|Shahid Sattar and Eman Ahmed
Efforts towards austerity and import bans have had a unique impact on Pakistan’s business environment, causing an unprecedented surge in entrepreneurship due to the emergence of market gaps and shortages. There have been revisions in government spending, as well as a strategic decision taken early on to curb imports of non-essential items.
The motivation for this policy was a need to manage the foreign currency balance of trade, but it opportunely steered double-digit growth in the number of new firms during the last month, with the government’s reforms encouraging entrepreneurship in the country.
According to the Securities and Exchange Commission of Pakistan, “the corporate registrar incorporated 2,257 new companies and startups in February, up around 40 per cent year-on-year.” The total number of registered firms therefore rose to 137,054.
This growth was attributed to various measures such as “the introduction of a simplified combined process for name reservation and incorporation, reduction of fee, facility of online payment, issuance of the digital certificate of registration and assistance provided for incorporation by the newly established business centre,” the SECP said in a statement.
Pakistan’s commendable wins
In 2020, three Pakistani startups won the Shell LiveWIRE Top Ten Innovators Awards, each in three different categories. The global competition rewards businesses that demonstrate excellence in innovation featured startups from all around the world.
AquaAgro, a startup that has invented a system that can help the farmers grow their crop efficiently and save more than 50 per cent of the water used in traditional farming, won first prize in the Environment & Circular Economy category.
EDVON, the second winner, worked to develop STEAM curricula and DIY robotics kits for K-12 students. Their latest Corona-fighting robot improves sanitation and compliance in healthcare settings.
The third, Enent, won the runner-up prize for developing clean-tech electronics that can help to reduce Pakistan’s energy wastage. The startup claims it can reduce carbon dioxide emissions by 18,000 tons every year while having a substantial impact on grid efficiency.
Reasons for booming entrepreneurship
Pakistan improved its ranking by 28 points from 136 to 108 in the World Bank’s Ease of Doing Business Index 2020 for the second consecutive year. The most notable improvement of 58 points was made in the ‘starting a business’ indicator, placing Pakistan at the second position in South Asia in terms of ease of starting a business.
Furthermore, the lockdown sped up sectors such as e-grocery, e-food delivery, fintech and edtech. The restriction on non-essential items has allowed a variety of new businesses to come forward and fulfil resultant market gaps to satisfy demand.
New enterprises that arose have the potential to grow into powerful enterprises. International funds that have invested in similar companies in other markets are eager to invest in Pakistan, as they are familiar with the model which Pakistan has just begun to explore. This potential source of funding needs to be tapped and formalized by the government in the shortest time possible.
It is evident that investment in tech is a rewarding process that can lead to development and prosperity for Pakistan. But what can we do to further drive innovation and sustain the momentum that allows new businesses to flourish?
A major part of entrepreneurship involves constantly identifying market gaps – of which there is no shortage as Pakistan lags behind the world in the arena of technology. This gives small startups and aspiring entrepreneurs an array of opportunities to develop new products.
Read more: Pakistan: A sleeping technology giant
The promising IT sector
Pakistan’s technology exports have the potential to reach $10 billion from the present $1.2 billion in the next 10 years, as 20,000 graduates enter the technology sector each year and the workforce already possesses an abundance of IT engineers.
A recent report on Pakistan’s IT sector published by Karachi-based securities brokerage firm Khadim Ali Shah Bukhari Securities (KASB) argues that the technology sector has the most promising outlook in Pakistan.
The trends point towards a healthy contribution of IT to the overall exports in the future, alongside a significant increase in the representation of technology stocks in the public market. Pakistan’s IT exports, estimated at around $1.2 billion in 2019, grew by 46pc in Q1FY21.
According to IT Minister Amin Ul Haque, one of the key challenges of the new technology-based startups is access to early-stage and growth-stage capital. Over the last two years, the State Bank of Pakistan (SBP) has taken quite a few initiatives to ease its foreign exchange regime to boost exports and attract foreign investments — direct and portfolio — as well as facilitate non-resident Pakistanis to bring in and take out their savings without any hassles.
The latest in this series of actions taken by the central bank are revisions in its foreign exchange Manual to facilitate equity investment from abroad by startups, fintech and exporters as notified earlier last month.
Cotton crisis: a major concern
However, Pakistan’s looming cotton crisis is a major cause for concern. The shortage of cotton and cotton yarn will reverse the wheel of industrial growth and could lead to massive unemployment if corrective action is not taken. Some are terming the cotton crisis “a bigger threat than Covid-19.”
The influx of raw cotton and yarn from India over the last few years may have been one of the factors for the sharp drop in the production of raw cotton and the closure of the spinning capacity in Pakistan.
Yarn of Indian origin was being imported with abandon over the last few years. The influx of yarn into the country has reduced the capacity of the spinning industry sharply, and industries worth millions of dollars were laid to waste.
Pakistan economy cannot grow without moving into value-addition, particularly in the highly productive textile sector, where the predominant focus is on cotton. By prioritizing short-staple fibre raw cotton, the industry is operating in a shrinking market while neglecting the rapidly expanding market for man-made fibre (MMF).
Complications for Pakistan
The MMF tariff regime further complicates Pakistan’s entry into this market. In addition, there are irrational duty protections on obsolete plants – a 7% customs duty on the import of polyester staple fibre. This racks up the total import duties, which subsequently fall in the range of 20% including antidumping duty. Despite the antidumping duty on cheap Chinese materials having expired, the duty has been extended for a further year.
More than 60% of the world textile trade is in MMF materials, the demand for which has grown exponentially owing to the convenience it affords. There is a wide array of opportunities in the active-wear and athleisure markets for startups to tap into; an initiative for which they must be encouraged with a package of special incentives from the government.
Furthermore, Pakistan’s average labour productivity level (output/input) is not up to par. The country’s labour productivity not only lags behind its neighbours but also parallels many African nations.
The recent rise in creativity, production, employment and growth has been a beacon of hope, but the structural issues of Pakistan’s workforce and cotton sector need to be sustainably resolved as soon as possible so as not to offset the recent positive developments being made in entrepreneurship and the private sector.
Sustaining the upsurge in entrepreneurship
Moving forward, businesses must maximize their efficiency by harnessing technology to streamline operations and automate manual processes. They must enable productivity advantages by allowing remote work, as has been the norm since Covid-19 changed the business landscape.
Businesses must also gain an agility advantage: enabling data-driven insights, faster decision-making, and cultural flexibility to adapt and change course. These are some of the thought pathways for technical transformation highlighted in Adapting Pakistan to Post COVID-19 Technology Gains by Amer Zafar Durrani, President of Energia.
The central role of digital technology has pushed the boundaries of firms and global value chains, leading to more efficient and relevant business models that can take local start-ups to a global scale. Pakistan’s recent upsurge in entrepreneurship must be sustained by keeping up with these models.
Read more: Why Pakistan needs a Technology Road Map?
Mr Shahid Sattar, now Executive Director & Secretary General of All Pakistan Textile Mills
Association (APTMA), has previously served as Member Planning Commission of Pakistan and an advisor to the Ministry of Finance, Ministry of Petroleum, Ministry of Water & Power. Eman Ahmed is a Research Analyst at APTMA. The views expressed by the writers do not necessarily represent Global Village Space’s editorial policy.