Foreign investment landscape remains a concern for Pakistan not only because FDI remains sluggish and weak due to the inherent structural issues, but also because of the political volatility in the country along with geopolitical instability keeping investors at bay. Not to forget, the pandemic that had eclipsed prospects of major investment inflow in the last two years. In 8MFY22, FDI grew by 6 percent year-on-year only where China remained the largest investor despite falling share of power sector FDI. However, growth in ICT FDI – particularly IT sector – has seen significant growth during the last two years.
The extension of this can be seen in the rise in IT-based businesses and startups, which to some extent is due to the rise in foreign investment in them. The State Bank of Pakistan’s first quarterly report for FY22 highlights the rise digital service firms and tech entrepreneurship are benefitting from the global investment flowing in the tech startup space, which has been due to the prospects the sector offers, digitization, rising tele-density, increased demand for digital services during the pandemic and the recent foreign exchange regulatory changes.
The digitization is a trend that picked up massively during the pandemic as a result of social distancing and other curtailment measures. The same trend was a fillip of hope for local IT-based businesses and tech entrepreneurs. The central bank also mentions how ecommerce, fintechs and other measures to address issues like financial inclusion, gender disparity in financial access, and other digital solutions have been key areas of interest for the foreign investors, which spurred external financing in tech startups. According to Invest2innovate’s latest report on the country entrepreneurial ecosystem, the startups raised an all-time high investment of $350 million in 2021 despite covid, which was 5 times over the amounts raised in 2020. As per SBP’s quarter; report, total of eight Pakistani start-ups raised funds from foreign investors during 1QFY22, worth over $150 million. Foreign investment is flowing into startups at various stages of their lifecycle for the first time in the country, and the investment frenzy in the tech startups is particularly coming from the venture capital firms. At the same time, highest capital has been reported to come in early stage startups; the i2i’s analysis shows that capital for later stage rounds is limited – a developing issue for startups in these stages. Fintech sector followed by the e-commerce sector have been named as the two key sectors that dominated the startup capital inflow.
In terms of digital service based retail startups, grocery delivery services have been the highlight with B2B models overtaking the B2C models with more connections in the supply chain and warehousing. The other segment that has attracted the most capital is the fintech, which the central bank says are at the core of addressing the banking disparity.
These segments have actually experienced significant regulatory changes which have prompted activity in them. The quarterly report by the central banks counts these initiatives as facilitation for the startups space and hence the investor interest. First, many fintech start-ups have started to offer loans to their customers or are offering electronic money wallet services. The revised foreign exchange regulations are also helping these startups and freelancers, while the regulations for freelancers to receive payments from abroad via money transfer operators have also been made easier. SBP has also allowed local start-ups to raise finance from foreign investors via convertible debt instruments, which could be later transformed into an equity stake, which will further attract venture capitalists.
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