Who is failing Pakistani startups?
It would be unfair to say that COVID-19 is the only factor putting the now and tomorrow of startups in Pakistan in danger. Most issues preventing sustainability of these firms have been around since long.
A recent publication widely cited in media now recognizes how the foreign exchange manual at State Bank of Pakistan (SBP) continued to pose constraints on raising capital for new private enterprises. For decades this has discouraged venture capital, private equity funds, and angels to invest. The collateral issues were never resolved through creative solutions seen in peer economies. Potential investors willing to support startups through a loan with the possibility of later converting this into equity could not be facilitated.
In a much-awaited development, SBP has notified some revisions to the foreign exchange manual. The central bank statement says, “New policy for equity investment abroad will attract foreign direct investment through the establishment of holding companies by Pakistani fintechs and startups, support exports by facilitating exporters to establish subsidiaries or branch offices outside Pakistan and allow resident Pakistanis to acquire sweat equity, amongst other changes to the foreign exchange regulations.”
The SBP will also now allow private investment companies to issue a share of their funds to non-residents who may be willing to provide equity or other venture funds.
To a large extent this is good news for the overall investment regime in the country. However, larger and well-established firms are bound to benefit more. Non-exporting firms or potential exporters still require further changes to foreign exchange rules to integrate with value chains abroad. Why did this not happen through the recently notified change is certainly a question that comes to mind. Also, to explain the benefits to startups and smaller firms and ensuring the uptake of changes to mechanisms of capital inflows and outflows, the banking sector will need to expand its outreach.
While Pakistani startups pin their hopes to some foreign investment pouring in from abroad amid the pandemic, it is important to ponder and perhaps have a deeper evaluation of why local financial institutions remain unable to fulfil funding and finance requirements essential for startups and scaleup stages.
Fostering an entrepreneurial culture at several levels, ensuring availability of data and evidence on business possibilities, pro-startup tax regimes at national and sub-national levels, participation of newcomers in public procurement opportunities, rationalizing regulatory issues at the local level, opportunities for capacity building and networking, are much needed ingredients to support a congenial ecosystem.
Dr. Vaqar Ahmed
The central bank and the Securities and Exchange Commission of Pakistan (SECP) will need to address factors which prevent banks and non-bank financial institutions to take a risk on new and creative ideas. A survey conducted by the Sustainable Development Policy Institute and British Council Pakistan Office under the Developing Inclusive and Creative Economies (DICE) program show that the startups in social enterprise sector often complain that credit officers in leading local banks do not understand the social business models and this in turn leads to a declining of loan applications. Such capacity deficits at financial institutions cannot be addressed without a nudge by SBP, SECP, and proactive efforts by Pakistan Banks Association.
Are the above developments enough to guarantee survival of new and emerging private enterprise? The stakeholder dialogues under Strengthening Use of Evidence for Development Impact (SEDI) program explain that funding shortfalls across the country was not the only issue putting these firms at risk. Fostering an entrepreneurial culture at several levels, ensuring availability of data and evidence on business possibilities, pro-startup tax regimes at national and sub-national levels, participation of newcomers in public procurement opportunities, rationalizing regulatory issues at the local level, opportunities for capacity building and networking, are much needed ingredients to support a congenial ecosystem.
The incubation centers and accelerator programs across the country continue to do a terrific job of giving entrepreneurship its due respect and encouraging youth to go the self-employment way. However, it is not surprising to see a low survival rate of the new startups who undergo these programs. It will be timely for relevant regulatory bodies to sit with these young entrepreneurs and discuss why many are unable to graduate into becoming larger entities? What are the difficulties due to which they are not finding markets abroad and become exporters of goods and services? And, why some of them end up selling their businesses at early stages?
During COVID-19, several peer economies have moved fast to offer ease of doing business in several forms. This means that competition to lure foreign capital is intense. The key elements which ultimately help decide if a country receives quality capital is a low burden of regulations faced during the initial life of enterprises and joint ventures, the certainty of a tax regime, non-discriminatory credit regime and a general intent of the government to reduce costs of doing business. The startups in manufacturing sectors would also need access to affordable utilities and locations. Such an enabling environment is even more necessary now as the government has agreed with the International Monetary Fund to eliminate many of the corporate tax exemptions provided to private enterprises.
While the government has promoted programs on financial inclusion and regulatory modernization, the outcomes are slow to materialize due to weak public-private engagement. Indeed, the inflows through Roshan Digital Accounts are encouraging, however one also finds social media full of Pakistanis abroad grudging about the complexity to open and operate these facilities. A more responsive grievance redressal is the need of the hour.
– Dr. Vaqar Ahmed is an economist and former civil servant.
He tweets @vaqarahmed