Bringing Pakistan’s Technology Sector to the Forefront

This blog post is based on two policy talks held at CDPR entitled, “Bringing Pakistan’s Tech Sector to the Forefront” and “Realizing Pakistan’s IT Export Potential“. 

Pakistan’s tech industry is shaping up. The country produces +20,000 IT graduates each year, it offers a domestic market of over 200 million, and has churned over 700 tech start-ups since 2010 of which close to 70% are functional even today. The industry has the ability to provide a fundamental boost to the country’s economy, especially in this time of fiscal restraint.

Several college graduates and young entrepreneurs are dreaming of the next billion-dollar idea. This conception is not far-fetched. A group of young Estonians developed Skype in 2003 which was eventually sold to Microsoft for $8.5 billion in an all cash deal! In fact, all tech giants across the world today have had humble beginnings. WhatApp was sold to FaceBook for 19 billion dollars, almost three times Pakistan’s defence budget. Such is the scope and potential of this sector.

On the flip side, statistics say nine out of ten startups are bound to fail. Those that succeed do so because of the right product fit. They have ideas that tap into a real market need and create innovative products that simplify lives. How do they make the right product? If their product is removed from the market, it will be sorely missed. This is when they have hit the jackpot.

Pakistan’s success story so far

With latest technology and access to faster internet, the tech industry is producing services and products, across sectors, that are increasingly more dynamic and revolutionary. The industry’s access to seed, private equity and venture capital funds is also improving.

Patari, an online streaming application and a household name for music lovers, made headlines when it secured $200k in seed money in 2017. In 2015, Eatoye, an online food delivery service, was acquired by one of the world’s largest food portals, FoodPanda and continues to expand across Pakistan. More recently, Airlift nabbed $12 million in Pakistan’s largest Series A funding – a company’s first significant round of venture capital financing – ever for a startup in all of South Asia. It is a ride-hailing startup which connects passengers with buses on a fixed-rate, operating in Pakistan’s largest cities.

These prominent app-based startups and many more cater to the domestic market, are part of the local economy and form an important element of the tech eco-system. There is another major component of this sector which caters to the international market (through software development and business process outsourcing) and is deeply embedded into the global value chain. However, most Pakistani firms provide low value products and services. Despite this, IT exports reached the billion-dollar mark in 2017-18, with software exports comprising $700 million. In fact, IT experts place the total exports at $2.5 billion (incorporating an estimated $1.2 billion earned by freelancers). This is however still much lower than India’s exports at approximately $125 billion for the same year.

Rising exports and domestic success stories show the immense potential of this sector. But two fundamental constraints are limiting this potential – restricted supply of skilled labor and lack of a supportive ecosystem.

Skilled workforce

The tech industry is highly skill and knowledge intensive. It may be able to withstand disruptive energy supply, but it will not flourish without an adequate supply of skilled labor.

Official statistics confirm that at least 10,000 IT graduates enter Pakistan’s workforce each year. At the same time Pakistan also ranks much better in cost than most lower-middle-income countries group. The average annual cost of a software engineer in Pakistan is one fifth of the cost in USA and Europe[1]. However, of the total graduates, just under a thousand graduates are products of Tier 1 universities and of these around half meet the skills requirement for specialized input needed by the industry.

The tech industry relies on skills broadly of two kinds – technical/ specialized skills to develop and design IT products and skills to develop innovative business models and marketing strategies. One without the other will continue to constrain Pakistan’s access to a market for high value products.

The academic path to becoming a tech professional is not well defined. Product development relies on a workforce with more refined skill set, based on knowledge about product design, technology and marketing. Pakistan is not able to develop a niche in gaming (which is 80% of the revenue of Google and Apple Store) because its workforce lacks knowledge about game development and design.

At the same time, it needs creative minds that are able to come up with innovative solutions to problems put forward by international clients. Basic software development only requires writing codes towards an end-goal already defined by the client and therefore does not enable/require the workforce to become creative.

Since the required skills do not exist amongst Pakistani graduates’ firms, those wishing to capture the high-end market – have to also invest in skills development. In addition to a product risk (i.e. whether they have the right product fit in the market) the companies also end up facing an execution risk (due to inadequate skills).

The country also lacks creativity in developing innovative business models, regardless of how technically sound a product is. Developing scalable business models is a first crucial step towards attracting large sums of money or venture capital funds.

Developing good business models and creative products is only possible if the firms are supported by a strong educational/ training system. At the moment very few universities focus on subjects like entrepreneurship, computer design or branding which can help entrepreneurs when they start on their own and enable them to add value to their products. Pakistan also lacks a strong cohort of tier 2 universities.

Overall, the multifaceted nature of producing IT products/services requires a multi-disciplinary education. Currently, Pakistan’s education system does not nurture this kind of thought process or encourage innovation.

Having the right ecosystem

The country hasn’t yet created an ecosystem where an entrepreneur is born, raised, and educated in Pakistan and will go onto register his or her company in Pakistan and make it big. Young Pakistani entrepreneurs struggle to develop their ideas. At the same time, they are unaware of how to operate in the local market and how to attract foreign investors.

Pakistan has a thriving freelance industry. Globally it is ranked 4th in terms of number of freelancers engaged in software development and technology[2].

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Does this really demonstrate success for this sector, or does it indicate the industry’s failure to absorb the large number of graduates and provide them with gainful employment? And unless this talent becomes part of the formal economy, its growth will always remain constrained.

Access to funding is a significant bottleneck. There is only $0.06 per capita of venture capital money in Pakistan per year, while Bangladesh has $0.07, Nigeria $0.18 and India $3.72. In 2017, only nine Pakistani startups received venture capital funding compared to 34 in Nigeria, 38 in the UAE and approximately 790 in India. Overall, Pakistan’s tech startups raised under $30 million in 2018 compared to countries such as Indonesia (excluding unicorns[1]) raised over $274 million in 2018.

The issue is two-fold: regulations make it cumbersome to set up a fund inside Pakistan; regulations make it hard to get money out of the country.

Global venture capital investors find the process of investing, having shares issued and registered riddled with red tape. Approvals are required from various government departments such as the Securities and Exchange Commission of Pakistan, Competition Commission of Pakistan and State Bank. This would put off anyone who has the option to invest elsewhere in the world. Due to over-regulation investment funds choose to operate from outside of Pakistan.

Foreign payments are heavily regulated and offered at unfavorable exchange rates. Pakistani startups prefer to route foreign funding using alternative means (such as register the company abroad) or keep the funds overseas.

Lack of recognized international payment gateways especially impacts smaller businesses as larger players rely on banking channels for their transactions. Absence of recognized payment gateways such as PayPal also make it difficult for new clients to trust young entrepreneurs, whether individuals or companies.

What more can be done?

Pakistan may have been slow to catch on but there is now wide recognition of the significance of this sector for the country’s economy. The government is carrying out initiatives and rolling out policies that are highly supportive of the ICT space in Pakistan. It has proposed a regulatory structure, though yet to be implemented, that intends to boost both the outward-looking and domestic ICT industry by providing an enabling environment.

The new government has established a 17-member task force on IT and telecommunications comprising members of the tech sector to advise policy changes and develop strategic plans to strengthen the technology ecosystem of Pakistan. In terms of execution progress remains slow.

Pakistan also approved its first ever Digital Pakistan Policy in 2018 to transform IT and other sectors of the economy. Under the landmark policy, the country aims to double its overall IT exports by 2020. However, this policy is not accompanied by a time-bound plan.

Pakistan has now launched a Digital Pakistan initiative, aimed at giving a comprehensive cover to government’s multidimensional objectives, such as job creation, ending corruption and supporting and promoting the economy. Underpinning this campaign are the five core pillars of the strategy: access & connectivity, digital infrastructure, e-government, digital skills, training & innovation and entrepreneurship.

Start-up incubators and accelerators are also springing across Pakistan run by both the public and private sector to support development of spinoffs and improve access to financial and technical resources. At least 20 incubators have been established in collaboration with Plan9 – a PITB run technology incubator. So far, it has created 1400 jobs and made an investment worth $5.8 million, with over 180 startups now graduated.

Initiatives have also been taken to ease tax regulations to encourage investment in this sector and make entry simpler for startups. The government also approved licenses for Pakistan’s first Private Equity and Venture Capitals funds. There has also been an agreement with South Korea to create a technology park in Islamabad.

However, to fully realize the potential of this sector, Pakistan needs to remove the core obstacles that limit growth. Despite all the positive reform efforts, an overarching IT policy is still missing. Convergence to a central policy document, will help avoid overlap between the various policy actors and help assign clear responsibility to each player.

Secondly, government should open up procurement for the private sector to encourage the tech industry to build their portfolio, get exposure to large scale projects and pitch for similar projects in the foreign market, apart from creating more jobs. Some big successes can be seeded on their back, making international venture capital sit up and take notice.

Improving the labor supply is a long-term goal. However, some quick fixes can be implemented to partially relieve this market constraint. Pakistan can create innovation clusters where industries and universities can come together to form specialized research hubs. Pakistan also needs to improve its learning by doing culture as most graduates take up to a year or more to fit into the industry. Finally, the higher education commission needs to take some serious decisions about the role it can play in promoting a culture of innovation, creativity and entrepreneurship.

Pointing out that Pakistan needs to advance on all these dimensions is neither news nor helpful development advice unless it is accompanied by a time-bound action-oriented plan that delineates responsibilities. The Digital Policy recently announced must be supplemented with a plan of action, with short to medium to long term plans on how the core set of objectives can be achieved with assignment of responsibilities across various stakeholders.

 

Zara Salman is the Senior Research Associate at the Consortium for Development Policy Research (CDPR) and Hina Shaikh is a Country Economist at the International Growth Centre (IGC) in Pakistan. 

 

[1] A unicorn is a term used in the venture capital industry to describe a privately held startup company with a value of over $1 billion.

[2] To put it briefly, incubators provide a fully equipped space for entrepreneurs to nourish and execute their start-up and provide mentoring and networking sessions. Whereas in an accelerator, the start-up is given a specific amount of time and a small investment to make it work.

[3] A technology incubator (named after the first free-share operating software by Bell Labs) was launched in 2012.

Moving Beyond the Blame Game: Addressing Local Sources of Air Pollution

For the past several months, in Lahore and cities nearby, climate anxiety, or distress caused by environmental change, is at its highest. This is due to the pervasive health and environmental emergency brought on by dangerously high levels of toxicity in the air that have crossed all critical thresholds.

Pakistan is ranked 169th on global environmental performance and 7th on the global climate risk index. At least 135,000 people die annually in Pakistan due to health complications arising from air pollution and this is likely to increase. Following advocacy efforts by the international human rights watchdog, Amnesty International, and the civil society to raise awareness of the scale and effect of this crisis, the government is now at last beginning to respond.

The smog crisis not new. It has been several years since the air quality has visibly worsened especially in the months between October to January. Despite the hazardous conditions, the government’s response has been slow. It has been the civil society that has taken the lead in informing citizens about the sources and impact of polluted air. The government’s initial stance was to place blame on neighbouring India. While smog travels to Pakistan when post-harvest crop stubble is burnt in Indian Punjab exacerbating the issue, it is not solely responsible for Punjab’s air pollution. In fact, Pakistan’s Punjab follows the same agricultural protocol. Furthermore, it is important to clarify that the air quality problem has been erroneously dubbed as the Lahore smog – it is a regional environmental failure extending from Peshawar to Dhaka.

The Consortium for Development Policy Research brought together a panel of experts to discuss this issue, its cause, the ensuing health emergency and policy responses. The year 2019 saw for the first time, a surge in intellectually informed discussions across the most afflicted cities of the country, drawing upon evidence from research done by the World Bank, the Food and Agriculture Organisation (FAO) and the air quality data being provided by Air Visual, a citizen-led air monitoring application operating in several countries. Availability of such foundational research on what air pollution is, what it does and how it is caused has enabled a vast range of stakeholders to join hands with a consensus on the steps to be taken collectively, going forward.

Currently, the Government of Punjab has four high-quality air monitors operating across Lahore district – the Met Station on Jail Road, Gulberg, Township and Wagah Town. There are also monitors installed (one each) in Gujranwala, Faisalabad and Multan. But these are too few to provide a reliable picture of the air quality both within cities and across the province. According to monitors in Lahore, the worst air is found at Wagah Town situated close to the Indian border, characterized by unpaved roads and a hub for the steel industry. The Environment Protection Department (EPD) in Punjab recognizes that the steel industry does not have mandatory pollution control equipment, such as dry scrubbers, installed, to remove the tiniest and most dangerous particulate matter from their emissions. Cross-border sources of emissions and dust worsen the air quality around this area. The cost of purchasing pollution control equipment is prohibitively high, restricting its use. Government support is thus needed in installing pollution control equipment at factories.

However, the most fundamental cause of air pollution in Pakistan remains the poisonous fumes that emanate from the use of extremely poor-quality fuel in the transport, energy and industrial sectors of the country – at least 80 percent of the critical levels of year-round air pollution can be attributed to these sectors. So far, Pakistan has been importing adulterated, low quality fuel consisting of high Sulphur content in coal and diesel. It uses Euro-2 diesel, which contains 500 parts per million (ppm) of Sulphur, releasing high levels of carbon monoxide (CO), as well as the life-threatening PM 2.5 pollutant. CO is primarily an outcome of incomplete combustion, due to substandard fossil fuel engines.

The recently announced government-sanctioned vehicular emissions checks for public sector vehicles is a necessary step but insufficient without an outright ban on the import and utilization of bad fuel. Mandating the use of only high-quality fuel is a first critical step in addressing this issue. The government is now setting the policy framework to take this step.

Moreover, EPD has only been able to convert 10 of the 157 brick kilns into Zig Zag-technology kilns, which operate at elevated productivity levels, resultantly emitting much less fumes. The remaining traditional brick kilns continue to operate in environmentally damaging ways, even using plastic and rubber as fuel.

However, the government’s policy of taking punitive action against the agricultural, industrial, energy, and transport sectors for emitting poisonous gases and particulate matter is perceived by many experts as unfair. The stance is rooted in an outdated approach towards regulation called control and command. The idea of imposing fines and bans on individuals for not conducting their livelihoods in greener ways is unjust when the state has not provided alternate choices. Instead of incentivizing individuals to switch to cleaner energy and technology, command and control environmental laws seem to hamper economic development. This approach has now become obsolete in most of the developed world.

An alternative and more effective approach can be the use of quantity-based environmental regulations such as a cap and trade system. Such a system would allow polluting industries to negotiate amongst each other the extent to which each will pollute given their emissions-reducing costs in order to remain within the combined upper limit of emissions permitted by the government. Another option can be the use of environmental regulation that is information-based, entailing naming and shaming the worst polluters by publicizing this data on public platforms. This could eventually create competition among firms to cut down emissions. The success of such strategies is reliant on easy access to and objective utilization of existing data and on-going research, as well as provision of real-time, curated data on multiple aspects related to air pollution. For such regulations to effectively work, this information has to feed into the national discourse.

The protocol set by the Clean Air Act of US establishes mechanisms to utilize data for devising evidence-informed laws to keep air pollution levels within globally accepted thresholds. This would entail that Pakistan, currently factoring in only 6 pollutants to measure air quality, include all 9 globally identified pollutants to effectively determine healthy air. As a next step, the legitimacy of the real-time and forecast data provided by the Air Visual app showing the air quality index of cities across Pakistan should be officially acknowledged as an additional resource, apart from the government-generated data available through the EPD. Though not always accurate, the Air Visual data can provide a strong base for awareness and used as a policy tool to create democratic consensus for providing a regulatory framework that ensures everyone’s right to breathe clean air and their right to information.

The official stance on measuring air quality is to use a rolling average of the daily air quality rather than measuring it at one point in time. The rolling average, provided by government monitors, is calculated by allowing pollution levels at different times of the day to be diffused with air that is away from an emission’s source, thereby giving a more realistic depiction of air quality in an area. Though the science is sound, this point becomes moot due to the insufficient number of high-quality monitors installed across the province.

The Finance Minister in his additional role as Chairperson of the Smog Monitoring Committee stated that the government has recently acquired a loan of $273 million to systematically address all environmental concerns in Pakistan. Taking stock of the data pointing at poor fuel quality as the main culprit for the heavily polluted air across Pakistan, the incumbent government has formulated an intensive strategy. There will be an immediate leap from the currently imported Euro 2 quality fuel to the import of Euro 4 and by the end of 2020, only Euro 5 fuel will be imported, which contains around 50 or less ppm of Sulphur content as opposed to 500 ppm – this will help decrease air pollution by up to 90 percent. Further, domestic oil refineries will be forced to shut down unless they upgrade their oil quality within three years. Moreover, a more ambitious intention is to incentivize the introduction of electric or hybrid vehicles for private and public transport in 2020 with a special emphasis on fueling buses with CNG, and finally, technology to burn crop stubble in steel furnaces will be imported to minimize open fires. Alarmingly, the oil industry has been persistently resisting government orders to reduce manganese content in its fuel – an extremely harmful additive for human health – even after a complete ban on adulterating fuel with this substance was levied in May 2019.

Cognizant of the fact that Lahore has lost 70 percent of its green belts in the past decade, the government is set to make an overarching move by building an urban forest in Lahore spanning 60 thousand canals.

All these steps are crucial for developing climate change resilience in Punjab and countering the ill-effects (including the worsening air quality) of fast paced urbanization.

It is now a waiting game to see whether these interventions are carried out successfully or not and how fast improvement will begin to take root in terms of balancing the country’s health, environmental and economic interests.

Sharmin Arif is the Communications Associate at the Consortium for Development Policy Research.

BISP Scorecard Helps Ensure Fair Selection of Poor Beneficiaries

This policy brief is based on a study conducted by the researchers through Oxford University and Lahore School of Economics, and funded by the British Academy and Lahore School of Economics. The study is entitled “The Downside of Discretion” and is available at sites.google.com/site/kvyborny.

Pakistan’s Benazir Income Support Programme is one of the world’s largest public assistance programs, issuing a regular Unconditional Cash Transfer to 7 million recipient households across the country. When BISP was first initiated, parliamentarians were asked to identify and nominate poor households for the program. Then, the Government of Pakistan worked with advisors in aid donor agencies to develop and implement a Poverty Scorecard (Proxy Means Test) to select the poorest recipients, using a simple formula based on their assets.

This policy brief summarizes the findings of a research study on the effects of this reform to use the Poverty Scorecard. The study looks at survey data from thousands of households, and compares how BISP was distributed as the Poverty Scorecard reform was rolled out. It finds that the reform that implemented the Poverty Scorecard:

  • Improved targeting by reducing favoritism for politically connected households. Before the reform, households from the home villages of winning politicians were two to four times (200-400%) more likely to receive the transfer than those in rival politicians’ villages. After the reform, there is a large and significant reduction in favoritism for the best-connected group – the politician’s own caste/clan in his home village. These households no longer receive any advantage in getting the BISP after the reform. Favoritism was reduced across parties and for powerful senior politicians as well as junior politicians.
  • Improved targeting by reducing BISP transfers to wealthier households, such as those who have finished (pakka)houses or who are highly educated.
  • Increased welfare by 15% by targeting poorer households who benefited more from the funds, even after accounting for the administrative costs of the Poverty Scorecard survey (National Socio-Economic Registry)
  • Improved public approval of social protection programs by 40%.

Before BISP, many governments in Pakistan each introduced a new transfer program, in part in response to favoritism in previous programs. This led to inconsistent coverage, making social protection ineffective as a safety net. BISP was the first social protection program in Pakistan to adopt a completely objective, rule-based system for selecting recipients.

The study shows that the investment in the Poverty Scorecard / National Socio-Economic Registry and the commitment to an objective targeting system has paid off by making BISP pro-poor and resistant to political favoritism. The findings suggest that the government should build on BISP’s success by expanding the use of the NSER for identifying beneficiaries across programs through the Ehsaas initiative, and make this system accessible to provincial governments and other development partners to expand the benefits of this investment.

 

Kate Vyborny is Associate Director, DevLab and Research Associate, Department of Economics, Duke University; Visiting Fellow, Lahore School of Economics.

Muhammad Haseeb is a Ph.D. candidate at the University of Warwick and former Research Fellow, Lahore School of Economics.

Pakistan’s Macroeconomic Distress

“In the last 60 years Pakistan’s economy has crashed 13 times and every time it crashes, it requires a bailout from the International Monetary Fund,” remarks Professor Atif Mian during one of his recent talks at Institute of South Asia Studies at UC Berkeley[1]. The given statement outlines a grim picture on the state of Pakistan’s economy, one that is not ordinary and in dire need of structural reforms. Professor Mian has identified low investment rates, weak balance of payment, and fiscal and liquidity problems as four problem areas that demand attention in order to understand the economic setback that Pakistan faces today.

12121212121The macroeconomic ramifications of past governments and their policies and actions over the decades is well reflected in the economic indicators of 2019 as well.

According to the quarterly report [2] published by State Bank of Pakistan, Pakistan’s fiscal deficit deteriorated from July-March 2019 as compared to FY 2018. The CPI inflation averaged at 6.8 and real GDP at 3.3. These economic indicators showcase the structural deficiencies and its vulnerabilities to the build-up of external and internal deficits Pakistan face today. (Reference Table 1.1)

The country’s import bill reduced as a result of import compression in FY 2019 introduced by the current government to stabilise the economy. Nonetheless, improvement in trade deficit coupled with healthy growth in workers’ remittances resulted in reduction of current account deficit from US$ 13.6 billion in Jul-Mar FY 18 to US$ 10.3 billion in Jul-Mar FY 19.

Interest rate’s hike and exchange rate’s depreciation emphasised the rigidness of current expenditures where revenue mobilisation remained weak due to stagnant tax revenues and steep fall in non-tax revenues only resulted in slowdown of economic activity.

With the stabilisation measures in place, the given economic indicators emphasise that current measures need to be reinforced with deep rooted structural reforms. Reforms in fiscal sector such as broadening of tax base, reduction in untargeted subsidies, and withdrawal of discretionary tax exemptions and privatisation/restructuring of loss making Public Sector Enterprises (PSEs) are vital for economic recovery[3].

So, what is the reason behind Pakistan’s repeated macroeconomic crisis?

Pakistan’s macroeconomic [4] mismanagement is consequential to two foremost causes a) The imbalance between public sector spending and income and b) Pakistan’s weak export base which makes the country vulnerable to the external sector.

As compared to other emerging markets, Pakistan’s income from taxes, fees, and other sources is strikingly low which leads to an imbalance between income and expenditure. Despite constant government efforts to improve tax policy and administration, Pakistan’s Tax to GDP ratio remains low, below the middle-income countries (MICs) average of around 18.5 percent[5]. High proportion of taxes collected through indirect taxes and the small number of individuals who file income tax returns are some of the features of our tax structure leading to low revenue collection.

In context of public spending both current and capital spending by federal and provincial governments can be dramatically improved. Persistent losses made by some public sector enterprises, and the even larger losses made in the energy sector, provide additional scope for improving public finances. Low level of expenditure on health and education causes Pakistan to lag on many development indicators. Hence rationalising and improving the effectiveness of public expenditure is need of a dire review.

The second source of macroeconomic vulnerability is the external sector with low level of exports. The declining balance of trade over the years puts Pakistan on a trajectory of increasing deficits[6].

 

Balance of Trade in Goods
Source: Pakistan Bureau of Statistics

Adding up the total value of the exports of all countries in the world, Pakistan’s share has declined over time, from 0.16 per cent in 2003 to 0.12pc in 2017, according to the Pakistan Business Council. The underlying cause for low level of exports is that Pakistan has limited number of categories to export. As for economic growth Pakistan needs to diversify its categories of exports and explore opportunities to serve new markets.

How is Pakistan tackling its current macroeconomic crisis?

The recent political transitioning and macroeconomic crisis has put Pakistan under constant vigilance from spectators and lending institutions alike. As seen by aforementioned data and statistics, the current government inherited a challenging economic situation that demanded structural reforms to ensure a stable economic growth. The financing gap of US$12 billion  demanded a bailout package from the International Monetary Fund (IMF)[7].

To stabilise the economy and address the twin deficit (current account deficit and fiscal deficit) Pakistan signed its 22nd IMF bailout package of US$6 billion in light of challenging economic environment, with lack luster growth, elevated inflation, high indebtedness, and a weak external position[8].

With another IMF programme in line one would ask the reason behind why the past IMF programmes failed to address the macroeconomic vulnerability? The answer is simple as IMF programmes do attempt to address the structural issues, IMF engagement is more effective at addressing short-term problems of macroeconomic instability. IMF role is limited in promoting longer-term actions to address underlying structural issues.

In a recent policy dialogue, Unlocking Pakistan’s Growth: What can macro policy achieve, an inaugural event part of Pakistan Development Forum 2019 answered these questions based on evidence. The event was co-hosted by Centre for Economic Research in Pakistan (CERP) and Evidence Policy Design (EPoD) at Harvard Kennedy School. Top government officials, Adviser on Finance Dr. Hafeez Shaikh and Governor State Bank of Pakistan, Dr. Reza Baqir, shared the panel with leading Harvard faculty Dr. Asim Khwaja, Sumitomo_FASID Professor of International Finance and Development, director of Harvard’s Center for International Development (CID), and Dr. Carmen Reinhart, Minos A. Zombanakis Professor of the International Financial System and a former deputy director of the IMF. The interactive public event, held at Harvard University, witnessed a well-rounded discussion to understand and evaluate the effectiveness of economic stabilisation measures taken by the Government of Pakistan.

According to Governor Reza Baqir, the current IMF programme has led two institutional changes.  First, a shift from a fixed exchange rate system to a flexible exchange rate system and secondly, for the first time Pakistan’s government is not borrowing from State Bank of Pakistan.

“In 2014 the current account deficit of Pakistan was in balance, but grew to unprecedented level of US$2 billion per month, making it the largest deficit in Pakistan’s history. Simultaneously a fixed exchange rate policy led to a heavy reserve loss” stated Governor Baqir. “Since 2018, when the real effective exchange rate began to depreciate through a series of devaluations, the current account deficit began to turn around. It has now halved from its peak,” he shared. He added, “The IMF programme comes at the end of this time horizon (exemplifying through data on inflation and policy rate over the years), which is to say that a lot of the external adjustment has been done before the start of the programme.” This is a strong indicator of success of the programme.

Stating fiscal deficit as another other key cause of requiring external financial assistance, Governor Baqir said, “The fiscal adjustment is off to a good start, tax revenues have already begun to grow after having fallen for a number of months.” On inflation, Governor Baqir noted that “factors like exchange rate adjustments and the fiscal adjustment that is under way with associated increase in taxes and utility prices—adjustments that were necessary to address the accumulated imbalances of the past—led to an increase in inflation, which necessitated a tightening of interest rates.”

From the federal government’s perspective Dr. Shaikh enlisted key development facts associated with Pakistan pertaining to its complex geography, poor strategic alliances, short-lived and unsustainable growth spurts, and inability to engage women to contribute to the economy to highlight the situation of the country.

Dr. Shaikh showed confidence in the measures taken by the current government to revive and stabilise Pakistan’s economy while emphasising the importance of strengthening institutions and giving them autonomy. “As a result of tough decisions, we are seeing good initial results. The current account deficit was brought down by 30% last year, and exports are finally beginning to pick up as a result of targeted support by the government”. He also pointed out that both tax revenues and spending on social safety net programmes have risen in the current administration.

Leading the academic perspective Professor Reinhart, former Deputy Director of the IMF, identified ‘Low Saving Rate’, prevalent in many emerging markets, as an additional challenge for Pakistan. According to her, the issue of hidden debts is a usual source of weakness during a financial crisis and as per her experience private sector liabilities convert into public liabilities which should be a note of caution to the government officials. “After a couple of good years, you begin to treat the favourable growth environment as permanent and you overspend. Something happens, your budget deficit is larger than planned, and financing from the bank becomes the norm. That of course means downward pressure on the reserves. … Don’t get overly optimistic; don’t think that the good news is permanent, and limiting borrowing is, in addition to a floating exchange rate, a safeguard to maintaining reserves,” added Professor Reinhart.

The real solution to become a stable economy in case of Pakistan is a long-term plan and a consensus on what kind of economy it wants to achieve in next 10-20 years. As a country Pakistan needs to abstain from the short-termism or myopia and focus on building domestic capacity/productivity and institutions to avoid the recurring economic crisis it sees today.

Lareeb Tariq is a Communications Associate at Centre for Economic Research in Pakistan (CERP)

References:

[1] What to do about Pakistan’s Economy: Dr. Atif Mian’s talk on The 7th Mahomedali Habib Distinguished Lecture on Pakistan

[2] The State of Pakistan’s Economy. Third Quarterly Report 2018-2019 by State Bank of Pakistan

[3] The State of Pakistan’s Economy. Third Quarterly Report 2018-2019 by State Bank of Pakistan

[4] Center for Global Development: Why does Pakistan have repeated economic crisis by Masood Ahmed

[5] For the year 2014. Source: IMF World Revenue Longitudinal Dataset. The list of middle-income countries can be found at the World Bank’s country income classifications webpage available at: https://datahelpdesk.worldbank.org/knowledgebase/articles/906519

[6] The Analytical Angle: How data can help Pakistan fix its trade imbalance by Maroof A. Syed and Maha Rehman: https://www.dawn.com/news/1494806

[7 and 8] https://www.dawn.com/news/1481849/pakistan-reaches-agreement-with-imf-to-receive-6-billion-over-3-years

 

 

Flooded Cities: Managing Stormwater in Pakistan

This blog post is based on a session of the Lahore Policy Exchange held at the Consortium for Development Policy Research on Friday, 4th October with Ahmed Rafay Alam, Dr. Fozia Parveen, and Zahid Aziz.

Cities do not need to be located near large water bodies such as rivers, lakes, or the sea to be vulnerable to flooding. Rapid development and urbanization, often unplanned in developing countries, has resulted in pluvial flooding[1] in urban areas to become increasingly common all over the world. Urbanization creates city landscapes that are unable to absorb or otherwise manage rainfall. Subsequently, pluvial floods occur when an extreme rainfall event creates a flood independent of an overflowing water body, resulting in a situation where water flows into an urban region faster than it can be moved out. Urban flooding is more localized, has the potential to be more frequent, and is not as well understood as other forms of flooding.

The reasons for urban flooding are multiple and varied, particularly in developing countries. These include lack of rainwater storage and management systems, inadequate waste disposal mechanisms, institutional capacity, urban governance, and development which ignores topography. The problem is compounded by ageing and overburdened drainage networks, climate change, and the unhindered expansion of cities.

Many cities even in the developed world are now being forced to devise solutions to control and mitigate the effects of pluvial flooding. In the United Kingdom, pluvial flooding is regarded as a greater threat than both fluvial (river) and coastal flooding combined. This is partly because of the unpredictable nature of urban floods. There are no easily defined flood plains (the land surface adjacent to a water body) for urban areas as there are for rivers and seas, and the probability of flooding ultimately depends on how buildings and sewerage react to a sudden increase in water flows. However, one guiding principle that can help tackle urban flooding is that water will always flow to the lowest point.

Most recently, life in Pakistan’s two largest cities[2], Lahore and Karachi, came to a virtual standstill as a result of flooding during the Monsoon season with significant loss of life, property, and economic activity. Lahore in particular has suffered from urban flooding for many years, and mitigation efforts have either not been made or have been sub-optimal.

i1Source: https://www.dawn.com/news/1494534

The solutions to urban flooding vary greatly by location as each city faces a unique set of challenges. Even within Pakistan, reasons for urban flooding vary across Karachi and Lahore. In July 2018, Lahore received up to 288 millimeters of rain and again this year, rainfall of up to 250 mm was recorded (in one month). This is in stark contrast to previous years when the highest amount of rainfall Lahore received was 177 millimeters in 2014 (see table below). In comparison, Karachi received rain up to 55 millimeters when it rained for five consecutive days in September. However, despite the vast difference in the amount of rainfall received, Karachi found itself much more ill-equipped for the subsequent flooding.

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Source: WASA, Lahore

Before a discussion on the causes and solutions of urban flooding can begin, it is important to understand the impact of urban flooding and why it deserves our immediate attention.

The costs of urban flooding

Flooding in urban areas is capable of causing a great deal of destruction in a short period of time with the effects extending beyond flooded streets and diminished mobility. Unlike floods associated with rivers and seas, the visual impact of urban flooding is significantly lower, but the impacts on economic activity prove to be much more damaging in the long-run, even though the effects may not be immediately identifiable, and may be even more difficult to quantify. In a report published by the Center for Disaster Resilience at the University of Maryland and Center for Texas Beaches and Shores at Texas A&M University, the cost of urban flooding was identified as a series of effects on individuals and communities “such as loss of hourly wages for those unable to reach their workplaces; hours lost in traffic rerouting and traffic challenges; disruptions in local, regional, and national supply chains; or school closings with resultant impact on parents.

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These effects are particularly damaging for those living in lower-income areas and have a disproportionately larger effect on the disadvantaged. They are also amplified in lower-income localities because of poor infrastructure and other urban services such as waste management. In Lahore, in particular, many low-income localities are “illegal developments”, with a direct impact on the quality of public services available.

An accompanying feature of flooded cities is a breakdown in power supply for prolonged periods of time. This has a direct impact on citizen well-being, as well as relief efforts by the government. It is difficult to identify whether these breakdowns are caused directly by floods, or by weaknesses in the electricity transmission infrastructure. However, given the frequency with which breakdowns occur, with or without rain, all evidence points to the latter. Deaths due to electrocution further reinforce this point.

Finally, flooded cities also increase the stress on an already weak public health sector. Stagnant pools of water create the perfect breeding ground for waterborne diseases such as cholera and malaria-carrying mosquitoes. Dense urban localities with poor sanitation help spread diseases such as measles.

What causes urban flooding?

Development and Urban Sprawl

One of the largest contributing factors to urban flooding is a rapid increase in urbanization and built-up area within the city, with an associated increase in impermeable surfaces. The images below show the rate at which built-up area has increased in Lahore. Put together, between 2010 and 2017, Lahore lost more of its green cover than it did in the previous two decades.

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Source: http://www.technologyreview.pk/lahore-is-losing-its-green-cover-fast/

It is not difficult to understand why these changes have taken place. Symptomatic of a poor urban planning process (and lack of depth in the profession), mega projects, such as signal-free corridors and a general expansion in the road network, were used by successive provincial governments for political mileage and to garner votes. One key failure of the process is the poor quality of Environmental Impact Assessment (EIA) reports prepared, which can be defined as “the systematic examination of unintended consequences of a development project or program, with the view to reduce or mitigate negative impacts and maximize on positive ones”. Contrary to best practices, EIAs are largely considered formalities and are not used as planning tools in Pakistan.

An additional driver of the loss of green coverage is the increase in suburbia across the entire country. Gated housing societies have become the location of choice for many middle-to-high income households as a result of poor urban service delivery within city centers. These housing societies eat into the agricultural land surrounding the cities and leave little to no room for rainwater to get absorbed into the ground. Many also do not factor in stormwater drainage at the time of construction.

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Source: http://www.technologyreview.pk/lahore-is-losing-its-green-cover-fast/

It cannot however be denied that Lahore’s population has grown vastly in the past two decades. In 1998, Lahore’s population stood at 5.14 million. According to the 2017 census, this number has increased to around 11.13 million. However, much of the increase in the built-up area has come about due to excessive suburban development, which caters primarily to higher-income segments.

These developments provide insights into the decision-making process of city management. Contrary to the direction most cities in the world are going in, city planning in Pakistan primarily serves the car owning elite at the expense of lower-income segments. While a signal-free corridor does make it easier to travel from one end of the city to the other, the impacts on citizen well-being, especially in lower-income segments, is ignored.

A further repercussion of an increase in built up area is the overall increase in surface temperature. According to one study published in the Pakistan Journal of Meteorology, between 2000 and 2011 the overall surface temperature of Lahore had increased by 0.73°C. This creates an urban heat island effect where monsoon winds are attracted towards high-temperature areas, potentially increasing the frequency of high-intensity rainfall events.

Weaknesses in drainage and waste disposal mechanisms

Lahore is served by eight main drains – Central, Lower Mall, Chota Ravi, Alfalah, Gulberg 1 and 2, Edward Road, Mian Mir and Gulshan-i-Ravi – and seventy-six tributary drains.

As can be seen in the image below, this network was built up in phases since Partition in 1947. The largest investment in the network came between 1971 and 1990 when 44.48 percent of the current network was built. The investments then declined over time with 31.76 percent of the network being built in 1991-2000, 14.51 percent in 2001-2008, and 3.33 percent in 2008-2018. (Source: WASA Lahore)

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Source: WASA, Lahore

However, the drainage network has not kept pace with the rate of urban expansion. In many communities, the infrastructure is aging and undersized. In simpler terms, drainage networks are built with capacity limits and expiry dates. Many of the drains are nearing their expiry dates, and with an increase in commercialization and vertical building, the capacity of these drains is also being strained. This problem is compounded by an inability to maintain existing drains with resultant blockages in the entire network.

Blockages in turn are caused by three main reasons. The first is deposits of sediment in the drains due to surface water runoff. This decreases the carrying capacity of the drains leading to overflows and flooding. To address this issue, Lahore’s Water and Sanitation Agency (WASA) took assistance from the Japan International Cooperation Agency (JICA) to clear the drains of sediments in 2004. However, no permanent solution to siltation has been implemented. The second reason for blockages is the use of these drains as waste disposal sites by residents. In the absence of proper waste disposal mechanisms, the banks of open drains are often used as dumping sites. There is also a behavioral aspect of citizens at play here who choose the convenience of using open drains for dumping domestic garbage. Finally, storm water drains are also connected with domestic sewers at various points. Together, these three factors constantly depress the carrying capacity of the entire network and ensure that cities like Lahore remain prone to flooding.

Reducing the risk of urban flooding

It is not possible to make cities completely flood-proof but they can be made flood resistant. Traditionally, policymakers considered floods as something that must be responded to (hence the extensive literature on disaster management). The contention here is that cities should be designed in such a way that makes the possibility of flooding as remote as possible.

One primary difficulty that city management in Pakistan faces is that our cities have largely been built. That is to say, poor planning, or lack thereof, has already resulted in cities that are very poorly built and managed. Any reform measures now, especially infrastructure upgradation, would need to take into account the disruption caused to daily life and economic activity, as well the sheer difficulty of intervening in an urban environment that is already in place. Storm water management, indeed sewerage in general, is no exception.

Like most other reform efforts in Pakistan, making our cities flood-resistant requires a series of reform measures, both in the short-term (what is called low-hanging fruit) and in the long-term. Some of these are possible within the current governance structure, others involve an overhaul of how our cities our managed.

Protection

Going by the causes of urban flooding outlined in the previous section, the easiest reform measure, and one that could be implemented in the shortest amount of time relatively speaking, is developing proper waste disposal mechanisms in all cities, especially in low-income localities, and thereby killing two birds with one stone. Domestic waste management is a key urban service, and one that cities like Karachi struggle with even today.

The second low-hanging fruit is empowering agencies such as WASA to regularly maintain the existing drainage network. This entails mobilizing considerable resources to provide the agencies with the equipment necessary to clear the drains of sediments and domestic waste. Maintenance would also involve separating the existing domestic waste and storm water networks. This too would require considerable resources, but is an objective that is achievable within the current system.

A third short-term achievable target is to leverage intelligent urban design to control the spread of floodwater. Many cities are now using innovative concepts such as water squares to divert flood water into lower-lying areas. WASA Lahore has plans to build one such water square at Lawrence Gardens to divert floodwater from the converging point of three low-level roads. Moreover, at an individual or household level, houses are being designed to harvest rainwater to be used later on. Incorporating rainwater harvesting units in houses would considerably lessen the strain on the drainage network.

One of the more difficult challenges, and one that would require a long-term strategy is to control the expansion of cities, spread the urbanization over a larger number of cities, and ensure that the environmental impacts of cities are not ignored. Cities such as Lahore, Karachi, and Peshawar attract people from all over Pakistan, a factor which strains urban service delivery. Having multiple urban centers would make it easier to manage the cities, and drive economic growth as well. This would also entail revamping governance structure to allow decisions which impact cities to be taken at the city level. If the city is affected by floods, then the city should be responsible for developing system to tackle flooding. Consequently, the city must also then be allowed to raise the revenues required to develop those systems.

The monsoon rains and the accompanied flooding are not necessarily an evil that must be defeated. Rainfall is a central feature of our ecosystem and our urban planning and design needs to develop ways in which we can co-exist with nature in a harmonious manner.

[1] In this article, pluvial flooding and urban flooding are used interchangeably.

[2] For reasons of simplicity and data availability, this article focuses primarily on Karachi and Pakistan as examples. However, the causes and solutions will largely be the same for most Pakistani cities.

Bakhtiar Iqbal is a Research Assistant at the Consortium for Development Policy Research (CDPR) with an interest in urban planning.