IF you look beyond the usual sectors fuelling the current economic recovery in Pakistan, you will find an exciting trend in the country’s e-commerce sector. By 2020, the country’s e-commerce sector is set to be valued at over $1 billion. Despite high levels of growth and attractive valuations, this sector has not been touted as a contributor to the country’s economic resurgence.

This is mainly due to the fact that the e-commerce ecosystem in Pakistan is still in its nascent stage where it is difficult to get access to information about ongoing trends. A report by an organisation that has accelerated over 25 start-ups in Pakistan, and to which this writer contributed, has attempted fill in some of the gaps.

Research has shown that Pakistan’s consumer economy is growing rapidly along with the country’s middle class, which is already the size of the entire population of Turkey. According to World Bank data, final consumption expenditure amounted to almost 90 per cent of the country’s GDP, one of the highest in the region.

The introduction of 3G/4G services in the country means that internet penetration has risen rapidly, with internet subscriber growth averaging over 10pc per year and total subscribers crossing the 30 million mark in 2016. Cheap smartphones, low cost of 3G/4G services and a consumer-goods obsessed middle class has meant that Pakistan’s e-commerce sector is ‘mobile first’: a number of e-commerce start-ups interviewed said that over 75pc of their total order volume was through mobile devices.

E-commerce is one of the fastest-growing sectors in the country.

Over the last few years, India’s ecosystem has cast a long shadow over other regional economies’ start-ups. Given its vast market size and the raw ability of companies to achieve scale, India made a whole lot of sense for international investors: the country saw over $13bn of risk capital being deployed in 2015 and 2016 alone! Skyrocketing valuations across the border, however, present Pakistan’s e-commerce sector with a unique opportunity.

Pakistan has three things going for it in terms of attracting foreign capital into the e-commerce sector: the country’s rising middle class is more densely populated in urban areas that are well-connected; a homogenous taxation and regulatory environment; and low valuations in the e-commerce sector. The combination of these factors means that investors can acquire strategic stakes in high-growth e-commerce start-ups at a bargain.

Despite these positives, the sector faces a number of headwinds that need to be addressed, both by market participants and by the government. Given that e-commerce is a fairly new phenomenon in Pakistan, there is a trust deficit among consumers when it comes to buying their products online. This deficit is not wholly unjustified either: a number of start-ups interviewed for the report said that a key challenge for them was to ensure that their vendors had the right quantity, and more importantly quality, of products in their inventory.

Issues with quality control further widen consumers’ trust deficit, leading to a slower rate of adoption across the sector. While e-commerce companies are beginning to get a better grasp on vendor management, a lot of work still needs to be done, including technologically integrating vendors into e-commerce platforms and developing robust quality management processes and trainings for vendors across the country.

Another complicating factor is price: much like in the rest of the world, consumers in Pakistan look for bargains when they shop online. However, the e-commerce sector in Pakistan has not yet achieved the scale at which, say, the Amazons of the world operate, leading to an inability to draw attractive prices from their suppliers.

As the sector has grown, traditional bricks-and-mortar businesses have realised the transformation potential of e-commerce to their businesses. This is leading to an increasing number of traditional companies offering attractive prices to e-commerce companies. One may expect this trend to gain momentum in the coming months as the sector increases its market share and builds a loyal customer base.

Digital payments represent another key hurdle for Pakistan’s e-commerce sector. While a number of products like EasyPaisa, EasyPay, etc are available today, none of them have high market penetration. This, coupled with the fact that only 16pc of the country’s population has a bank account, tremendously raises the cost of doing business for e-commerce companies.

Companies interviewed for the report said that at times they have to fulfil over 95pc of their orders using the cash-on-delivery model. This increases the liquidity requirements for e-commerce companies and also forces them to have dedicated teams that manage cash receipts for the company, thereby raising operational costs. The larger players in the e-commerce space have started to crack the code around digital payments, and are optimistic that the industry will come together to coax consumers into moving away from cash-on-delivery.

Outside Pakistan’s traditional economy, the country’s e-commerce sector is one of the fastest-growing sectors in the country. It has achieved this growth not because of, but in spite of, government policies. While both the federal and provincial governments, especially in Punjab, have focused on start-up incubators and accelerators, there is no e-commerce policy framework in the country. The government has constituted an e-commerce policy board and directed the commerce ministry to develop an e-commerce policy framework, but no major breakthrough has yet been achieved.

This lack of policy direction, however, was not brought up by any of the companies that were interviewed for the report, highlighting the fact that the entrepreneurial talent in the country is successfully pushing ahead on its own. Given that the sector is in its early stages, a regulatory and policy framework pushed onto it may do more harm than good. The lesson learned is that while the government can create the enabling environment for e-commerce by, say, incentivising adoption of digital payments, it need not do anything else.

The writer is a South Asia analyst at Albright Stonebridge Group in Washington D.C.

uzairmyounus@gmail.com

Published in Dawn, March 7th, 2017