WHEN the State Bank of Pakistan launched the Roshan Digital Account initiative for overseas Pakistanis in September 2020, it had at its core a principal premise and a proposition. The premise was that overseas Pakistanis want to save and invest in Pakistan but are hampered by three key hurdles created by our banking system: difficulties in opening an account including the requirement for physical presence and extensive and varied documentary requirements; regulatory restrictions against taking their investments out of Pakistan at will without the need for regulatory approvals; and the anxiety posed by an unpredictable taxation regime on the earnings from investments brought into Pakistan.

The proposition was that if the regulator recognises and addresses these hurdles, overseas Pakistanis will step forward and send their savings to Pakistan for investment and other purposes. This core idea proved essential to Roshan’s eventual success where previous initiatives to mobilise the diaspora’s savings, such as Pakistan Banao Certificates, had failed.

The time has come to apply the same core ideas that were behind SBP’s Roshan initiative to another key constituency that needs to be better supported by our banking system: Pakistan’s innovators and especially those working in technology-related areas. This group includes start-ups, companies offering IT and IT-enabled services (ITeS) including software exports, and freelancers. Their frustrations with our banking system are similar to those that overseas Pakistanis experienced until the Roshan initiative: difficulties in opening a bank account and accessing key banking services, inability to easily repatriate foreign currency that they may bring into the country from selling their services abroad or raising foreign capital, and fear of unpredictable taxes on earnings from funds they may bring from abroad.

Read: Roshan Digital Account: a landmark initiative for NRPs

Take start-ups for instance. By media accounts they raised more than $350 million in 2021, partly helped by SBP’s relaxations of the foreign exchange regulatory framework in early 2021 for raising foreign funding. However, most start-ups are not bringing into Pakistan the funds they have raised overseas. Typically, they bring in only the minimum amounts needed for local expenses. Similarly, software exporters and freelancers are earning foreign exchange through exporting their services but keep as much of the proceeds abroad as possible. As a result, Pakistan is deprived of foreign exchange that is badly needed especially at this juncture. More importantly, our innovators may be missing out on opportunities for growth and effectively competing in the international marketplace for the services they provide because the financial system — instead of supporting them — is hindering them.

The time has come to apply the core ideas behind the Roshan initiative to another key constituency.

How could the key principles behind the Roshan initiative be applied for the banking system to better support Pakistan’s innovators? First, all key stakeholders in the public sector would need to embrace the goal that this constituency needs to be supported. The area that traditionally has given consternation to a regulator is repatriability: that whatever you bring in from outside is free for you to take back along with any earned profit on the investment. On the one hand this would appear logical. On the other, our history is rife with good-intentioned initiatives being misused. The same concerns arose at the time of launching Roshan. The solution was to devise safeguards in the process to limit misuse. The same approach is needed in this case with the view that the benefits of giving such flexibility would more than outweigh any risks. Besides, if we don’t try, how would we know?

Second, it would be important for the initiative to be owned and driven by the central bank. This is to assure the intended beneficiaries that the policy would not change with any changes of government. Similar concerns arose with Roshan at the time of the recent change in government. Rumours began circulating on social media that the political change may mean discontinuation of Roshan. SBP had to step in to reiterate that Roshan was an initiative of the central bank. Investors and foreign exchange earners need to have the comfort that the policy regime under which they may bring their foreign exchange is not tied to politics.

Once the ownership has been established, creating the framework for the banking system to facilitate innovators would be straightforward. SBP’s learnings from the launch of Roshan would help get this off the ground quickly. The first step would be digital account opening through a streamlined customer journey with standardised requirements. In the early stages of launching Roshan, SBP officials had to sit with the IT teams of banks and prod them to redesign their customer journeys to achieve the goal of customer facilitation. The same approach may be needed here. As part of the customer due diligence there would need to be a mechanism to ensure the account beneficiary is a start-up, an IT or ITeS company, or a freelancer. One simple approach would require proof of appropriate registration with SECP or the Pakistan Software Exports Board; other solutions would also be possible.

The second element of the framework would be repatriability of funds brought from abroad and attractive returns on foreign currency held in Pakistan as was done for Roshan. To avoid arbitrage opportunities, it may be simplest to offer the same terms as through Roshan. And finally, and critically, the framework would need a simple and full-and-final taxation regime on profit earned on such funds brought from outside, as was done for Roshan.

Supporting our nascent innovation sector is key to support growth and a diversified economic structure. Our main industries as well as our export structure are largely the same as a decade ago. Rapidly growing emerging markets are promoting innovation and competition to shake up existing structures and introduce new products, services and brands. The global space for housing innovators is also getting competitive. We don’t want to lose Pakistani innovators to nearby jurisdictions just because we are unable to proactively address their needs. For innovation to flourish in Pakistan our financial system has to step forward to offer Roshan solutions to our innovators.

The writer is former governor of the State Bank of Pakistan.
Twitter: @rezabaqir

Published in Dawn, July 3rd, 2022