history of the country. This policy managers, when viewed within the context of these remarks, make a choice has directed large amounts of capital into real estate, with whole lot of sense. And while debate about the implications and effecthe argument being that Pakistan needs to build affordable housing tiveness of these choices is warranted and necessary, it ought to be set for underprivileged segments of society. But look at real estate aside for an issue of far more significant concern: Pakistan’s economy is prices and the types of projects coming up across the length and overheating within months of nearing a four percent rate of growth. breadth of the country, and you will realize that much of the gains Since the onset of the twenty-first century, and perhaps a few are coming from speculative investments being made by those with years before that, Pakistan’s economy has experienced a secular decline: capital and access. The outcome of this policy choice is that privpeak growth rates and the duration for which spurts of growth can ileged segments of society have gained even more wealth, which be sustained have both drastically fallen. Since 2000, Pakistan has had is translating into demand-side pressures on the economy and the lowest average rate of growth and the second-highest average rate the external sector. The result is that wealth has been amassed by of inflation among a group of peer economies that includes the likes of investors living in Plotistan at a time when tremendous pain and Nigeria, Morocco, Vietnam, and Bangladesh, according to World Bank trauma has been inflicted on ordinary citizens living in Pakistan. data. These spurts of growth are based on short-term spending, Dr. Baqir’s recent remarks in an interview, where he accepted catalyzed either by fiscal and monetary stimulus, or through amthat the economy is at “the stage of taking steps to prevent overheatnesties that create speculative bubbles. The ensuing crisis further ing,” are further evidence of this secular decline. What these comments indebts the country, fuels even more inflation, and makes it that much harder to find and tap into additional resources necessary to deliver growth. Lenders of last resort, including the International Monetary Fund (IMF) and Saudi Arabia, have also recognized that their capital is used to generate these unsustainable spurts of growth. This is exactly why the expected resumption of the IMF is dependent on the fulfillment of prior actions, including a 150 basis points hike and withdrawal of tax exemptions that distort the economy. The writer is Director of the What Pakistani policymakers need to realize is that the IMF program is not going to address, Pakistan Initiative at the in any significant way, the decades-long crisis that has hollowed out the country’s economy. Finding Atlantic Council, a Washington a way out of the crisis requires introspection and a fundamental change in who gets access to ecoD.C.-based think tank, and host nomic resources and for what purpose. It also requires a recognition among political and non-politiof the podcast Pakistonomy. cal elites that politically costly decisions, many that will hurt the very forces that have underpinned He tweets @uzairyounus. the country’s political economy, need to be made and sustained for years, if not decades.
Policymakers have done little to try and prevent Pakistan’s economy from overheating
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COMMENT
OPINION
Mushtaq Khan
The adult in the room
the government, which is already barred from borrowing from SBP. With non-bank borrowing (via NSS) experiencing an outflow of Rs78.9 billion in the period from July to October 2021, this is a battle of wills that the government simply cannot win. While the government is keen to ensure that interest rates do not rise too sharply (just think of the fiscal and borrowing pressures this would create), accusing the market of profiteering and working against the interest of the country could actually have the opposite effect. By putting banks on the defensive, the monetary ith interest rates creeping up and a tightening cycle could be prolonged, and the quantum of the rate persistent weakening of the rupee, the hike may be larger. To avoid this outcome, the authorities need to authorities are struggling to manage market gain the trust of the market and convince banks that chasing inflasentiments. Unfortunately, this is not the tion is not SBP’s policy objective. If possible, the SBP should also end, and the drip-drip of bad news will try to communicate that the December monetary policy decision continue in December. On December 14th, would be the penultimate hike before the EFF restarts in January the SBP is likely to announce another hike in interest rates (we project 2022. a further 150 bps increase). On December 20th or 21st, the SBP will reAnother source of anxiety is the government’s decision not to lease its November BoP data where the current account deficit (CAD) participate in President Biden’s democracy summit. With China for the month could be as high as $2.2 to 2.6 billion, and at some point, and Russia conspicuously uninvited, this is an effort by the Biden December’s inflation data will also be released, which could be above administration to build a global coalition that is opposed to “au12.5 % YoY (year-on year). thoritarian” governance. Media reports claim that Pakistan conIn response, Shaukat Tarin has blamed banks for driving interest sulted with China, and found that its Eastern neighbour was not rates up, claimed that demand for dollars from Afghanistan is weakpleased about being excluded by its arch competitor. The stakes ening the rupee, and said that the rupee should be at Rs168/$. He also in the US-China standoff are that much higher with the growing warned that the authorities had formulated a policy response that will number of OECD countries boycotting the Winter Olympics to hurt those people who are speculating against the rupee. These are be held in China. Then, of course, there is the US-Russia standoff fighting words, but they are unlikely to change market sentiments or over Ukraine. arrest the trajectory of both the money and foreign exchange markets. Growing geopolitical tension should not impede Pakistan’s The fundamentals are siding with the markets. efforts to restart the EFF. The conditions have been agreed upon, Blaming commercial banks, speculators, and hoarders for manipand it will reflect very poorly on the IMF if it changes the rules of ulating the market is an indication that the economic team is unable the game in the midst of play. As has been argued before, restarting to manage sentiments; it also creates a government narrative that the EFF with the accompanying IMF Staff Paper should go a long the growing uncertainty is because of selfish individual behavior. As way in creating more certainty about what to expect. Even though things go south, this narrative could become more stringent. the program parameters are likely to formalize the policy priority One serious concern is that if the authorities call in the banks to stabilize the economy (over economic growth), in our view, this and read them the riot act, banks will simply stop bidding in the austere outlook is better than the prevailing uncertainty. primary auctions. If so, this will reduce commercial bank funding to But this is still five weeks away and the markets remain jittery. If the authorities continue to intimidate market players, and take policy steps to hurt them financially, this could shatter the relationship between the economic team and the market. Again, this is a battle the government cannot win. Unfortunately, because of the underlying economic fundamentals (whether imposed The writer has worked at from outside or engineered from within), Pakistan’s economy will continue on its roller-coaster ride, Citibank, served as Chief with the authorities and the market indulging in a pointless blame game. Economic Advisor to the State And with each passing day, the rupee will continue to lose value (the midpoint rupee-dollar Bank of Pakistan and now runs parity for December 9th is 177.8334). As this continues to play out, both sides will get angrier, media a private macroeconomics reports will stoke this anger, and the markets will become more difficult to manage. The authoriadvisory by the name of ties should realize that this is not the right way forward, and the longer this impasse continues, the Doctored Papers worse off the country is. So, the question is who should be the adult in the room: the government or the markets?
The government does not want interest rates to rise sharply, but the banks will want to play it safe
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COMMENT
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The calm before the storm With new car models set to be launched by major assemblers, the immediate future will be interesting
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hat is the best way to assess how the car industry of Pakistan is doing? For Saroash Saleem, investment analyst at AKD Securities, it’s easy: use the quarterly capex for the three companies that produce cars in Pakistan. Capex is short for capital expenditure, also known as funds typically used by a company to upgrade, and maintain physical assets such as plants or buildings, and are also the funds used to undertake new projects or investments by a company. Which is what Saleem highlighted in his note to clients sent on December 7 – that the rising capexs of the three companies signal a new shift. So, first in the picture is Pak Suzuki Motors. According to its latest financials, Pak Suzuki has a capex of Rs4.5 billion in the first nine months of calendar year 2021, increasing 5.7 times year-on-year. This is mostly to do with the new Swift car which will be launched in the second half of 2022. Meanwhile, the capex of Indus Motors feel to Rs437 million, which is significantly
less that the average quarterly capex of Rs 614 million in fiscal year 2021, which means that its new cars are expected to come online soon. Once Indus’ plant is upgrad-ed, the company will be able to deliver 20% higher output, improving the delivery times. As of now, it takes four months to have a Yaris delivered, and another 6 months to have a Corolla, Hilux or Fortuner delivered. Finally, Honda’s capex in the latest quarter has increased from Rs234 million in the first quarter of 2022 to Rs523 million in the second quarter of 2022, or a cumulative capex of Rs757 million. “Although we are yet to gain clarity from management, we attribute the rising capex to the new model launch of Civic which may be unveiled in 2023,” said Saleem. Suzuki definitely has the most hype going for it: after all, it is about to launch the fourth generation of the Suzuki Swift. This had previously been launched internationally in 2016, and was retired this year. Which means that it will probably be introduced in Pakistan in the second half of 2022, based on the company’s history of introducing the cars in the local market after they have been
Sadly, despite being about five years late, it is still expected to be an upgrade for the Pakistani market as the company had been selling the second generation of Swift - for over a decade. One can see why the news of a new car might have everyone quite excited 28
discontinued in international markets. Sadly, despite being about five years late, it is still expected to be an upgrade for the Pakistani market as the company had been selling the second generation of Swift - for over a decade. One can see why the news of a new car might have everyone quite excited. This new car is expected to have a 1.2L engine and priced in the range of Rs2.6-2.8million. So, what does this mean? According to Saleem, “With competition in the local space gearing up, the frequency of new model rollouts has become the need of the hour to sustain the market share, hence, the rising level of capex as witnessed in the previous quarters,” He noted that the government had announced it would increase the Regulatory Duty (RD) on imported cars from 15% to 50% in order to contain the massive import bill witnessed in November 2021. This might bodes well for these companies, as they could recapture some lost market share. At the same time, the said measures are expected to insulate the local industry from rising interest rate environment where SBP aims to achieve mildly positive real interest rates by the end of fiscal year 2022. Saleem bets on Indus, who has the first mover advantage when it comes to the hybrid segment, and which is expected to benefit the company in the long term. Similarly, he notes Pak Suzuki as one to watch out for due to its Swift in the pipeline and less competition from imported cars.
AUTO
Inflation ripples reach the banks The utterly absurd prices in the market have caused great trepidation across the board
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hat the State Bank of Pakistan (SBP) decided to increase the interest rate in November was no surprise. It was the degree by which it decided to do so - a whopping 150 basis points to 8.75%- that took everyone by surprise. Though, in hindsight, it had been coming for weeks now. To recall, the SBP had aggressively slashed the benchmark interest rate from 13.25% in January 2020, to 7% by June 2020 to minimise the impacts of Covid-19 on the economy. It then proceeded to keep the interest unchanged for six consecutive monetary policy committee meetings during a 13 month period. Finally, in July it raised the interest rate to 7.25% in July 2021, a move that caught analysts off guard, many of whom were expecting the central bank to leave the rate unchanged. What gives? The central bank had earlier stated that “With risks rotating from growth to inflation and the current account faster than expected, there is now a need to proceed faster to normalise monetary policy to counter inflation and preserve stability with growth.” And there is reason to be panicked: inflation shot past the expected range of 7 to 9% for this year to 11.5% in November alone. The utterly absurd prices in the market have caused great trepidation across the board. This combination of rising inflation and rising interest rates has a definite spillover on banks. According to Jehanzaib Zafar, analyst at AKD Securities, in a note sent to clients on December 6, since the start of the fourth quarter of calendar year 2021, the secondary market yields have jumped up by as much as 335 basis points owing to those same fears. And that means the local banking sector is actually in a sweet-spot, as a steep escalation in revaluation rates will signal an earlier than expected loan repricing. This is expected to be
reflected in the quarterly net interest margins of the banking sector where higher yields will push up the funded income of the banks. So those banks that have a higher mix of the current account in the overall deposit mix, like UBL Bank Alfalah, and Bank Al Habib, will most likely outperform their peers. Conversely however, Zafar noted that though the banks’ core income stands to benefit from the higher yields, there is still the one time loss arising from the revaluation of investments to consider. Consider: the yields during the 3rd quarter of calendar year 2021 moved upwards in the range of 30-90 basis points, which resulted in a decline in the revaluation surplus of the banks, thereby trimming the respective book values by 1%-3%. “However, the magnitude of the revaluation loss will be much bigger this time owing to inordinate rise in secondary market yields and will mimic what we saw during fourth
And there is reason to be panicked: inflation shot past the expected range of 7 to 9% for this year to 11.5% in November alone. The utterly absurd prices in the market have caused great trepidation across the board. BANKING
quarter of calendar year 2018, where we had a similar jump in secondary market yields and the same resulted in 5% - 9% decrease in the book values banks,” said Zafar. So what does this mean for individual banks? According to Zafar, that depends on three factors: the quantum of floating rate securities; maturity profiles of investments; and a shift in investment avenues during the quarter. Zafar expects banks like Bank Alfalah and MCB, which have distinctly shorter weighted average maturity profile, to do well. But banks like Bank Alflaah, which have 13% of their investments held for trading portfolio will underperform. Something else to watch out for: with book value eroding, amid jumps in secondary market yields, the capital buffer available to banks is also expected to erode. This in turn will have repercussions for the payouts from banks with limited capital buffer. According to Zafar, the banking sector payout during the quarter may take a slight hit, as was seen during 2018 and 2019. “However, the currency depreciation that has been witnessed during the quarter may mitigate the hit somewhat owing to the translation gains for banks with foreign operations such as UBL and HBL,” said Zafar. n
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By Ariba Shahid
O
f all the crazy things to hope or expect, wanting banks to not be greedy is up there. Corporations exist to make money, and banks are more serious about this than most sectors. And why wouldn’t they be? They’re
BANKING
entrusted with money from individuals and a lot of people depend on them for their good business sense. It is their job to make money and thus their job to be greedy. For banks, greed is good. Expecting them not to be greedy is expecting them to go against their innate nature and also be bad at their job. Like expecting a great white shark to go vegan. For some reason the ministry of finance wants to
reprimand banks for being greedy. On Thursday, the Finance minister went live on ‘Dunya Kamran Khan k Saath’ to talk about the money market and the macroeconomy in general. When talking about the debt market, Kamran Khan asks, “The banks have blackmailed (the government). Why is the state quiet?” To which Finance Minister, Shuakat Tarin who is an ex banker himself
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responds, “We are speaking to the banks tomorrow. We’re going to explain to them that they shouldn’t do such antics.” The antics the minister is referring to is that the banks often wait for a greater rate hike to invest in t-bills. Of course, what seem like antics to the government and the finance minister aren’t antics to the banks. For them, this is a prudent and very much legal tactic that they can use to make money - which is what they are there for in the first place. Think about it, if you’re in the business of making money off lending, wouldn’t you rather wait for when the policy rate goes up to invest in t-bills? Why invest now when the yields are low? The monetary policy meeting is scheduled for Tuesday. The market anticipates at least a 100 bps policy rate hike. A look at the yield curve also endorses the fact that the policy rate needs to be higher. In fact, the market is now operating at 11% which is 225 bps higher than the present policy rate. However, the market can anticipate and move however it wants, the decision ultimately lies in the hands of the SBP. In an earlier conducted exclusive interview with Profit, Dr Baqir had said that “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.” Before the previous MPS decision, the market had anticipated at least a 100bps policy rate hike. In order to beat the market, or in other words, lead the market instead of follow the lead, the SBP went 50 bps over the expectations. Baqir said, “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.” However, in light of recent events, it seems like the SBP is being pulled along by the banks. The ministry of Finance does not seem too happy about this. “If we wanted we could have canceled OMO operations. When the Ministry of Finance wont take up credit, the SBP picks up money from the market through OMOs. If OMOs don’t happen, banks won’t get interest on their money lying idle.” However, what is interesting is that the banks are net borrowers in OMO. If the government wants to punish the banks by forgoing OMO, bank’s won’t have money to invest in government paper. More importantly, SBP controls OMO and not the government. If Tarin is making such statements it also puts
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the autonomy of the SBP into question. Lastly, the SBP earns off OMOs which then are tunneled into the government to fund the fiscal deficit. Stopping OMOs or pulling back is bad for the government itself. This attempt to reprimand the banks is pointless especially considering the government itself showed benevolence to the banks in an earlier auction. On November 18, right before the scheduled MPC meeting, the Tbill auction saw 6 month bids rejected at 10.2%. A similar amount was then raised later which was accepted. The government is now paying 1.2% more interest, i.e. Rs 666 million more to commercial banks. Did they expect banks to be thankful and ignore their greed to get over the “benevolence”?
So how are banks bullying the regulator and government?
B
y wanting to make money through legitimate means. Yes, you read that right. Basically after the 150 bps policy rate hike in a preponed monetary policy meeting, the next t bill auction on December 1 witnessed the yield move up 3 percent to 11.5% from the previous cut off yield. The 3 month treasury bill is 200 bps higher than the policy rate. In the T-bill auction on Dec 1, 2021, the government raised over Rs500bn at a much higher rate than their previous auction where the government accepted much lower bids. This shows that the market is expecting the policy rate to go up higher. More importantly, they expect the policy rate to go high super fast. That, however, puts the SBP’s slow paced accommodative stance under question.
The previous MPS tried to counter market aggression but has been met by more market aggression.
What to expect?
W
e expect the SBP to increase policy rate by 100-150bps in upcoming monetary policy on Dec 14, 2021. We also expect SBP to revise upwards its inflation and current account estimates, says Topline Securities. Topline Research conducted a poll of key financial market participants on expectations over MPS. A total of 75 participants took part in the latest poll, compared to 73 participants in the poll conducted for Nov-2021 MPS. About 52% of the participants are expecting 100bps increase in the Policy Rate in the upcoming MPS whereas 16% of the participants expect more than 100bps rise in MPS. On the other hand, 16% of them anticipate an increase of 75bps and 10% of the participants expect a 50bps increase. Only 6% of the participants expected no change in the Policy Rate. The market expects more than 100 bps increase by the end of FY22. Keeping the market aggression in mind, analysts expect the SBP to follow and pick up on their drift. This is why all eyes are now on the SBP and the move it is to make. Is it going to be aggressive to beat the market again, or is it going to continue with the intended accommodative stance plan it had set out to do? In the case of the former, it makes one wonder whether it should be that easy to string the regulator along. In the case of the latter one wonders whether the SBP should show flexibility in its policy making. However, a hostage State Bank is good for no one. n
BANKING
SSGCL to halt gas supply to non-export sector
By Ahmad Ahmadani
T
he Sui Southern Gas Company (SSGC) has announced that gas supply to all general industries (non-export) including their captive power plants across Sindh and Balochistan will be suspended from today in a bid to provide gas to domestic consumers. The SSGC released a statement in this regard on Friday stating that gas will remain discontinued till further orders; however, zero rated export industry including CPPs along with the fertiliser sector will continue to get utility. “The volume of gas curtailed from this arrangement would be diverted to domestic customers for them to cater their enhanced gas loads in context of the winter season,” the statement read. According to a spokesman of SSGCL, the decision has been taken in order make gas available to the domestic and commercial sectors during the current winter season that
ENERGY
has seen a major demand-supply gap due a extraordinary spike in fulfilling water and space heating needs in upper Sindh and especially Balochistan that is experiencing extreme temperatures. It may be mentioned here that gas supply to the CNG sector and CPPs of the non-export industry had earlier been suspended till February 15. In Balochistan, supply of additional gas is a must for the survival of human lives since it serves a huge population in extremely low temperatures. “SSGC looks forward to the non export industrial sector for understanding the gravity of the situation and expects its cooperation for serving domestic customers through uninterrupted gas supplies,” the spokesperson Salman Ahmed Siddiqui said. Siddiqui added that the decision was made in accordance with the Ministry of Energy’s approved gas load management plan. With the advent of winter season, SSGCL is facing a severe shortage of indigenous gas from producers every passing day, resultantly depleting line pack. At the same
time, SSGC is experiencing increased gas consumption in the domestic sector that peaks during winter season and ultimately causes low pressure in the whole system. SSGCL’s Deputy General Manager, Sohail Mustafa Jaleel, in a letter dated December 10, requested all industrial associations to cease 100 per cent consumption in all general industries (non-export) captive power units operative till further orders in the larger interest of the general public. “We expect that needed cooperation and support shall be extended to SSGC to pass through this difficult period,” Jaleel said. Earlier on November 27, SSGCL had cut gas supplies to all CPPs of general industries across the two provinces in adherence to Petroleum Division’s priority order for gas load management. The discontinuation of supply was exercised under the Gas Sales Agreement (GSA) signed with CPPs, which states that gas will be provided by the company on an ‘as and when available’ basis during March to November each year, adding that the domestic sector tops the list of the petroleum division’s priority. n
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“I was inspired by PTI govt to reach new highs” canister of petrol tells beaming Muzamil Hassan on podcast
I
By The Dependent
n a new tell-all, long-form, youtube podcast hosted by Syed Muzamil Hasan, a canister of petrol revealed details of how it was given the space and freedom to grow and reach new heights under the incumbent Pakistan Tehreek i Insaaf (PTI) government. “I was inspired by this government. Under erstwhile governments, I wasn’t really appreciated. I wasn’t given my value. But under Imran Khan I have finally managed to get to
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almost Rs 150/liter,” said the canister of petrol. “And I am so grateful that I’ve been allowed to get to this point,” it said as Muzamil looked at it intently, nodding and beaming with pride. The more than hour long interview spanned over a number of issues, and started with a short introduction to the guest. “Basically, I am a naturally occurring liquid found beneath the earth’s surface that can be refined into fuel. I was formed when large quantities of dead organisms–primarily zooplankton and algae–underneath sedimentary
rock were subjected to intense heat and pressure,” said the canister. “A lot of people just see me for the canister I have on the outside, but it is the inside that counts.” Muzamil also asked the canister some hard hitting questions, including how it could be all praise for Imran Khan despite their past. “I know he said I should have been even cheaper back when I was already pretty cheap, but he is a changed man. Now he says I should be even more expensive! I think no matter the past, actions speak the loudest,” said the canister.
SATIRE