E-Commerce in Pakistan

Uzair Salman

Global e-Commerce has grown exponentially during the last two decades as a sales growth of 13 percent was recorded in FY 2017-18 with estimated sales crossing $29 trillion. The number of online shoppers also grew by 12 percent to cross the mark of 1.3 billion. The situation in Pakistan is also not much different as a shift in shopping habits has been witnessed in the country and consumers, moving away from traditional methods of purchasing, are now turning towards online retailers and as a result, the e-commerce industry in the country has witnessed a boom. According to State Bank of Pakistan (SBP) figures, excluding Cash-on-Delivery (CoD) sales, e-Commerce sales stood at Rs 18.7 billion by the end of June 2018 while the total size of Pakistan’s e-commerce market in 2018 was Rs 99.3 billion. The number of registered e-Commerce merchants has risen 2.6 times and e-Commerce payments have surged 2.3 times in a span of just 12 months. Keeping in view these changing trends, the federal cabinet has rolled out a new e-commerce policy framework would encourage a shift from cash-based transactions to digital payments, with a requirement for all payments over Rs10,000 to be digital-only by September 2022.

The emergence of e-Commerce platform has paved the way for inclusive trade and economic development. e-Commerce offers huge opportunities to the developed and less developed world alike. These primarily include access to distant markets, rapid exchange of goods and services, secured payments, promoting innovation and creating employment opportunities. It has the potential to provide the less developed world with the opportunity to cover a considerable distance on the road to socio-economic and technological development, which it missed at the time of the industrial revolution. In developing countries like Pakistan, e-Commerce can play a vital role in improving livelihoods, augmenting enterprise competitiveness and increasing their share in global trade. With respect to increasing the share in global trade and to narrow the digital divide between developed and less developed world, it is essential to take measures, which enhance local capacity qualitatively and quantitatively.

Introduction

Among the wonderful inventions of twentieth century, the Internet has come to wield immense influence on our lives. From reading newspapers to monitoring the performance of companies on stock exchange, from learning the first aid techniques when in emergency to learning the recipe of making a cake when guests visit, and from listening to music to keeping abreast of the latest cricket scores, our lives have got increasing intertwined with internet. Doing business online is yet another application of internet, which is changing the way business is done. The term electronic commerce or E-commerce may loosely be defined as doing business over the internet, selling goods and services which are delivered offline as well as products which can be “digitised” and delivered online such as computer software, videos, and music.

What is e-Commerce?

e-commerce in its wider sense encompasses all transactions involving business organisations, governments, or consumers that are done online through internet. However, the narrower view of E-commerce focuses only on transactions between Business and Consumers (Business to Consumer E-commerce or B-to-C E-commerce) and among two or more businesses (Business to Business E-commerce or B-to-B E-commerce). Banking, entertainment, telecommunications, and manufacturing industries globally have already started using E-commerce business models, and have been reaping the benefits in terms of greater revenues and lesser costs. Within these industries, Internet is used for four major tasks with respect to E-commerce: Firstly, attracting new customers through online marketing and advertising; secondly, serving existing customers via customer service and support function; thirdly, developing new markets and distribution channels for existing products; lastly, developing new information-based “digitised” products, which are then transmitted online.

e-Commerce in Pakistan

In Pakistan, e-Commerce has strong potential to expand and to help accelerate national economic growth. Following intensive investment in ICT infrastructure since the late1990s, Pakistan in the past two decades has developed a strong ICT sector by liberalizing the telecommunication sector, creating an environment conducive to an expansion of its information technology (IT)-enabled services industry, and cultivating an information society with wider diffusion of ICTs and the internet. Pakistan, which has about 60% of its more than 200 million population in the 15 to 29 age group, represents an enormous human and knowledge capital. Pakistan has more than 5000 IT companies & call centres and the number is growing every year. Pakistan has more than 300,000 English-speaking IT professionals with expertise in current and emerging IT products and technologies and 13 software technology parks. More than 20,000 IT graduates and engineers are being produced each year coupled with a rising startup culture.

In Pakistan, the overall share of services sector in real GDP was around 60% at end FY 2018, and around 56% in nominal GDP; the latter was higher than South Asian average. Services sector has been witnessing a shift towards digitization. Growing internet penetration is revolutionizing the way consumers and businesses gain and share information, execute transactions and manage their day- to- day operations. Improving digital connectivity is reshaping consumer behaviour, which is increasingly tilted in favour of convenience, cost savings, and customized retail experiences. Businesses are also capitalizing on opportunities enraging from the digitization, such as supply chain efficiency, lower transaction cost and enhanced flexibility in addressing consumer needs.

Pakistan is among the economies where digitization is triggering changes in some components of the service sector. The shift is most prominent in areas like e-Commerce, fintech, and e-government, where new ventures and approaches to deliver services are picking. Specifically, the market size of e-Commerce has grown significantly in Pakistan over the last few years, transforming the way consumers interact with – and especially pay businesses.

As per UNCTAD’s B2C e-Commerce Index, in 2017 Pakistan ranked 120 (out of 144 countries) on e-Commerce readiness index with a score of 24.0. However, a noticeable surge has been witnessed in recent past in the number of online vendors, local e-Commerce platforms, online payment facilities introduced by banks and large cellular service providers. Improved internet accessibility and significant efforts of the government for financial inclusion in most parts of the country can be rightly credited for this. PTA’s data reveals that, as of July 2019, there were 161 million cellular subscribers, 70 million 3G/4G subscribers and 72 million broadband subscribers and total tele-density of 76.56%.5 From 2017-2018, the number of local e-Commerce merchants increased 2.6 times and e-Commerce payments increased by 2.3 times in just 12 months.6SBP’s Annual Report on the State of Economy 2017-18 shows that sales of local and international e-Commerce merchants were Rs. 20.7 billion in 2017 growing by 93.7% in 2018 to reach Rs. 40.1 billion. These figures do not include all the post-paid cash-on-delivery transactions which account for 60% of the total value of e-Commerce in Pakistan.

Around 64% of Pakistan’s Population is under the age of 29 and the country will continue to enjoy the youth bulge for another 30 years or so, according to a report from United Nations Human Development, 2017. As young population is more open to embrace technology as compared to old generation, the promotion and regulation of e-Commerce becomes more significant in providing employment to around 130 million Pakistan’s youth in the next 30 years.

Problems in Exploiting e-Commerce Potential

Currently, the growth of E-commerce in Pakistan is hampered by a number of factors, which are discussed below. These barriers must first be removed for E-commerce to grow in the country.

1. Misconceptions

Most people in Pakistan have developed wrong conception of E-commerce. They take a very limited view of E-commerce, restricting it to only those products which may be “digitised” and transmitted online through internet and the payments for which is also made online through credit cards.

This narrow view excludes the other three main functions of E-commerce outlined above i.e. attracting new customers, serving existing customers, and developing new markets and distribution channels for existing products. This misconception is among the main reasons that have held most Pakistani entrepreneurs with existing conventional business back from entry into the ‘cyberspace’.

2. Mistrust

Among the most important impediments to the growth of E-commerce in Pakistan is the issue of trust. Counterfeiting and distribution of below par products in the face-to-face transactions is a common problem in the country. How can people be expected to trust the sellers whom they do not know, and who would deliver goods online/offline after the payment is made.

The issue of trust is further aggravated by the lack of confidence people have with respect to the security and privacy of their personal information like credit cards, home addresses, phone numbers etc. The emergence of trustworthy web-based companies, with support/guarantees from Government or trustworthy multinational companies, in the county is required to dispel these fears of the consumers.

3. Traditionalist Society

A large number of people in Pakistan will take a long time to come round to the idea that they can order goods and make payments through internet from their homes without physically going out. This is due to the fact that on-site commerce has a socialising effect, which is altogether absent from E-commerce. In a strongly relationship-oriented society like Pakistan, people tend to form individual relationships and long term associations with the businessmen and vendors.

These relationships are maintained over the years and may not be easily replaced by the anonymity of the E-commerce transactions. Moreover, most of the retail business in Pakistan is conducted through small local enterprises rather than chains of departmental stores. These small local businesses are run by relatively less educated entrepreneurs who are least eager to embrace the new technology.

4. Low Literacy Rate

The literacy rate of the country, according to official figures, is around 54 percent. Out of these 54 percent literate people at least 50 percent are computer illiterate. Thus, with around 75 percent of the population without computer literacy, the growth of E-commerce in the country cannot be expected to progress at any faster pace.

5. Limited Access to Technology

In order to undertake E-commerce transactions, one must be connected to the World Wide Web, for which possession of a personal computer (PC) or a laptop is a basic requirement. Although the prices of computer hardware have declined in the past few years, yet a personal computer is still not affordable by vast majority of the people of the country. Besides a personal computer, a telephone line or cable line are also required for a user to get connected to the World Wide Web. Thus, high costs of computer hardware are proving to be a bottleneck to the growth of the E-commerce in the country.

6. Access to Internet Services

It is true that in the past few years there has been a significant increase in the number of internet users in Pakistan, with some observers claiming that in Pakistan the internet access is now available to almost all cities, towns and villages covering almost 97 per cent of the population.

Even if this, seemingly exaggerated, estimate is accepted, the per hour cost of internet use in Pakistan, along with the common problems of low speeds and getting disconnected frequently, render this wide accessibility of internet useless. For e-commerce to flourish we need high speed, cheap and reliable internet connections available to the vast majority of the population.

Conclusion

E-commerce market of Pakistan has experienced exponential growth and still there is a lot of room for more growth. Though there is a vast scope of e-commerce in Pakistan, it remains an untapped resource. According to the Pakistan Telecommunication Authority (PTA), there are 162 million mobile and 71 million 3G/4G subscribers in Pakistan. Despite these staggering figures, e-commerce remains an unexploited market. There are many reasons for this underutilisation such as lack of awareness amongst the masses, trust-deficit between the customers and owners of e-commerce brands, government’s disregard to promoting it, etc.

Notwithstanding these issues, it is incumbent on the government to promote and encourage entrepreneurs for many reasons. Firstly, it helps in facilitating the people to get their desired goods or services at their home without much trouble. Secondly, with the help of e-purchases, people may find the products at competitive prices. Thirdly, it can also be the source of employment generation as scores of people can be adjustment in this field. Fourthly, exportable products can fetch the dollars for the cash-starved national kitty. Lastly, it boosts economic activity which needs the country most.

 Dissecting e-Commerce Policy Framework

The draft e-commerce policy framework is a step in the right direction. However, it seems as though the cross-cutting nature of e-commerce has muddled the policy response once again. At the top, it is a good idea to create a high-powered “National e-Commerce Council” that will act as a one-window unit for policy implementation and operational matters at the federal and provincial levels. Given past experiences with such councils, it would be better to establish and empower one National e-Commerce Authority, which can dedicatedly steer the sector in the desired direction by taking a holistic approach. In the payments area, the proposal to enable card-not-present transactions over the Internet through the 1-link network (Paypak) will help reduce the reliance on cash-on-delivery (COD) mode of payment. However, it is not a good idea to limit COD transactions to Rs10,000 per ticket in three years and entirely to zero transactions in ten years. Just ensure better e-payment solutions and let people pay as they like

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The proposal to provide a three-year income-tax exemption to micro digital businesses having annual turnover of up to Rs10 million is positive. However, it can be further graduated upwards to include small and medium digital enterprises. The draft framework encourages freelancers and software exporters when it talks about enforcing the law for retention of 35 percent of earnings in special FCY accounts. Digital businesses can also make import payments up to Rs100,000 per                                                                                     invoice without SBP approval.

Beyond those measures, the draft framework is fairly generic in nature. On matters of taxation, the proposal to harmonize the GST across the country, as provinces are charging different GST rates on services, kicks the can down the road. There is also no clarity on how e-commerce players will avoid double taxation within and across provinces for the same transaction. At the Customs, it isn’t clear what kind of warranty contracts will be acceptable for re-export of damaged goods without new documentation.

The consumer protection leg of the draft is rather weak. The draft sounds over-optimistic when it suggests that making changes in existing consumer protection laws and consumer courts will cut it. The idea to establish independent alternate dispute resolution centres and e-courts requires elaboration. For online marketplaces, a code of conduct has been outlined, which deals with product pricing, disclosures, complaint resolution mechanisms, etc. However, consequences of violating this charter aren’t spelled out.

This sector’s importance for Pakistan’s youthful population can hardly be overemphasized. Therefore, the cabinet would be wise to ask the Commerce Ministry to have another go at consultations and come up with holistic and actionable measures in the short, medium and long terms. Any proposed measures must go far enough to evoke compliance by digital businesses and inspire confidence among consumers.