EVERY year, the finance industry, both in Pakistan and elsewhere, races to make strategy and outlook documents about how the economy will shape up. It’s a ritual — one that takes up our social media feed and dominates media consumption even if the reality turns out to be starkly different. Maybe that’s the adult version of pretending to have a Palantir, but who among us can claim not to have indulged in a bit of fantasy? At least, I am about to.

Before we get into how 2024 will shape up to be, it’s important to look back. For those in positions of power, maybe reflect a little too? The overarching theme throughout the year was the shortage of dollars, as the rupee saw a historic single-day devaluation in January alone. It was a pretty good indication of how things will turn out for the rest of the 11 months.

For Pakistan’s startup ecosystem, the decline in investment was steep as funding value dipped to almost $75 million in 2023 from $332m the year before. Investors who, until recently, couldn’t stop hyping up the local market had suddenly disappeared from deals and focused all their energies on imparting wisdom at conferences instead. Now the question is: will it be more or less the same in the coming year?

To understand the outlook of deal activity, we need to look at sources of capital, in terms of venture capital (VC). Traditionally, ie during the highs of 2021 and early 2022, it was foreigners who were the biggest contributors of investment in terms of dollar value, while the local VCs played a key role in originating the transaction through their better on-ground network.

The only way funding will bounce back in Pakistan is when the global VC finds its footing

Neither of them can be seen these days. Once the Federal Reserve hiked the policy rate, many VCs simply said goodbye to the asset class, particularly from high-risk emerging markets.

But even in the United States, the number of active investors, defined as making two or more deals, fell by 38 per cent in 9M’23 compared to the same period last year, as per PitchBook.

On the other hand, some of the prominent local investors have run out of capital and are currently trying to raise their second funds, which understandably takes time in the current environment, especially given Pakistan’s situation. That not only means fewer deals from Pakistan-focused VCs but a noticeable decline in new originations for foreigners as well.

Ideally, this is where the local money should have stepped up, but let’s be real — none of us expect the real-estate magnates to deploy their stacks of cash in VC.

The only way deal activity will bounce back in Pakistan (even if not to 2021 levels) is when the global VC finds its footing. Luckily, the vibe for that is at least a little optimistic. According to Pitchbook’s H2 Survey, half of the respondents expect total dollars of VC investment in technology startups to increase, either strongly or moderately. How much of that spills over into emerging markets, especially a high-risk one like ours, is anyone’s guess.

For the local startup ecosystem, the decline in investment was steep as funding value dipped to almost $75m in 2023 from $332m the year before

Beyond the venture ecosystem — which dominates conversation much more than its current contribution to the economy — things may be a little better in the coming year. The technology sector at large will continue to grow and be led by new company incorporations, especially as real estate feels the pressure.

Another key sector to look out for in 2024, like every year since Covid-19, will be fintech. While the digitisation of payments will continue unabated, the more interesting areas are going to be the uptake of Raast person-to-merchant (P2M) and the performance of the new digital retail banks.

Since the launch of its flagship switch system, the State Bank has aggressively pushed Raast as the future of payments and fintech in Pakistan. In achieving that goal, the success of the P2M module is imperative for a number of reasons. First of all, it has the potential to bring the informal economy into the formal net through digitisation and, therefore, increase tax revenues.

Secondly, the transaction data gives insights into the functioning of previously underserved segments and allows operators to create financial products for them accordingly. To get there, the State Bank has already unveiled the draft framework for its new regulatory sandbox, where fintechs could experiment with new models.

How the upcoming digital retail banks position themselves at the intersection of Raast will be quite interesting, as they have all the ingredients for success in theory: 1) a fresh approach, 2) the regulatory mandate and 3) the financial muscle.

While these pockets of optimism are important in their own right, let us not miss the forest for the trees. Until and unless the government gets its fiscal house in order, the country at large will not grow at the rate it needs to.

The writer is the co-founder of Data Darbar

Published in Dawn, The Business and Finance Weekly, January 1st, 2024