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CONTENTS

10 In Pakistan, the startup ecosystem fosters an elite group of professionals 18 Nowhere to go but up: The SBP simply had to hike 20 State Bank hits solar imports with fresh restrictions

21 Have we peaked yet? Ammar H Khan 22 The evolving middle-east geopolitical chessboard Uzair Younus 23 Laying Connectivity: Decoding the Submarine Cable Network

27 Telcos Energy Concerns: Unnecessary Whining or a Genuine Problem? 30 Is a deregulated petroleum market the way to go ?

Profit

33 IFRS-9 likely to revamp loan provisioning

Publishing Editor: Babar Nizami - Editor: Khurram Husain - Joint Editor: Yousaf Nizami Assistant Editors: Abdullah Niazi I Sabina Qazi - Sub-Editors: Mariam Zermina | Basit Munawar Editor Multimedia: Umar Aziz - Video Editors: Talha Farooqi I Fawad Shakeel Reporters: Ariba Shahid I Taimoor Hassan l Shahab Omer l Ghulam Abbass l Ahmad Ahmadani Shehzad Paracha l Aziz Buneri | Maliha Abidi | Daniyal Ahmad | Ahtasam Ahmad | Asad Kamran Chief of Staff: Maliha Abidi - Regional Heads of Marketing: Mudassir Alam (Khi) | Zufiqar Butt (Lhe) | Malik Israr (Isb) Business, Economic & Financial news by 'Pakistan Today' Contact: profit@pakistantoday.com.pk

Editorial Cooling the economy

or more than a year now, we have been hearing the State Bank of Pakistan (SBP) tell us about how well the economy is growing, and how it sees its role in supporting this growth. So it was a bit of a surprise, though not exactly a shock, to learn in the last Monetary Policy Statement that the priority is now to cool down this growth and contain the inflation that has risen in its shadow. In the analyst briefing that followed the announcement, State Bank officials even conceded that a large share of the current inflation is the result of domestic factors, and only a part of it is the result of the energy price hikes sweeping across the world. In fact, the SBP had begun to concede this ground as far back as September 2021, when the current cycle of monetary tightening began in earnest with a mild rate hike of 25 basis points (bps). Since then, we have seen two emergency meetings of the Monetary Policy Committee, and an ever-sharpening cycle of tightening that does not seem to have an end in sight. When this cycle began, interest rates were, perhaps, as far in negative territory as they have been in two decades (if not more). With the latest hike of 125 bps announced on Thursday, rates are now as high as they have been in two decades (they were 15% back in 2008 when the great financial crisis hit). Such a sharp cycle of monetary tightening speaks volumes. It tells us the SBP has been late to the game of recognising the dangers lurking within the very growth it was touting as a success all last year. All through those months, we saw the central bank praising the growth and spinning away the vulnerabilities. Today, they are squarely focused on the vulnerabilities and are talking of cooling the growth process, trimming their GDP growth forecast down to 3-4 percent where the government has set 5% as its target. Today, they are also committing that future decisions on rate hikes will be “data dependent”. This is a bow to the demand from the IMF to make interest rate decisions “data driven” that has been made since the fifth review in March 2021. A data-driven decision on interest rates is in contrast to the “story-driven” decisions they have been making so far, telling us that growth is more important, that burgeoning vulnerabilities in the shape of rising trade and current account deficits, as well as inflation, are either transitory phenomena or will sort themselves out once growth persists. In the MPS of March, they went so far as to issue a benign outlook on inflation, based on the fuel price caps that the government had announced only a few days earlier. Today, the bill has come due from this folly. Months of touting growth as the most significant objective of the central bank have brought us to a place where the policy rate may need to be hiked to a level not seen in three decades, given the new inflation outlook sees the Consumer Price Index somewhere between 18 to 20 percent by year end. The SBP is now counting on a sharp drop in inflation once the global energy price spiral breaks, which is a real possibility. But it’s a hope nonetheless. There is an important lesson to be learned here. Central bankers should not become too enamoured with GDP growth. Their job extends far beyond just ensuring increases in aggregate output. They are cu-

rators of systemic stability, and that job requires a much more refined view of the economy than just a fixation on headline growth numbers. We can only hope that whoever is finally brought in as the next SBP Governor will bring a more balanced view than his predecessor.

In defence of our startups

uch has been said about the rise of the startup ecosystem in Pakistan. From enthusiastic cheerleading to words of caution and cynicism, there is actually very little which has not been said about the tech-driven revolution that has everyone’s attention. One of the things that has perhaps not been said enough, however, is the very obvious disruption that the startup ecosystem has caused in Pakistan’s highly skilled labour force. In this week’s cover story, we have profiled five men and five women who are working in different startups across the country. Some of these are senior executives, but our attention is largely towards the recent graduates with a few years of experience. This is a group of young men and women who have thoroughly impressed us with their knowledge, their insight, and their dedication. Perhaps, even more heartening is the fact that a lot of these professionals are young women who are confident, competent, and in many cases leading the battle for their startups. Our findings show that this generation of junior executives value freedom over structure, appreciate a sense of ownership over job security, and care more about the culture of a workplace than its prestige. There is a clear aversion to hierarchies, which all in all is a good thing. Hierarchies are at times necessary, but they eventually lead to the bureaucratisation of organisations. The startup ecosystem has given birth to a group of young graduates that have access to decision makers, are given the agency to be creative and are trusted with responsibilities that in other places would be considered well beyond their pay-grade. In response, they have returned the faith of the startups that have invested in them and have proven to be efficient and dedicated workers. Highly skilled labour is one of the pillars of any economy. It is composed of individuals with advanced education that have not just the skills to perform complicated tasks, but the ability to adapt to technological changes and learn new skills on the fly. Thanks to the startups, the next generation of highly skilled workers will be much more innovative than the ones before them. Profit has never shied away from coverage of the startup space. Whether the story presents startups in a flattering light or an unflattering one, the one thing this publication has always felt is that stories about startups are important and worth writing. The story of the individuals that make up this ecosystem is also important and worth writing. After all, these are the people that will be the decision makers of the future and will determine the lasting legacy of the startup ecosystem in Pakistan.

Readers Say Someone should make a movie out of this... Brilliant! Apropos: Love, financial fraud, smuggling and murder – the tragedy of Seth Abid’s family @AL5980, Twitter Money and happiness are each other's enemy. Why people want to be so rich. Apropos: Love, financial fraud, smuggling and murder – the tragedy of Seth Abid’s family @harvestgoddess7, Twitter It's a bizarre story but not surprising. If a murderer can become a Prime Minister of Pakistan nothing else matters. Apropose: Love, financial fraud, smuggling and murder – the tragedy of Seth Abid’s family Jeff Jaffary, website Interesting article indeed and very well written. Apropos: Love, financial fraud, smuggling and murder – the tragedy of Seth Abid’s family Anonymous, website Although the articles are super long on this website, its keeping me hooked! How u guys do that i dont know but such information is rare to find so Great work guys A very good Read Ahtasam, keep writing. Apropos: EY is evaluating an internal spin-off Duaa Dehraj, website Well i think Yousif Adil, Ford Rhodes & Taseer Hadi in itself not as such of a brand as A.F Ferguson & Co and solely depending on BIG 4 affiliation was not a good strategy, nevertheless it is alarming for all the stakeholders. Apropos:EY is evaluating an internal spin-off Talha Ahmed, Website Very insightful read! Don’t usually follow financial articles but this piece was quite informative and very well-written. Apropos:EY is evaluating an internal spin-off Zoya, Website

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1- So the initial assumption that Russian Oil cannot be processed by Pakistani Refineries stand incorrect. It can be processed as it suggests from the report. 2- As it stands, there is room to take on Russian Oil by PARCO to the tunes of 300,000-400,000MT annually, in the current situation with existing commitments (honouring existing contracts) And that means, for the next contract review Pakistan can look into gradually moving the supplies in large volumes. PRL suggests the same. So we can actually plan on procuring start up volumes. 3- Difference in cost of logistics is ab-

sorbed by the fact that per barrel price of Russian Crude is less than half of what we are paying. With Russian Fuel price cap by NATO and US, oil from Arab countries it will become thrice the price of Russian oil. So to say that cost of logistics is show stopper is ridiculous. At present Russian Crude trades around 40USD/Barrel, India is getting discounts and oil to Indians are sold around 28-30 USD/Barrel. Price of Arabian Light is over 100USD/Barrel…additional 6-7 dollar /barrel on logistics would still leave it very cheap for us. Secondly, the quoted price is from Russia, Fujairah has an Oil Bunker reserved for Russia where oil is despatched to India. As NATO would starting banning Russian oil, Russians would likely come under pressure to look for more customers and logistic flexibility can be discussed, as long as Contract is supplied a storage/buffer can be allocated in Fujairah IMHO. Syria is also another option. 4- Chinese bank can assist Pakistan to carry out purchase wit Russia. Chinese banks are executing transactions with Russia. Iran has been buying Russian products for years. Buying Rubbles and transaction with Russia wouldn’t be an issue. If Pakistani delegation opens up talks on this subject, Russian govt. themselves would tell them ‘hows’ and ‘where’s’ of the process. The sticking point I see is the existing commitments putting constraints on volumes, but if we start with what we can buy, then at the contract review we will have a process already established to procure larger quantities to gain larger economic benefit. But we must start the process. Let us not forget the price differential between Russian Oil and Arab Oil, its massive and this difference will grow further due to western price CAP plan on Russian Crude which will very likely cause Arab oil price to shoot-up and Pakistan will end up with much larger Bill, would then need IMF for loan in order to pay for loans. Apropos: Refineries respond to questions on importing Russian oil Junaid Khan, Website And what about the most important issue that everyone wants to dodge……. transportation and the time it takes to get from a Russian port and the risk and the fact that there is little or no transportation sustainability and the fact that there is high risk at the black sea and on an on… …. why do we dodge this everytime we try to justify this fools mission to source oil from somewhere more difficult more risky more costly and more impractical. Apropos:Refineries respond to questions on importing Russian oil Zahid Jamil, Website

COMMENTS

IN BRIEF

Solar being touted as the magic bullet

Budget of the Army slashed!

In order to satisfy a key requirement of the International Monetary Fund (IMF) concerning establishing primary budget surplus in the next fiscal year, Pakistan has drastically reduced the armed forces development programme by Rs72 billion or one-fifth of the allocation.

In an effort to end the protracted power outages that have put the nation’s way of life on hold, the government is putting together a comprehensive solar energy package that includes tax exemptions and loans at reduced interest rates for customers.

Interest rates up again

SBP aggressively raised the policy rate by 125 basis points in reaction to June’s stunning inflation reading and the trade deficit that quickly ballooned in the final two months of the just ended fiscal year.

LNG shortage to aggravate energy crisis

Pakistan was able to attract no bidders for the latest tender it floated for 10 LNG cargoes, the gas is necessary to keep our power plants running, without it the energy situation in the country is expected to get much worse.

Senior journalist taken into custody Imran Riaz Khan, a senior journalist and Express News host who has been one of the most outspoken opponents of the current alliance, was taken into custody late on Tuesday.

COVER STORY

By Abdullah Niazi and Taimoor Hassan

atima Mazhar started her career as an investment banker in Dubai. She worked as the Chief Operating Officer (COO) of a company in the Gulf state, and was doing pretty well for herself as a young, up-and-coming senior executive. Then she left. Not excited by her job anymore, Fatima began searching for her next step when she came across a startup called Careem. The company felt like a good fit, and so Fatima started work there - as a call centre agent. Within a few years, Fatima would go on to become Careem’s head of expansion and eventually launch the ride-hailing app in Pakistan as well. Usman Arshad has a similar story. He was a Vice President at J.P.Morgan where he

had started off as a talented network engineer. He left the investment bank to join Pakistani fintech startup Sadapay. He still works for Sadapay out of Scotland. Fatima and Usman are part of a rising crop of people that have chosen to work in Pakistan’s emerging startup ecosystem rather than for large legacy companies, MNCs, banks, and FMCGs. This, perhaps more than anything, is the biggest contribution that the startup ecosystem has made to Pakistan. On the one hand, there are seasoned executives with decades of experience that have shifted careers from legacy banks and MNCs to join startups in leadership positions. Then, there are fresh graduates with degrees from foreign universities and from institutions like LUMS, IBA, and the like that are choosing to apply to and work for startups. This has created a base of talent in Pakistan that is being trained in a very different way from how they would traditionally come

up through the ranks. Because startups are small operations and focus very much on culture, young employees fresh on the scene get the opportunity to have direct contact with decision makers and take on tasks that they would not normally do in larger corporations. On top of that, they are also paid very well - with average starting salaries at startups beginning close to the six figure mark. Progress through the ranks is also quick, and there is a definite sense of ownership that exists as well. At the same time, these young professionals get to interact with and learn from seasoned industry professionals that have decades of experience and have chosen to shift from their traditional career trajectories to work for startups. What does this cultural change in Pakistan’s job market look like? Profit profiled nine of these professionals from different startups - both senior executives that have shifted to startups and recent graduates still making their way to the top.

Now, Fatima could very easily have stuck to this role. It paid well, it was a cushy job in the Gulf, and it could have led her to more senior positions at larger companies. But in 2013 when she started to feel like she wasn’t excited about the work she was doing, she left. “I have never quit a job while I’ve had another job lined up. I feel like that is cheating on the company. At this point, a friend told me that Uber was entering the UAE and I thought that sounds interesting and started looking them up,” she explains. “However, anytime I would google them, Careem would pop up because of how strong their search engine optimisation was. This really intrigued me, and when I saw they had a Pakistani founder I reached out immediately because it seemed like the right fit for me.” Careem was new, however, and Fatima had to start off there as a call centre agent since there was no other opening. Careem told her she would grow with the company, and she did. “I remember my first meeting with Karl Magnus

Olsson, one of the founders of Careem. I think if God-forbid I am old and riddled with Alzhemiers that meeting will be one thing I won’t forget. Because when I saw him talk about Careem, I kid you not I saw his eyes light up. And I thought, this is the sort of work I want to do. I want to be passionate about what I do. So I took up the job without a second thought.” After this, Fatima threw herself into her work entirely. She rose to become the head of expansion for Careem. She would go to a city, hire a team, train them, launch the app, and then move on to the next city. In two years, she did 286 flights. And the reason she was able to do this was because of the startup ecosystem. “At startups you have direct access to the decision makers. Someone at Pepsi won’t be able to meet their COO more than once a month but in a startup an intern can stand up and have their voice heard without consequence. And then of course, everytime someone calls a Careem or mentions it in Pakistan I feel proud because I launched it here and I can claim that this is something I did,” she says. In that way, culture has been very important to Fatima. When Uber was acquired by Careem, she had taken a sabbatical to complete her MBA from MIT. She resigned from Careem and moved on to WeTruckIt in Pakistan and worked there for two years. She briefly founded her own startup which did not work out and is currently the COO of Colabs. “In the beginning I would stay 20 hours to learn everything about the job. I learned how to code. I got very involved and was even the product manager for a while. That is the thing about this job. It is the same equation do you want to be a small fish in a big pond or a big fish in a small pond. I feel like the latter is the better option.”

Fatima Mazhar Chief Operating Officer

Colabs

onfident, candid, and very true to herself, Fatima’s story is grounded in hard-work, self belief and a complete dedication to whatever it is she is doing at any given moment. Perhaps, what strikes out most about her is her complete lack of pretences. Maybe that is why at different points in her career she has been able to accept jobs that others would have balked at and do them with the same enthusiasm with which she has approached her executive level posts. “I play Polo, and people say that playing polo is like playing golf during an earthquake. I think that stands true for a regular job and a startup job as well. Working at a startup is like trying to work during an earthquake. You are constantly firefighting and combating disasters. For some people that are free flowing and creative that works much better than a corporate job,” she tells Profit. “For me, the most important part has always been making sure I’m justifying the salary I am getting for whatever job I am doing. And I think if you put in the effort, particularly in the startup ecosystem, you will get the recognition you deserve.” “I started in 2008 as an investment banker. I did that because I was told it was the place to be. Then the financial crisis hit and I was without a job, so I took up a sort of internship at this company and within two years I became their Chief Operations Officer - which is also where I discovered I was good at operations and wanted to pursue it as a career.”

Syed Talib Rizvi Executive Director

since they are still working within the same regulatory framework that traditional banks are working under. “There are so many talented young professionals coming in to work with us. The founders of these startups are also so full of energy and brimming with ideas it is brilliant to witness. I realised looking at this that if people with good financial fundamentals can adapt to the tech wave then there is huge potential for them in this ecosystem,” he explains. According to Talib, while these founders have great ideas they often require a guiding hand from seasoned professionals such as himself. {Note from the editorial staff: The English expression, ‘seasoned professionals’ doesn’t do justice to what we mean. ‘Manjhay huay’ in Urdu is what we are essentially trying to describe.} “I’m one of the few senior bankers that

have shifted to the startup ecosystem. I think there is a big role that my colleagues and I have to play in this. These kids are talented but they are free souls. People need to be around to channelise this energy. That is where experience comes in,” he says. “This is a big challenge particularly with financial sector startups. It is a steep learning curve, but that is why I am around as a guide to take them through the regulatory environment.” In this way, Talib imagines a scenario in which the young up-and-coming entrepreneurs aided by professionals such as himself can come together to build a new product in Pakistan’s regulatory environment. It is a question of using each person’s strengths and tailoring them for solutions. “Startups are agents of change. A person like me respects the SBP as a fatherly department not as a challenge. Their regulations are not hurdles, they are a facilitation. The problem is that founders and investors have so much energy they do not always know how to control it. The enthusiasm overflows at times. This is where experience comes in. Since I have an understanding of and respect for the regulator, I can help these founders in charting these waters.” “In all of this the most important factor will be the kids coming in. This is highly skilled labour and it is the backbone of any economy, and let me tell you there are not enough startups in Pakistan right now. There are many more to come and people will continue gravitating towards them. Startups offer a more open work environment, you get to have an impact, and they are also getting very good salaries.”

were also gravitating towards tech jobs. Everyone wants to be a part of something new. I just wanted to be a part of something, and while that is a risky business, that risk is something I actually enjoy,” she says. However, Meiryum also believes that while the ownership aspect is an important factor in what is attracting young

professionals towards the startup ecosystem, equally important is how startups often offer very competitive packages. Since startups are small teams and dedicated to providing quality products, human resources are something they usually spend extravagantly on. “I have noticed that a lot of startup and tech jobs have really good salaries and benefits. That’s a pretty good way of looking at it. People are being valued. Assuming the bubble doesn’t break, and that this ecosystem is still around, other fields might actually have to pull up their salaries as well.” “There is, of course, an element in startups that involves working in disorder, but the people coming in are very talented and take it head first. We are fire-fighting everyday in the startup ecosystem, and in my experience a lot of the young professionals coming up are extremely self motivated self starters that would be valued in any industry anywhere. A lot of fresh grads are really, really used to having a lot of agency. No one is comfortable with hierarchy and that’s a really good thing. I don’t know if that is a generational thing but it is very good.”

TAG

alib Rizvi has 25 years of experience in commercial banking. He has held leadership positions at Bank Alfalah, Dubai Islamic Bank, and Habib Metro. Articulate, and unfailingly polite, he is completely devoid of the stuffiness that often plagues career bankers whose lives have been spent getting signatures and waiting on a ridiculous chain-of-command that exists in these financial institutions. Currently, after decades of working in traditional banks, Talib is working as the Executive Director of a financial technology startup TAG. “Nobody can take my banking experience away from me. I am one of the few faces in startups to have moved from commercial banking and I think many of my colleagues will realise this soon enough. All banks need to look towards digitisation. They are trying right now, but currently digitisation is not their core competence. I am simply trying to stay with the curve, and I think people that move into this early will have an advantage.” Talib believes that as the world changes, banks will be slow to digitise which is why institutions like TAG will have an edge in the years to come since their entire foundation will be digital. However, he believes that the young, energetic, founders, investors, and employees coming into these companies need guidance

Meiryum Ali

Director of Operations

Elphinstone

ith a bachelor’s degree in economics from Yale and training and experience as a financial journalist, Meiryum Ali is also a budding executive who has been working at Elphinstone - a personal financial advisory platform - for more than a year. Meiryum actually started her professional life at Profit magazine where she was both writer and editor. Her stories were crisp, informative, and written with talent, and while it was a career she enjoyed, it was the possibility of building something from the ground up that made her gravitate towards joining a startup. “I wanted to build something from the ground up. I had spent a lot of time reporting on things being built which created a natural curiosity about how things work. A lot of my friends my age in other careers with very different backgrounds

COVER STORY

Usman Arshad Lead Engineer

things like investment screening. There’s no way to check out the details of a company you want to invest in - how halal it is, how eco friendly etc. Since ethnic Pakistanis would be the biggest market for this, I was looking around when I stumbled across SadaPay and found it fascinating. Because of how unbanked the population is I thought this was definitely good, meaningful work. I got introduced to Brandon, to John etc and I realised this was not what I expected from Pakistan.” Usman says that the culture in Pakistan

is very ‘consultancy’ based - in that companies look for quick fixes rather than producing quality products and results. In startups, since it is entirely customer focused, you need high quality solutions. “I realised the culture here was very different. I feel like I’ve been able to influence the culture here and helping the unbanked is a noble cause. The goal is to make people’s lives better and easier. That is what we have done, for example with biometric verification,” he explains. The biometric verification that SadaPay has enabled in its app has been widely lauded and will remove so many barriers for a lot of people to increase their SadaPay account limits. Under it, people can simply verify their NADRA biometric record through the SadaPay app. “At JP, I had autonomy and a big salary but not the same impact. With SadaPay, I get that impact and opportunity to do the work. There is also a bias for people in smaller areas. We want to use technology to bridge that gap. We’re helping customers and that’s the main thing for me - giving opportunities to people that would not otherwise necessarily have those opportunities. That’s the magic of technology and what we can do with it for betterment.”

asking me if they can send me their CVs,” she tells Profit. Young, sharp-minded, and carrying an obvious passion for the work she does, Kinza is one of the many fresh graduates who have chosen startups as their first jobs. She had chosen to do an MBA right after graduating and done some work as a Teaching Assistant at LSE, but she had largely stuck to education until this point. Why did she choose to go this route? In her opinion, workplace culture was the biggest

motivating factor. “I had it in mind that I wanted to join a startup, particularly a fintech company since I felt there was a lot of room to grow in one. I felt like there were more growth and learning opportunities here. There is generally a casual, fun environment and that helps with creativity. Pakistan is a hotspot for innovation right now, and in a company like SadaPay you have direct access to decision makers which means you can have an impact.” “Maintaining this sort of culture is difficult, of course. But our COO still has monthly one-on-ones with everyone. If I ever want to speak to Brandon, I can simply book a slot and not be afraid that I won’t be heard. Then we have things here like a women’s corner, and I think that creates a certain bond among the women working in this space as well,” she says. “There is a lot I’ve done here that I’m proud of. I’ve learned to multi-task, I’ve gotten over anxieties, I’ve been the top performer in the customer experience department and have recently been promoted to a role in HR as well - all within a year. In hindsight, there aren’t any regrets and I think this is a great place to be.”

SadaPay

sman Arshad is a young Scottish network engineer with years of experience including working at J.P.Morgan. Ethnically Pakistani, Usman is currently working at SadaPay where he has made a major impact, and was recently part of the team that made in-app biometric verifications possible. But why would he leave a company as established as J.P.Morgan to join a relatively new Pakistani startup, that too when it was still very much in its infancy? “In order to produce a high quality product you need to interact with the customer. JP paid me really well but that wasn’t something I got to do there. It’s hard to make changes in a big ship. It takes a long time and a lot of effort. By the time a change is made, it is already too late - so I got sick of that environment,” he tells Profit during an interview. Usman is, of course, an anomaly. To maintain a link with his country of origin, he had wanted to get involved in and do work for Pakistan. “I was already looking into

Kinza Adnan People’s Manager

SadaPay

n 2020, Kinza Adnan had just completed her MBA from LSE when a friend approached her and asked her to apply to a financial technology startup called SadaPay. Right after graduation is an exciting time for people with MBAs. That is the time you are applying to, and actually being considered by large companies like Coca Cola, Nestle, Unilever, and the like. Large salary packages are dangled in front of you, and a clear if boring career trajectory presents itself. Having an MBA is the perfect route to becoming a ‘company-man’ and diving head first into the world of corporate bureaucracy. But all of it comes with a price, and one that the current generation of fresh graduates might not be willing to pay. “Back then people did look at me strangely for joining a startup rather than a big company, and I did see my friends getting large salaries. But a year into working at SadaPay and now my friends at Coca Cola and other large companies are

TEXTILES

a lot of time in East Africa like in Kenya, and then moved to corporate Pakistan at Habib Metro.” Kazi is not new to technology. Right before Rozee, he worked at Finca Microfinance Bank as chief operating officer in his last role, overseeing the blending of microfinance with technology when the bank digitised its lending process. This experience brought in him the un-

derstanding of and fascination for technology. Now, Kazi is leveraging his experience in the financial sector in a purely tech company to build a financial wellness platform. “I was part of developing it and that was a major experience in Pakistanaa’s tech stack. The way the penetration of smartphones and 3G and 4G were increasing, we knew a change was in the offing and we went for it.” “The signs were very visible. Especially with formalisation and eCommerce and behaviour changes, there was a lot of opportunity. People are catching on but we still have not achieved scale. There is a lot more growth and space left,” Kazi explains. Kazi understands the risks of working at a startup but argues that the culture of innovation that is building in Pakistan presents a great opportunity for creating something meaningful. At Rozee especially, since it was a startup when startups were not even a thing in Pakistan, the culture of innovation is more vigorous. “The stakes are high but there is an enabling culture too. It’s moving in the right direction. If it succeeds, there’s money to be made! At worst, it’s a valuable experience.”

a startup and I was hired in the marketing department. I spent an entire year there and got a full first-hand experience and a chance to interact directly with the entire team. The product was still in the development stage, and we worked tirelessly on it. That is also where I got a feel for flexibility and having a voice,” she explains to Profit. “Startup roles are more empowering and there is a lot of room to make mistakes. The budgets are small, but you know how to be flexible and the learning curve is great in startups.” But then, Covid hit. For six months straight Rubab worked from home like everyone else. While she continued to work hard at Tabeer, she was not satisfied with the produc-

tivity she was achieving at home and wanted an environment where she could thrive again - so she actively started looking for opportunities that were not remote. “That’s when I got a call from Rozee. I was asked to come in for an interview for a marketing role. I found out they were actually hiring for Dukaan.PK. Since they knew I had a tech background, they chose me as their first employee. Rozee focuses on ecommerce and digitising small scale entrepreneurs. That was an interesting experience handling the marketing all on my own. Eventually, however, I got an offer from Colabs and moved there.” Colabs was another place where she realised that she wanted to be in the startup environment. Normally, if you join a bank or an MNC, you get pigeonholed into the role you begin with. Shifting from marketing to communications is difficult enough in a legacy company even though the two are linked - so shifting from something like marketing to product is nearly impossible. And while Rubab did not begin her stint at Colabs in marketing, that is where her passion lay and the Colabs leadership decided to give her a shot there. “I was at the Colabs marketing department for a few months and enjoyed my time there. Eventually, I got another offer from Educative - another edtech company and decided to move back to the sort of work I started with. I am now handling their online marketing.”

Shahid Hosain Kazi CEO

Rozee.pk

hat can a banker build for a tech platform that collects resumes from candidates and matches them with businesses for jobs? Ask Shahid Kazi, a former banker with tons of experience and now the CEO of careers platform Rozee.pk. He will tell you that there is a set of financial wellness offerings that can be built on the platform for such candidates. A former banker and financial wellness go well together, removing the oddity in Shahid Kazi’s switch to a careers startup. The aspirations of building something Kazi plans to build sound more doable in a startup setting which allows for innovation and creative decision making. “I am primarily a banker and headed strategy at Bank Alfalah and Warid as well as an extension,” Kazi tells Profit. “I had spent

Rubab Zahra Naqvi Social Media Marketing Manager

Educative

ubab graduated from the Lahore School of Economics in 2019 with a degree in marketing. Almost immediately after graduating, she got a job at a digital marketing agency and worked on some accounts for big clients. The work, however, was not quite as freeing and creative as she expected it to be. “I had actually gotten into Pepsi’s Management Trainee Officer Programme. Back during our time at university, we used to do case studies and it seemed the only route to professional success and happiness was to join these large companies.I realised, however, after handling digital marketing accounts that there is very little freedom to do what you want. This is something I have a lot of passion for.” This is a reality of marketing jobs. A lot of talented, creative people such as Rubab go into it. But good ideas are very regularly dismissed or not taken up because of the vast bureaucracies that run big account corporations. That is why when Rubab received an offer from an edtech startup called Tabeer Academy, she decided to take the plunge. “When I joined, Tabeer had yet to be fully launched. It was my first experience at

COVER STORY

University, entrepreneurship has driven him from an early age. . An enterprising individual with a knack for taking on mean problems, Taimoor took a crack at solving the energy problem for Pakistan and founded a renewable energy startup.

“The ecosystem back then was not very conducive to new ideas,” Taimoor tells Profit. From his first startup right after graduation, Taimoor moved to London for his MBA in Leadership and Strategy, following which he joined Walmart and had the first-hand experience of how corporate bureaucracy works. “At Walmart, you’d be isolated from other departments and it would be years before you could get to know how things are done in collaboration with other departments. You are restricted to your JD,” says Taimoor. After his stint at Walmart and before Bookme, Taimoor worked at Lahore-based startup RepairDesk as product manager. “In startups, you have an overarching experience of how a business is run. How they become profitable,” Taimoor tells Profit. “You may be an IT guy but you get to start to learn about the business side as well. This eventually grooms your skills and you are an entrepreneur in the making.”

put that in startups it is the people that matter, not the funding. “It is not about how much funding a startup has, it is about the people running it. If the founders and managers of a startup do not understand, for example, how to navigate a choppy economy like Pakistan, then it does not matter how good an idea is or how much funding that idea has behind it the startup will face trouble. Even when I joined Dastagyr, the one thing I looked at very carefully was the founders. I researched them, their work, and asked around about their reputation as managers. I got glowing reviews in response and that is why I decided to take on the job.” This kind of insight is rare even in seasoned professionals. Coming from a 2019 graduate with two or three years of experience under her belt, it shows that a lot of these up and comers have a deep understanding of the environment in which they work. It is insight that has served Saniya well in her time at Swvl and Dastagyr. At Swvl, she started off as a

customer experience executive. “That’s what I loved about the startup space. Immediately after being hired I was thrown into the deep end and I really got a flavour for having this kind of agency and responsibility. After setting up that department I shifted to sales which proved to be awesome exposure. I got promoted from there until eventually Dastagyr asked me to come in and lead their customer experience team.” This, as well, is a stand-out in the startup ecosystem. In most traditional companies, as we have mentioned before, moving between departments is a painful process. In this case, Saniya successfully moved from customer experience to sales and thrived in both roles. As a result, she now possesses skills in both fields and has doubled her portfolio. “I think the most important factor that gets you hooked to the startup culture is that you have no constraints. As an entry level executive, you have the opportunity to come up with and implement your vision. You are given a lot of responsibility but as a result a lot of freedom as well. The only constraints I can think of are budgetary, but even with those you have access to decision makers and can make a case for yourself - something that doesn’t happen in MNCs or other large companies,” she explains. “There are two parts to this, the first is the sense of ownership and the second is the faith that your company puts in you. At Dastagyr, I know I can form my own team and make calls. Plus everyone is so energetic and bouncing ideas off each other that we can actually take those ideas, experiment with them, execute them, and if they work even scale them. And if you get to that stage, you feel proud looking at something that is your brainchild.”

Taimoor Ali

Chief Operating Officer

Bookme.pk

hat does working for the world’s biggest private employer teach you? In his time at Walmart, Taimoor Ali learned that at legacy corporate machines, it is impossible for employees to bring innovation and new-age thinking in business processes. Taimoor currently serves as COO at Pakistan’s leading online ticketing portal Bookme.pk. Before this, he had briefly founded his own startup in the early days of Pakistan’s startup ecosystem, and later had a stint at Walmart where he found that legacy corporations were not his speed. A 2012 graduate from Pakistan’s COMSATS

Saniya Sultan

Customer Experience Lead

Dastagyr

n economics graduate from the Lahore School of Management Sciences, Saniya Sultan is the leader of the customer experience department at the B2B marketplace Dastagyr. At 25 years old, this is the second startup Saniya has had a pivotal role in shaping. “My degree was in economics, but that wasn’t where my talents or interest lay. I took a lot of marketing and business courses while I was at LUMS. When I was graduating, I did apply to some MNCs and legacy companies and that was definitely a route I was considering. I made it to the final round interviews at one company but didn’t make the cut. After that I had other decisions to wait for, but I got an offer from Swvl and didn’t want to wait any longer so I took it,” she tells Profit. From here, there was no looking back from Saniya. During her Junior year at LUMS, Saniya had interned at Careem and another startup based out of Plan9 in Lahore. So she already had a flavour for the sort of freedom and creativity that working at a startup offered. Cool-headed, concise, and possessing insights on the startup ecosystem beyond her years, Saniya is exactly the kind of fresh graduate that encapsulates the emerging talent we are trying to shed a light on. When asked why she chose to take a job at Swvl and then again at Dastagyr and stick by the startup route rather than go to a traditional legacy company, she poignantly

Umair Aziz

Head of Information Security

SadaPay

ne of the most prominent fintech startups in Pakistan, SadaPay, is gunning to build a robust digital financial services ecosystem for the banked, as well as the underbanked and the unbanked. As you’d be aware that for any organisation, cybersecurity is crucial for smooth running of operations. At SadaPay, the person at the helm of protecting data and smooth availability of all systems is Umair Aziz, whose yearning to build information security systems from ground up brought him into the startup world in 2021 after a long stint at legacy tech businesses. A graduate of the National University of Science and Technology (NUST) in Islamabad, Umair is one of the fortunate ones to have found a job while he was in college. “I started my career in 2011 with a local company handling their security projects. After that I moved on to Saudi Arabia and worked on national level projects as senior security analyst,” Umair recollects his memory of early days working in IT security. “In 2018, I moved to Dubai to work in a company that provided IT services to auto

companies and right before Covid hit, I moved to EasyPaisa in their IT security department.” From his prior experience, Umair could tell with certainty that at legacy companies working in a set way, flexing new ideas was not gladly received, that these corporate laggards would stifle his hunger for innovation and freedom to do things in the most fitting of ways. This moved the needle for Umair and he switched to SadaPay where decision makers were easily accessible, decision making was easy, and freedom of thought and initiative was

welcomed. “The motive all this time has been to do things right from my own perspective,” Umair tells Profit. “I wanted to do things in a better way with more freedom and make a change, which brought me to SadaPay.” “If you work at a bank, you are not building anything; you’re steering an already afloat ship. But here, you have an opportunity to build foundations,” Umair says. “This is also why SadaPay’s success is personal to me.” Here, Umair was an active part of the team that got the electronic money institution (EMI) licence from the State Bank of Pakistan (SBP). SadaPay’s EMI licence was announced in April this year. “This was the team which really did it! I would never have had the experience of working on the regulations had I been working at a bank,” he tells Profit. It goes without saying though that while startups might look like a dazzling career choice, they are in fact very risky. Which is why the liberty to do things in one’s own way is perhaps the best way to get things done in the most efficient of ways. Before that, however, you need to be convinced that the idea that you are working around, convinces you as an employee. “There is obviously a risk to these career moves. It is a leap of faith you take in the system but also in the idea. When you come on board, you are buying into the idea first,” says Umair.

Conclusion

he startup ecosystem in Pakistan has done a lot for the country. It has introduced a spirit of innovation, it has brought funding to Pakistan, and it has created an entire system that is thriving and exciting people. The most important contribution of this ecosystem, however, is the people that it has raised. Young professionals get the freedom to enact brilliant ideas, and work in tandem with experienced individuals that have put their faith in this ecosystem. There are a lot of things in this ecosystem that need to be improved. It is not infallible. There is always room for improvement. But this in itself is an achievement that Pakistanis can be proud of.

Highly skilled labour is a crucial pillar of the economy. The startup ecosystem has given it a boost. The stories of people like Fatima Mazhar and Usman Arshad inspire confidence in the people leading this ecosystem. The stories of up-and-comers like Saniya Sultan and Meiryum Ali give hope for the generations that will eventually inherit this ecosystem. Perhaps one of the most significant signs that this is an ecosystem promoting good work culture is the presence of a large number of women that are gaining prominence in this space - something this week’s second editorial points towards. All in all, it is a heartening revolution to witness. We are all for it, and hope it will grow and become better than ever.

COVER STORY

Nowhere to go but up: The SBP simply had to hike

Not just a simple 125 bps hike; there’s more to what the SBP is signaling By Ariba Shahid

he policy rate has been hiked by 125 basis points (bps), bringing it to 15% – the highest since 2008. The decision to hike is in line with market expectations. However, the Monetary Policy Statement (MPS) released by the State Bank of Pakistan (SBP) shows there’s more than meets the eye.

Between the lines: SBP stepping out of character

he MPS placed a considerable amount of emphasis on inflation. Even during the press conference, acting Governor Murtaza Syed talked about how the SBP feels the pain of a common citizen battling inflation in these testing times. The MPC states that headline inflation is likely to remain elevated around current levels for much of FY2022-23. It believes that inflation will fall “sharply” to the 5-7% target range by the end of FY2023-24. References to runaway inflation (very rapid growth in inflation rates) were also made. The MPC notes that without decisive macroeconomic adjustments, there is a significant risk of substantially worse outcomes that would compromise price stability, financial stability, and growth. “This could take the form of runaway inflation, foreign exchange reserve depletion, and the need for sudden and aggressive tightening actions later that would be significantly more disruptive for economic activity and employment,” warned the statement. Unlike itself, the SBP stepped out of character and started giving policy advice that would help the current account deficit narrow. The suggestions were around ways to bring down energy imports. “...for instance, through early closure of markets, reduced electricity use by residential and commercial customers, and greater encouragement of work from home and car pooling”. The MPC noted that, without such measures, containing the trade deficit could become challenging. At this moment it seemed like the SBP was addressing the government telling them

to get their act together because there is a limit to monetary tightening that the SBP can do in a cost-push inflationary environment. It was a signal of “do more” to the government. In a question posed by Profit about inflation, Syed did admit that while inflation was primarily cost-push, the decision to hike policy rates despite that was to contain demand-pull inflation. He added that there was no pressure from the IMF to hike policy rates. Speaking of the IMF, the SBP called the reversal of the “unsustainable” energy subsidy package an encouraging development. The statement also noted that the FY2022-23 budget was centered on strong fiscal consolidation. “This has paved the way for the completion of the on-going review by the IMF programme, which will ensure that rail risks associated with meeting Pakistan’s external financing needs are averted.” The SBP also stressed the importance of the completion of the ongoing IMF review. It said if completed, it will “catalyze important additional funding from external sources that will ensure that Pakistan’s external financing needs during FY23 are met. Pressures on the rupee should then attenuate and SBP’s foreign exchange reserves should gradually resume their previous upward trajectory during the course of FY23.” However, again, unlike itself and beyond its concerns, the SBP talked about the nature of taxes and the impact on citizens. It stressed the importance of the need for new taxes to be progressive in nature. “In particular, their burden should mainly be absorbed by the relatively better off while adequate protection is provided to the more vulnerable, for whom high food prices are a particular concern. In this context, curbing food inflation through supply-side measures aimed at boosting output and resolving supply-chain bottlenecks should be a high priority”. Lastly, one detail that seems to be ignored is the SBP making an announcement regarding future MPC decisions. The MPC announced that, going forward, it will remain data-dependent, paying particularly close attention to month-on-month inflation, the evolution of inflation expectations and global commodity prices, as well as developments on the fiscal and external fronts. This has been a demand of the IMF since March 2021. Does this mean decision-making up to this point was sentiment-driven, narrative, or story-driven? Not a comforting thought

Recap: Build-up to the hike

onducting MPC meetings and announcing the policy rate is a routine matter at the SBP. However, this policy rate decision was highly watched as it set the stage for what is to come. Usually, in an inflationary environment, the SBP hikes the policy rate to reduce the money supply. This in turn brings down demand which brings down inflation. However, the macroeconomic environment has kept the central bank on its feet lately. For the sake of simplicity, we’re going to recap everything that went down in June, building up to the MPC meeting. Before we begin with June, just a reminder that on May 23, the SBP hiked the policy rate by 150 bps. It talked about fiscal austerity in the policy statement, a recent development.

June 9:

Despite the policy rate hike, things seemed to further deteriorate on the macroeconomic front. On June 9, the SBP held a confidential meeting with bank treasurers instructing them to bring down yields in the t-bill and PIB auctions. They were threatened with a supertax in case they didn’t comply. The banks were also asked to incur foreign exchange losses if needed, but to take pressure off the rupee as it was a national issue.

June 16:

Things then took a turn for the worse. Profit reported that the interbank had run out of dollars. This was based on the fact that forward premiums had turned into discounts in the interbank, signifying banks were desperate to get dollars. The last time this happened was in November 2021. The SBP conducted an emergency MPC to hike up policy rates back then.

June 20:

This foreign exchange liquidity crunch got more serious, and banks began turning away letters of credit (LCs). Importers in the country faced administrative delays in the processing of their LCs or plain outright refusal. There simply was not enough foreign exchange.

June 21:

To deal with the crunch, the SBP allowed banks to cut their Cash Reserve Requirement (CRR) and Statutory Cash Reserve Require-

ment (SCRR) in an attempt to boost interbank liquidity. The SBP did not formally come out and declare a percentage of a cut and instead decided on a case-to-case basis with each commercial bank based on the request put in by the bank. Based on Profit’s analysis, a 1% drop in the CRR or SCRR injects $72.88 million into the interbank based on the total foreign exchange deposits of $7288 million as of May 2022.

June 22:

Amidst all this doom and gloom, the SBP posted a congratulatory tweet about $57 million inflows into Roshan Digital Account (RDA) deposits, the highest ever daily inflow. Profit fact-checked this to find that the SBP was not announcing net deposits, but simply cumulating the inflows each month – and that the reserves are not equivalent to $4.5 billion. We understand that this was a move to instill confidence in the market that there are indeed dollar inflows.

June 26:

While foreign exchange still remained a concern for the central bank, they had rising yields in auctions to worry about as well. The SBP conducted a 77-day OMO injection. This is the longest OMO tenor ever introduced by the SBP. A sum of PKR 402 billion was injected through this OMO expected to mature in mid-September. The SBP has already locked in 94% of outstanding OMOs worth PKR 4.1 trillion in 63-day tenors. This means that a vast majority of funds through OMOs are in the form of longer tenors. Hold on to this information, we will jump back to it when we talk about the auction held on June 30.

June 29:

There is, however, a limit to how much banks can borrow through OMOs. The SBP then had no choice but to relax the leverage ratio for banks. On June 29, the SBP made an update to Basel III FAQs, relaxing the method of calculating the leverage ratio. Since the SBP can’t lend directly to the government, it uses OMOs to lend indirectly. With banks borrowing near their limit, the SBP used this method to help the government raise money in auctions. The SBP also sat down with banks and talked about the possibility of reclassifying loss-making bonds in the Available For Sale (AFS) portfolio of banks as Held to Maturity (HTM) at cost. If the SBP allows this reclassification, it would be easier for commercial banks to meet capital adequacy. At this point, it seemed like the banks were stringing along the SBP. The power dynamics have certainly changed – something we will get back to.

June 30:

Remember the OMO injection on June 26? It was primarily done to provide the market with cheap liquidity hoping to bring the yields down

in the Market Treasury Bill (MTB) auctions. The too long; didn’t read (TL;DR) is that it did not work, and yields did not come crashing down. However, the government, out to raise a target of PKR 800 billion, instead managed to raise PKR 1.74 trillion. The excess liquidity through OMO and leverage ratio relaxation was picked up by the government. The market placed bids of PKR 2.37 trillion, which shows you how much money the banks are now sitting on. What is important to note here is that participation remained concentrated in the three-month tenor with bids of PKR 1.9 trillion. The government accepted bids of PKR 1.7 trillion. Due to the heavy participation, the cut-off yield managed to decrease by 2 bps to 15.23% compared to the previous auction. Some 176 bids in total were made in the 3-month MTB, the lowest 14.5449%, and the highest 16.49%. This means the market is expecting a rate hike. In a weird turn of events, the SBP then also conducted a reverse OMO to MOP-UP excess liquidity from the market. As we’ve pointed out, the banks had a lot of money to invest in MTBs, the government picked up as much as it could. With banks reluctant to lend to the private sector during the current macroeconomic climate, the SBP conducted a four-day OMO mop-up and picked up PKR 392.6 billion at a rate of return of 13.65% per annum.

July 4:

Conducting a mop-up is saying the market has too much liquidity and it’s time to pick some up. However, on July 4, the SBP decided to conduct a 74-day OMO. At this point, the market no longer gets surprised at longer tenor OMOs because this just seems like the SBP’s new style. What was strange about this OMO is that the SBP conducted the injection asking for bids and then rejected all of them. Okay, fair enough – they probably changed their mind or just didn’t like the range of the bids. Twenty-eight bids that were placed by participants, ranging from 13.97% to 13.84% to raise PKR 1.91 trillion, were rejected by the SBP.

July 5:

After rejecting all bids in an OMO a day before, the SBP conducted a 73-day OMO injection. Twenty bids were placed ranging from 14.07% to 13.87%. The SBP offered PKR 1.371 trillion but only accepted nine bids worth PKR 1.186 trillion at a 13.97% annual rate of return. Maybe this was the SBPs way of getting a better rate of return for itself and signaling to the market that it’s no longer bowing down to the markets? The foreign exchange liquidity crunch turned into a serious issue; however, through the SBP’s steps of cutting the CRR, and SCRR, the market got its much-needed foreign exchange liquidity. As a result, the declining rupee stabilised, as opposed to the value it was shedding

amidst the chaos. Unlike last time, the SBP did not need to go down the emergency MPC route. While the SBP was able to deal with the foreign exchange issues, the yields have remained a point of contention between the central bank, the finance ministry, and commercial banks. In December 2021, the then finance minister Shaukat Tarin threatened banks with “koonda” on live television. This time around, banks were threatened rather discreetly, and rewarded with OMO injections and relaxation in the leverage ratio. More importantly, the fact that the SBP is in talks with banks to reclassify loss-making bonds is enough to show which side has bargaining power. With the regulator saving banks from incurring operational losses, something which is a fair element of businesses, one has to wonder about the larger picture. Despite that, the market did not bid lower. After all, why would they? They’re banks, not charities. Like we’ve said in the past, expecting banks to not be greedy is like expecting a great white shark to go vegan.

Will banks yield to the SBP?

he hike in policy rates was also driven by the fact that the SBP was behind the curve. The markets have been pushing for higher yields, as a result, the spread between the policy rate and yields has significantly widened. During the press conference, in response to a question posed by Profit, the SBP explained that the decision to hike policy rates and use OMOs was to bring down the substantial spread between the yields, Kibor, and the policy rate. Profit also asked the SBP whether hiking policy rates despite locking in long-term OMOs would confuse the market. The response given was that the MPC is an independent body with independent members and representation from the SBP. The deputy governor added, “Going forward if the policy rate and market rate have a substantial difference, the SBP will take necessary action to realign rates.” Speaking to bank treasurers, Profit has been informed that banks are placing higher bids in line with inflation expectations. “Why would we incur a real loss, considering inflation is higher than the rate of return we’d get. We’re answerable to shareholders,” said a source. “However, it is true that banks may put in lower bids if they knew they’d be rejected. The government is desperate for money. The confidential meeting at the SBP with banks proved it. This was reiterated later through the auction where they took up more than their target. Every time the SBP gives us liquidity through OMOs, we know we’ve got the upper hand,” he adds. n

MARKETS

State Bank hits solar imports with fresh restrictions New circular by SBP requires “prior permission” before opening import transaction of hundreds of items, including all solar equipment

By Profit

t landed like a bombshell. On the 5th of July, the State Bank of Pakistan (SBP) updated its list of products for which “prior permission” will be required and LCs can be opened for their import. Among the products added to the list – solar panels, inverters, and batteries. The requirement had been in place since May 20, but this new circular expanded the coverage to all items under HS codes 84 and 85, which includes “nuclear reactors, boilers, machinery and mechanical appliances and parts thereof,” as well as “electrical machinery and equipment and parts thereof.” The latter category has netted solar panels, inverters and batteries among many other items. “The import of solar equipment has been slowed since no payment can be made without prior permission,” says Muhammad Farhan, ex Chairman of Pakistan Solar Association. One of the HS codes, among hundreds, on the list of items that now require prior permission of the SBP is HS8504.4090, under which all inverters are ordered, but that code also includes other items like emergency power supply equipment for hospitals, he adds. “Tax on any equipment other than solar panels has not been zeroed,” he tells Profit, referring to the decision taken by the prime minister that excludes solar panels from the

Sales Tax. “Why have solar on-grid inverters not been zeroed? They have no other purpose!” What shocked players in Pakistan’s solar market was the timing of the announcement. The SBP circular including all their equipment in the list of items requiring prior permission was issued on July 5. The very next day Prime Minister Shehbaz Sharif tweeted an announcement of a “solar package” that his government is preparing to ramp up adoption of solar initiatives across the country. This is not the first time that providers of solar solutions have faced restrictions. On at least two occasions before this, the noose has been tightened around their necks, despite the fact that the country is facing daunting power shortages and spiraling cost of imported fuel. In April the State Bank required solar imports to post 100 percent cash margin on all LCs, placing a crushing burden on the cash

flows of all businesses operating in this sector. That was then followed on May 20 by a circular requiring “prior permission” for import of solar inverters as mentioned earlier. And then we have the latest circular issued on July 5 that expanded the coverage to panels, batteries, solar lanterns, geysers and all other products. “The government recently has taken a keen interest in solar energy and has pledged to expand renewable energy in the energy mix by 20% by 2025 and by 30% by 2030,” said Reon Energy in a statement sent to Profit magazine via email. On its website, Reon says it is the country’s largest company in the solar sector, providing large solar solutions to industry. They are currently engaged in the largest solar project in the industrial sector, for a cement plant in DI Khan, installing a project that will take the plant off natural gas forever once completed. The COD for that project is expected in November, but it has been hit by the new requirements. “The premier also recently stated via his Twitter handle that the coalition government aims to introduce the country’s first comprehensive solar policy which will drastically cut fuel imports, bring down cost of electricity and provide clean energy,” the statement continues, highlighting the irony behind the timing of the announcement. “On the contrary, the SBP lately imposed a regulatory bank approval requisite on inverters and batteries as per EPD Circular Letter as of May 20, 2022, and on solar panels, as per EPD Circular Letter dated July 5, 2022, to curb imports in accordance with the recent policy wide announcements.” n

OPINION

Ammar H. Khan

Have we peaked yet?

more than 20 months, but that still did not raise any alarm bells. The real interest rates continue to remain negative for more than 26 months now. Considering how monetary transmission mechanism, and second-round effects of inflation still need to take root, it will be another few months till inflation tapers off and a high base effect comes into play.

he State Bank of Pakistan (SBP) recently hiked interest rates by another 125 basis points, bringing the benchmark policy rate to a nice round number of 15 percent. The increase in interest rates did not really come as a surprise, as the central bank had already embarked on a contractionary stance albeit with a significant delay. Such a stance was driven by accelerating inflation, largely a function of a rapid increase in commodity prices, global supply side constraints, access to cheap capital for longer than necessary, and a bonanza in subsidised loans through various schemes financed by the central bank. The monetary base during the last 12 months increased by 115 percent, as more money was available in the economy chasing a finite supply of goods. This further put pressure on the value of PKR, as imports increased considerably, expanding the current account deficit, making an already precarious situation worse. Early signs of an overheated economy were apparent in the last quarter of the previous calendar year, but no one wants to end a party early, and so it continued. The party peaked when the central bank only a few months back even justified the existence of fuel subsidies, despite it being a reckless fiscal move. It may have continued even longer if commodity prices had leveled out, or gone down, but the opposite happened, as commodities across the board started reaching their multi-year highs. As double-digit inflation took root, it was only a matter of time before fuel subsidies were taken away, and the fiscal pains were passed on, eventually leading to the highest inflation on a monthly level in more than 13 years, in the aftermath of the global financial crisis of 2008. It was fairly obvious that inflation would exceed the 20 percent mark, and may follow the trajectory of 200810, but the central bank remained more reactive than proactive. Even upto December 2021, real interest rates had been negative for

The writer is an independent macroeconomist and energy analyst.

COMMENT

Anticipating higher inflation levels, and considering the government remains the largest borrower in the market, interest rates had been outpacing the policy rates with a greater margin. This was an anomaly, as lenders expected higher inflation levels, thereby having higher expectations of interest rates. Even though the central bank did try to suppress interest rates via a series of Open Market Operations, eventually the rates have converged after the recent hike. The monetary policy statement did indicate that the “monetary policy committee will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability, and growth, and will take appropriate action to safeguard them.” In such a scenario, one expects that the central bank would continue to maintain its hawkish stance, as it cools down the real economy, while evaluating the impact of supply-side shocks. The ability to contain supply-side shocks remains limited, but through the policy rate the central bank can ensure that inflation expectations are now de-anchored, and can be brought down as the high base effect kicks in. We may have not peaked yet, given the delta that exists between inflation and interest rates. If commodity prices stay elevated, consequently resulting in higher inflation expectations, we may have to see another round of interest rate hikes. Meanwhile, if global recessionary pressures are kicking in, and commodities start cooling down, as they already have, particularly leading with copper prices, we may have peaked in this rate cycle. Unless of course, there is another external shock in the offing. Another round of hikes from here may have adverse consequences on the overall health of the lending portfolio of financial institutions, as default rates may increase. That in turn would affect the stability of the financial system, particularly when a few banks are already under-capitalised, and are basically ‘zombie’ banks. Another hike would have to be balanced with overall stability of the financial system, and an eventual revival.

OPINION

Uzair Younus

The evolving middle-east geopolitical chessboard

jumbled response, saying that the meeting is “in Saudi Arabia, but it’s not about Saudi Arabia.” Economic realities, however, have forced a change of heart in Washington, with the Russian invasion of Ukraine upending global energy markets and Biden’s approval ratings, which currently hovers around 38 percent, below that of Donald Trump’s ratings two years .S. President Joe Biden this week travels to the into his presidency. This has increased Saudi leverage and enriched the Middle East where he will meet leaders of Israel Kingdom, meaning that it is able to extract a better bargain from the and nine Arab States, including Saudi King Biden administration in lieu of increasing oil production. Salman bin Abdulaziz and his successor Crown The Saudis are also not the only ones looking to strike a better Prince Mohammed bin Salman. Starting with deal with Washington. There is a broad recognition in the region that a visit to Israel, from where Biden will travel to the U.S. is going to continue reducing its footprint in the region, thereSaudi Arabia, this trip comes at a critical juncture, not only because by significantly curtailing U.S. ability to be a net security provider. As of the ongoing global energy prices that has fueled inflation and a result, regional powers led by Israel and the United Arab Emirates pummeled Biden’s approval ratings, but also because of rapidly are doubling down on cooperation, with the Saudis playing more of a shifting geopolitical sands in the region. A key focus of the visit will background role in moving things along. Washington’s desire to reentherefore be focused on Washington’s role in the region, especialter a nuclear agreement with Iran is adding to the sense of urgency, as ly given regional powers’ concerns about a belligerent Iran, the regional powers are united in their view of Iran as a revisionist actor ongoing nuclear talks between Washington and Tehran, and the seeking regional hegemony. U.S. desire to pivot away from the Middle East and towards the Biden is likely to encourage Arab states, especially Saudi Arabia Indo-Pacific. and the UAE, to continue building ties with Israel. This will also be a There has been a lot of debate within the Biden administrapart of a push towards deeper defense cooperation among these countion about the trip, particularly with regards to the president’s tries as they seek to cooperate on strategies that help defend against meeting with Crown Prince Mohammed bin Salman (referred to Iranian drone and missile attacks. Biden may also offer to increase as MbS). While there has been sustained pressure on the adminisdefense cooperation with Saudi Arabia – which is flush with cash due tration – both within and outside the president’s party – on several to the oil price spike – provided the Kingdom agrees to move forward fronts with regards to its Saudi policy. This includes human rights in bringing the conflict in Yemen to an end. concerns in Saudi Arabia, the war in Yemen, and the murder of A virtual summit between the U.S., Israel, India, and UAE is Washington Post journalist Jamal Khashoggi in 2018. Biden has also scheduled, once again underscoring Washington’s desire to bring also found himself in a bit of a quandary due to his past remarks regional powers together. The summit signals the push towards the about MbS: the U.S. president has referred to MbS as a ”pariah” creation of a western Quad, which was launched in late 2021. This and has vowed to singularly focus on dealing with the Saudi king grouping of countries has increasingly focused on more economic and not his successor, who has in recent years emerged as de facto issues, including digital infrastructure and technological cooperation. ruler of the Kingdom. When asked about his potential meetings in A web of free trade agreements is already taking shape among these Saudi Arabia during the NATO summit in Madrid, Biden offered a countries, with the UAE having an agreement in place with both India and Israel; an India-Israel agreement is currently in the works. This upcoming trip is yet another indication of the fact that the unipolar moment the world experienced after the collapse of the Soviet Union is coming to an end. The emergence of a multipolar world means that regional powers are exploring mutually beneficial agreements that would have been impossible even a decade ago. WashThe writer is Director of ington has also recognized that it will have limited capacity to entangle itself in regional battles moving the Pakistan Initiative forward, especially as it seeks to win a strategic competition with China. at the Atlantic Council, a Recognizing this shift, Middle Eastern powers, led by Saudi Arabia, UAE, and Israel, are rapidly Washington D.C.-based adjusting their diplomatic and economic posture, seeking to move beyond historical issues to deal with think tank, and host of the emerging challenges. The next few days will see a flurry of announcements on the back of these high-levpodcast Pakistonomy. He el meetings, and these announcements will only accelerate the pace at which the regional geopolitical tweets @uzairyounus. chessboard evolves to grapple with the challenges and threats of a multipolar world.

COMMENT

All you wanted to know about submarine cables. Spoiler alert: sharks are not dining on them

f nothing else, the internet has grown in Pakistan – in terms of both penetration, technology and of course the country’s reliance on it. At the start of this decade, Pakistan only had a bandwidth capacity of 155 megabits per second (mbps). Today’s capacity, in the face of increased demand, is 3 terabits per second (tbps). The total user base of broadband internet comprises 117 million users, as per Pakistan Telecommunication Authority (PTA). That’s a huge increase. There was also a change in the technology.

TECHNOLOGY

In the beginning, satellites were the backbone of telecommunication in Pakistan. However, as the world shifted to fibre connectivity, due to its ability to process greater volume of data at a faster rate, Pakistan also commissioned its first underwater fibre cable in 1986, and by the end of 1990s it was the primary source of internet connectivity. Pakistan envisioned to become a digital economy. But to achieve this, the country has to simplify access and digital connectivity reducing the coverage gap. There are 193 million mobile users in the country yet almost 50 percent don’t have a broadband connection. “The reasons for this (lagging behind in connectivity) range from cost to socio-econom-

ic factors; we need to tackle those systematically. Additionally, while we are approaching 90 million unique subscribers, some basic hurdles need to be removed for the remaining Pakistanis. Handset prices need to be curtailed, while the government continues to explore ways to both reduce the tax burden on imports and drive local production. The right incentives across the board will be required to achieve this,” wrote Tania Aidrus, in her foreword for GSMA’s publication, Pakistan: progressing towards a fully fledged digital economy. Therefore, it is extremely important to have a solid infrastructure that can support the growth of the internet user base but is also

robust enough to be operational throughout the year. Underwater submarine fibre cables are laid around the globe serving as the foundation of connectivity. Pakistan is a part of this extended network and is connected to the world through six submarine cables. Four of them are owned by PTCL (see graphic below) and two by Transworld.

Cost of Disruptions

onstant disruptions to the network can seriously halt the progress that a country makes on the digital front. As per a report by Deloitte published in 2016, The economic impact of disruptions to Internet connectivity, “In a low connectivity country, with a GDP per capita of $6,000, a population of 40 million people, and fixed broadband penetration of 5%, a temporary Internet shutdown could have an estimated GDP impact of $3 million per day of disruption.” The GDP per capita for Pakistan is well below the $6,000 (around $1200) yet the economic impact is still likely to be significant given the gradual shift to the digital economy.

Source: PTCL

Submarines, sharks and your internet connection

he process and infrastructure of submarine cables is not covered in the mainstream media as much. However, what gets a lot of eyeballs is when there are any faults in this complex

cable system. In the past three years, PTCL alone has faced 19 cable faults on its four underwater cables. There is a myth that the reason for outages are sharks, but that is far from true. There have been no reported incidents, in Pakistan, of shark bite causing internet outages over the past two decades. The main nemesis of submarine cables is human activity, specifically fishing and anchorage. The sea vessel anchors and fishing equipment can reach

Under the sea

efore diving deep (no pun intended) into the process, let’s get familiar with the components that enable this system to work. The overall network can be divided into six parts; Cable Landing Station, Cable Landing Point, Land Cable, Beach Manhole, Submarine Cable, Repeaters, Branching Units. The first component is the cable landing station where the cables are connected to the backhaul systems or in simple terms, the station forms a connecting point between countries’ internet infrastructure and the cable network. The cable landing point, as the name suggests, is the place where the submarine cable makes a landfall and after that it is connected to a land cable that extends to the aforementioned cable landing stations. For instance, one of Pakistan’s submarine cables that lands at the Karachi Seaview connects to the land cables at a point near the beach, identified by a small manhole. Two important components of the cable itself are branching units and repeaters. The branching units allow the cable to split and serve more than one destination. The repeaters are basically devices attached with the sea cable to amplify its signal. The power into the repeaters is supplied from the power station at the cable landing stations. For the cables to be deployed in the sea, a special cable laying vessel is used that unwinds the cable onto the seabed and buries it a few metres below the surface with the help of a shaft.

Source: Deloitte

Source: Seacom

the seabed and entangle with the cable laid down. When the anchor and fishing equipment is pulled back, it damages the cable in the process. Thus, the vulnerability of the cable increases near the beach as it is closer to human activity. The damage that can be done to these cables is of two types; shunt fault, and cable cuts. The shunt fault occurs when there is damage to the insulation of the cable. It causes a short circuit as power is being supplied to repeaters from the power station as mentioned earlier. However, a single shunt fault doesn’t affect the traffic flow as the power is reconfigured from other power stations. However, dual shunt faults at opposite ends of the cable will lead to a halt in data traffic. Cable cut on the other hand doesn’t only damage the upper insulation layers but also damages the inner fibre cable. This leads to data traffic outage on the affected cable. The point of shunt faults are identified by measuring the reduction in voltage and tracking the distance back to the power feeding station. While in case of a cable cut a laser is passed through the affected cable and the point where signal breaks is identified and measured back to the landing station. Once these faults are identified, a submarine cable solutions company is contracted to carry out the repair process. For instance, PTCL avails the services of E-marine PJSC, a subsidiary of Etisalat. The service provider then deploys the ship to the affected area, navigated through a dynamic positioning system, where the damaged cable is lifted to the ship deck with the help of a grapnel. Here a spare cable is used to replace the damaged part and a joint is placed to connect the spare cable to the main submarine cable. Once the repair work is completed, the cable is laid back onto the seabed. A one time repair process can cost upto $1 million and can take around three to four months. Therefore, incase of a fault, bandwidth of the cable is shifted to other available cables. Damages to submarine cables are a costly affair and impact productivity. Therefore, to avoid them, best routes are identified for laying cables where human activity is low. Further, dedicated corridors are also specified around which human activity is restricted to prevent damages to the cable system. Awareness programmes targeted towards fishermen and sea vessel operators also help in mitigating the chances of cable damage. However, completely eradicating the instances of submarine cable damage is not possible yet, and we may have to continue to bear with slow internet every now and then. n

Sketch map of submarine cable laying and burying

Source: Telegeography

TECHNOLOGY

By Ahtasam Ahmad

f bad network quality has been haunting you lately, then you should know that you are not alone. As the energy situation has deteriorated in the past few months, telecom operators have also faced the brunt of it. Telecom tower sites consume a considerable amount of energy, and power outages coupled with cost hikes have put the Cellular Mobile Operators (CMO) in a terrible fix.

TELECOM

Yet, power outages are not a new phenomenon and the telcos have been tackling this problem by arranging backup power supplies, primarily through generators. But, off late, they have decided to make a strategic choice by limiting the self generation of power and letting the sites go down in case of load shedding. The telcos are of the view that energy price hikes driven by rising cost of fuel has negatively impacted their profitability and the situation is becoming unsustainable. “Operating costs shoot up due to exorbitant generator fuel and maintenance costs.

More reliance on generators means more frequent refueling and more pilferage. For a low ARPU market like Pakistan, this is a matter of grave concern for all telecom operators,” said Salman Khalili, Head of Telecom Energy Solutions at Reon Energy. The tipping point of this matter was back in June when the telcos wrote to PTA, “In the absence of immediate reversal of adverse directives and elimination of electricity load shedding, the telecom operators would unfortunately be constrained to notify the Force Majeure situation under special circum-

stances.” However, it is unclear whether the concerns of the telcos are genuine or if this is just an attempt to blackmail the regulator into accepting their demand. The best way to explore this is by evaluating the financial statements of the Telecom operators and assessing the impact energy costs have on their business feasibility.

average 45 percent of overall service cost. When compared to the net revenues of Deodar, utility costs stand at an average of 38 percent over the given period. Further, compared to December 31, 2020, the fuel costs have almost doubled which means the costs of services would have risen disproportionately compared to the revenues.

Tower Sites and the Energy Problem

he share of tower sites in Pakistan is dominated by Jazz through its subsidiary Deodar, and the other three CMOs are on similar footing. As per an article by TowerXchange, a community for thought leaders in the global telecom tower industry, “Towercos in the country must offer a full tower+power service because Pakistan’s electricity grid is unstable, and outages can last eight or more hours.” “2022 has brought with it a significant increase in energy prices across the country, which is causing significant problems in terms of profitability for towercos and increasing costs for operators.” The article further added.

Source: TowerXchange

Deodar (Jazz) Financial Statements

his ultimately adds up to Jazz’s cost of services and reduces its profitability. For instance, Jazz paid PKR 28 billion to Deodar for site sharing in 2021 as per sources. This equates to around 14 percent of Jazz’s revenue from telecom business. The effects of energy cost hikes are further augmented by the fact that the company’s revenue growth has historically been slow.

However, this is an industry-wide phenomenon. If we take a look at Ufone’s financial statements for the year ended 31st December, 2021, Power and Fuel cost stood at around PKR 7.4 billion. (calculated by deducting PTCL’s standalone cost from Consolidated Power and Fuel cost of the group as the residual cost could only be Ufone’s given that the other subsidiary is a bank which surely does not electrocute its customers as a service). The amount is around 14 percent when compared to Ufone’s revenue 2021. Further, PTCL currently has 7823 connections telephonic exchanges across 19 regions that consumes around 16-17.0 Million Kwh of electricity per month which costs them approximately PKR 340 million. As per PTCL’s official communication to NEPRA back in March, the additional power costs have undermined the revenues generated by telephonic exchanges with the company closing approximately 10 exchanges every month. While the figures represent the bleak situation of the company a few months ago, the current fuel hikes are likely to deteriorate their condition further, given PTCL’s slow growth at the revenue front. However, one could argue that this is part of business and can happen to any industry. For instance, during the pandemic, there was a steep decline in the price of fuel leading to losses on inventory for Oil Marketing Companies. Yet, the Telcos are at a more vulnerable position given the slow growth in the topline over the years. The Average Revenue Per User (ARPU) is around $1 currently which is significantly less than the $9 figure of 15 years back when these companies started operations. But, the telcos are partly to blame for this situation. They have been late to innovate and realize that the conventional model is not as robust as it was a decade ago. The immediate remedy for this situation might come as a mobile tariff hike which the PTA indicated in its official communication earlier this month. However, the long term solution for this would be a strategic one given that the Telcos can’t control energy prices which are likely to increase further. A senior Telecom official while talking

The Financial Impact of Energy Costs

nergy costs are the single largest contributor to the cost of running tower sites. Below is an extract from Deodar’s financial statements representing cost of service data for 2020 & 2019. Over those two years the utility costs, consisting of fuel and electricity charges, account for an

Source: PACRA

to Profit suggested the following remedies to the industry and regulators to expand industry-wide revenues; bringing in more cellular users to mobile broadband net, reducing taxes on smartphones as its upfront cost is the biggest barrier for bottom of pyramid users to own smartphones, regulatory cover by PTA to encourage operators and micro credit providers to launch smartphone installment scheme. Further, the CMOs should focus on the 4G multiplay, meaning an operator shouldn’t just remain a pipeline but a destination as well for its customers. Users should spend more time on the network by using its digital apps thus, generating incremental revenue. (Read more about this in Profit’s article: The changing dynamics of the telecommunication market) While on the energy consumption front, long term investment in renewable sources like Solar seems as the obvious solution, “There is an increasing focus on solarising telco sites and adding additional battery backup. As electricity from the grid and international oil prices see an upward trend, and the price of solar panels plummets, the time is right to shift to solar energy.” Salman Khalili, Head of Telco, Reon Energy said in an interview with TowerXchange.

Source: Veon

Consolidated Figure

Standalone Figure

TELECOM

By Asad Ullah Kamran

n a recent turn of events, sources have told Profit that the government is considering deregulating the petroleum, oil and lubricant market. This comes at a particularly troubling time for the government, as it is facing record high inflation rates and fuel prices. Former prime minister Shahid Khaqan Abbasi, has advised the Petroleum Division to prepare a summary that would be presented to the Prime Minister Shehbaz Sharif. Sources also added that “once approved by the premier, the summary would be floated in the meeting of the Economic Coordination Committee (ECC) to seek its necessary approval”. In an interview given to Profit by Shahid Khaqan Abbasi in 2020, he categorically mentioned that “the cabinet had approved deregulation” during his tenure as the prime minister. However the market was not deregulated as the OMC’s and the Ministry was unprepared. He further went on to say that the market can be deregulated today since the cabinet has already approved it.

Regulation or deregulation ?

A 30

market that is regulated is one that is often subject to some supervision and regulation by governmental entities. The government may

decide who may enter the market and what prices they may charge. This is known as market regulation. Market players' freedom is restricted by regulation or given special advantages. Regulations cover a variety of topics, such as restrictions on how products and services can be marketed, the rights of consumers to request refunds or replacements, the requirements for product, workplace, food, and drug safety, the reduction of negative social and environmental effects, and the degree of control a particular participant is permitted to exercise over a market. The Oil and Gas Regulatory Authority (OGRA) was established by the Federal Government with the objective of fostering competition, defending the public interest, increasing investment in the midstream and downstream oil sectors, and managing sector pricing. The regulatory body OGRA is in charge of keeping an eye on the prices of oil and petroleum products. Fuel costs in the nation are set using the average price provided by Platts plus PSO's premium. Every two weeks, the oil industry's regulator, OGRA, calculates the weighted average cost of supply. The cost build-up for the marketing companies, which includes OMC margins, inland freight equalisation, dealer commissions, petroleum development levies, and other costs are then added on top of this average. OMCs can profit from the margin

granted to them during cost build-up or by looking for sources of supply that are less expensive than the weighted average cost determined by the regulator using information from PSO and Platts. Oil is an indispensable raw resource for vital economic activity and has unquestionable strategic significance for the nation. However, for an economy like ours that is dependent on oil, the state's tightly regulated oil prices have both long-term and shortterm negative effects. At the same time the government is responsible for ensuring that consumers aren't being exploited. The main argument that goes in favour of keeping the market regulated is the fact that a vast majority of the population falls below a certain income threshold. Coupling this with the fact that fuel has a very inelastic demand (demand is not particularly affected by higher prices), consumers would have to buy fuel regardless of its cost. We’ve figured out what regulation is, looking at the other side of the spectrum, deregulation is defined as the elimination of government involvement and control over the market in order to promote market functioning. For instance, the forces of supply and demand would have to be allowed to freely determine the price. Although the idea of deregulation may be a bold move going forward, it is not the first time the idea has been brought up.

Back in 2016 deregulation of the upstream and downstream industries was a very hot topic in light of shortages in the market. At the time, however, with just 12 or so Oil Marketing Companies (OMCs), deregulation appeared to be impossible owing to the risk of cartelisation and consumer abuse. As a pilot initiative the government did deregulate the High Octane Blending Component (HOBC), to see whether it was a feasible approach. HOBC is a relatively higher end product that is particularly consumed by people that have income to spare, making it an ideas test bed to see if deregulation can work, needless to say it had a lot of bugs as well. Again in 2020 with a huge shortage of petroleum products in Pakistan, talks regarding deregulation of the sector to address the sector's issues were initiated. However, despite the consideration no action was taken by the government. OMCs claimed that the petroleum division was responsible for the shortfall because it failed to manage supply and demand effectively through timely interventions. Whereas the ministry blamed OMCs as they were responsible for the shortages owing to their failure to have the necessary 21-day supply of inventories on hand. The shortage was further exacerbated as stockpiled petroleum products were being hoarded by some entities. The sector pleaded that the stock they had purchased at higher prices was causing them severe losses prompting hoarding. Which in effect is an effort to restrict the supply to jack up prices or pressurise the government. During the same period OGRA also alleged that OMC’s were taking advantage of the deregulated High Octane Blending Component (HOBC), by charging higher prices relative to its costs. This fuel is usually sold under a different name by each OMC i.e Shell V-Power, PSO Hi-Octane, etc . In a letter from OGRA to the managing director of Pakistan State Oil (PSO), it said that despite the deregulation of the HOBC pricing, the fuel was still being sold for more than what it was actually worth. Additionally, it stated that the HOBC pricing should be rapidly lowered to reflect its true cost in order to avoid cartelization being flagged by Pakistan's Competition Commission (CCP). These activities in the market by certain players do not particularly inspire confidence from the government to deregulate the market. Simultaneously if we take a look at the issues plaguing the sector the government regulations haven’t exactly been beneficial for the consumers or the companies in the sector either.

What would it mean for consumers ?

he line between keeping the market regulated or going for deregulation is very fine, the government has to consider a wide range of factors before making a decision on liberalisation of the oil market. If the government goes ahead with deregulation it would have a negative direct impact on the consumers. If we look in the near term, the costs of petroleum will rise right away post deregulation but will fall over time as new businesses enter the market and competition increases. To paint a more macro picture in this regard, the cost of transporting a tanker from a refinery in Karachi to a fuel station in Skardu would be significantly high. Whereas transporting fuel from a refinery to a fuel station within Karachi would be low. The cost of inland movement borne by a refinery for the transport of crude oil from the source to the refinery is known as the Inland Freight Equalization Margin (IEFM). Establishing and sustaining parity in fuel prices across the nation is the goal of this margin. The funds obtained from this margin are then used to establish a pool. In order to maintain uniform gasoline prices across the nation, the government utilises the funds from the pool to give indirect subsidies to Pakistanis. Deregulating the market would mean that there would be no support from the government in the form of Inland Freight Equalisation Margin (IFEM). Consequently the price of fuel would reflect the additional costs that were previously being covered by the government to keep the prices at the same level throughout Pakistan. Even if the government decides to move away from complete regulation, the tax charges on petroleum products can act as a moderator for the pro-market reform in favour of deregulatory measures. This would still provide the government with space to manage or manipulate pricing to a limited extent. Deregulation can be, at least in principle, a wise move by the government if done right and will provide businesses the chance to order and store petroleum goods at reasonable prices. Along with potentially lowering prices in some areas, it will increase the number of new jobs available to the populace by encouraging foreign and domestic investment. In opposition to deregulation in Pakistan, factors such as rising fuel prices, the hoarding of fuel, a loss of revenue for the government, as well as the political cost

for the government play a huge role. These factors can have grave implications towards deregulating the sector. Furthermore it must be noted that a very big fraction of the population does not live in urban centres, the density of petrol pumps in rural areas is well below that of cities. This effectively monopolises the fuel stations in remote areas due to the lack of competition, having this leverage in a deregulated market would allow the owners to charge exorbitant prices particularly from the poorer segment of the population. The biggest factor that gets in the way of deregulation is perhaps the political cost. As has been proven again and again our economy is highly politicised due to which the logical and most reasonable course of action is often forgotten in favour of a more populist one. According to some experts from the industry, the biggest barrier is the political cost that would have to be borne by the rank and file of each political party representing their respective regions.

Conclusion

he process of deregulation is a lengthy and very time consuming process. The interests of a wide range of stakeholders has to be taken into account, particularly that of the consumers and the industry players. Favouring one over the other can have a lot of blow back for the government. Given the current situation the world is heading towards regulating its energy sector particularly in Europe in line with the ever increasing costs. Countries like France and the United Kingdom have earmarked huge sums of money to provide relief to their people, Pakistan however cannot afford an adventure like that again. The government must build a very thorough data based case and understand all the factors that would go into making such a move. Particularly in the case of Pakistan a vast majority of the population cannot afford expensive fuels, particularly in the rural areas. In the case of diesel which is a staple for industrial, agricultural and other economic activities, government regulation might be necessary to keep the economy and inflation on an even keel. If we were to summarise it all up, there are both pros and cons of regulation as well as deregulation. Emphasis should be placed on the execution of either, right now regulation through OGRA or the Ministry of Energy cannot be stated as ideal, at the same time the activities of players in the industry do not inspire confidence either. Monitoring along with swift legal actions can potentially be a cure to the ailing sector. n

ENERGY

By Ahtasam Ahmad & Ariba Shahid

he SBP has issued final instructions on IFRS-9 for “ensuring smooth and consistent implementation of the Standard in the banking industry, with revised implementation time-

lines”. “For banks having asset size of PKR 500 billion or above, as per their Annual Financial Statements, as of December 31, 2021, and for all the Development Finance Intuitions (DFIs), SBP has set the revised implementation date as January 1, 2023,” said the circular. The SBP added that for all other banks and Microfinance Banks (MFBs), SBP has revised the implementation date of IFRS 9 to January 1, 2024. Implementing the aforementioned accounting standard would negatively affect the profitability of financial institutions due to an upward revision in loan default provisioning. Subsequently, the equity reserves on the balance sheet would also be impacted bringing down the balance sheet footing. Earlier, for the implementation of IFRS-

BANKING

9 by banks, SBP had set a deadline of January 1, 2022, which has now been revised at the request of banks that are facing challenges in the implementation of the new standard. The SBP says it has been consulting with the banking industry since early 2018 for the adoption of IFRS 9 in Pakistan. As per a senior banking source, IAS 39 was never fully implemented as the SBP already had a straightforward method to allocate provisions. Some local banks with international operations and foreign banks operating in Pakistan were fully compliant. Laziness on part of the banks is primarily why banks did not implement IAS 39 or IFRS yet. The source believes that this change in the accounting standards could leave roughly Rupees 40-50 billion impact on banks, although this is a very rough estimate.

What is IFRS9 and what does it mean?

FRS 9 replaces IAS 39, in laying out recognition and measurement criteria of financial instruments. Financial Instruments can be cat-

egorized into two broad categories; Financial Assets and Financial Liabilities. The financial assets consist of primarily two instruments, Equity-based or Debt-based e.g. Shares of a company and an investment bond. Financial liabilities on the other hand is an obligations that would be settled through payment of a financial asset. If a company owes its creditors money, basically, that’s a financial liability. The global regulators and accounting standards board were of the opinion that IAS 39 was inconsistent with the way entities manage their businesses and risks, and deferred the recognition of credit losses on loans and receivables until too late in the credit cycle. Following the global financial crisis, addressing this became a priority. IFRS 9 is a Global Standard issued by the International Accounting Standards Board (IASB). The Standard lays out the accounting treatment of classification, measurement of financial instruments, and impairment of financial assets. IFRS describes it as a standard that “requires an entity to recognize a financial asset or a financial liability in its statement of financial position when it becomes a party to the contractual provisions of the instrument.

Treatment of Financial Assets under IFRS-9 At initial recognition, an entity measures a financial asset or a financial liability at its fair value plus or minus, in the case of a financial asset or a financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or the financial liability.” The SBP states that with the implementation of IFRS 9, the existing provisioning requirement, following incurred loss approach, will be replaced by Expected Credit Loss Pro-

regardless that the asset will be fully collectible. Banks will also need significantly more new disclosures. Some banks may need new systems and processes to collect the necessary data. Moreover, IFRS9 also adds to the hedging requirements of banks. The key change brought by IFRS 9 is in relation to the accounting provisions for loan losses which are required to be made using the expected loss model under IFRS 9. Currently, loan loss provisions are

visions that will be based on expected losses on performing as well as non-performing portfolios. “This approach is forward-looking and effectively measures the loan loss provisions based on credit risk models,” reads the circular.

made when there is objective evidence of impairment (i.e. incurred loss model). This is a fundamental shift in provisioning. The ECL model applies to debt instruments (such as bank deposits, loans, debt securities, and trade receivables) recorded at amortized cost or at fair value through other comprehensive income, plus lease receivables and contract assets. Loan commitments and financial guarantee contracts that are not measured at fair value through profit or loss are also included in the scope of the new ECL model.

Impact on Financial Institutions

B 34

anks will also have to provide for possible future credit losses in the very first reporting period a loan goes on the books. This will be done

The Banking sector as well as other financial institutions charge their P&L with a non-cash expense under the heading of “provisioning for non-performing loans”. Currently, the following criteria is used to calculate the amount of loan provisioning in commercial banks. However, the change in requirement would mean that banks would be providing for these loans from day one and that is likely to increase the amount of provisioning, resulting in lower profits. An example of this would be in the case of loss provisioning. Currently, most banks are able to recover loans before it falls into the “Loss” category (refer to the table above). However, under the new model, the day installment is missed, 100% provisioning would be required. Further, the change would affect the capital adequacy of financial institutions. Banks, as per SBP regulations, are required to maintain a minimum capital adequacy ratio of 10%. The ratio is calculated by dividing the risk-weighted assets by the sum of tier-1 & tier-2 capital. However, to mitigate the effect of IFRS 9 on capital adequacy, the SBP has provided a transitional arrangement. “The transitional arrangement must adjust CET1 capital (Tier-1). Where there is a reduction in CET1 capital due to new provisions, net of tax effect, upon adoption of an ECL accounting model, the decline in CET1 capital (the “transitional adjustment amount”) must be partially included (i.e. added back) to CET1 capital over the “transition period” of five years.” IFRS 9 financial instruments application and instructions by SBP. Additionally, the Banks and other financial institutions lack the required data for credit scoring of each individual customer. Blue Chip companies like Engro, Nestle, etc. are considered low risk by the banks. However, large, privately-owned companies like many in the textile industry are considered medium risk while lending to the general public is considered high risk. Therefore, it would be a laborious process to calculate provisioning for each borrower, especially those in the medium and high-risk category given the lack of detailed financial history available. “The calculation of the ECL is a complex one including input of various economic indicators and manually performing those tasks will not be possible for the client base of the banking sector, therefore the sector will have to invest in new systems and establish new processes in line with the new standard.” Muhammad Havaris Arshad, Senior Chartered Accountant, and Manager PwC Pakistan. n

BANKING