Expanding narrow IT export base

KARACHI:

Pakistan’s current account deficit narrowed to $881 million in the first eight months (Jul-Feb) of current fiscal year from $2.741 billion in the same period of previous year.

This is entirely due to a meteoric rise in remittances. In Jul-Feb FY21, overseas Pakistanis sent home $18.743 billion whereas in Jul-Feb FY20 they had remitted $15.103 billion.

Such a handsome rise in remittances is a welcome move. But the improvement in one source of forex inflows does not provide a sustainable basis for improvement in the current account over the medium term ie in the next three to five years.

The country can get rid of the current account deficit – and can even turn it into a surplus – if the remittances and export earnings both grow handsomely. However, exports of goods and services are not growing, they are rather declining. In Jul-Feb FY21, Pakistan’s total exports of goods and services fetched $19.875 billion, down from $20.254 billion in Jul-Feb FY20, State Bank of Pakistan’s data reveals.

On the other hand, total import bill of goods and services stood at $37.296 billion in Jul-Feb FY21, far higher than $35.720 billion in Jul-Feb FY20. During the period under review, the gap between exports of goods and services and imports of goods and services expanded to $17.421 billion from $15.466 billion.

If this trend continues – and it is sure to continue amid ongoing economic recovery, it will soon start neutralising the effect of thicker inflows of remittances on the current account.

Consequently, the current account deficit will once again start expanding, thus affecting exchange rate stability and fueling inflation, which is already high. This may start as early as in the second half of next fiscal year ie from January 2022, if not earlier.

Pakistan can avoid this situation by boosting export earnings as much as it can. But it would be naive to expect that exports of goods can expand at a desired pace because competition is tough in export markets and Pakistan’s competitors like China, India, Vietnam and Bangladesh have already captured much of the market share.

Enhancing exports

Ample room is, however, available for accelerating export of services, particularly export of information technology (IT) and IT-enabled services (ITeS).

Pakistan’s existing export base of IT and ITeS is narrow and can be expanded to the desired level in three to five years if the government sticks to its own, declared action plan.

Exports of IT and ITeS earned just $1.298 billion in the first eight months of FY21 and fullyear export revenue is expected to rise close to $2 billion.

The government has set annual export revenue target of $5 billion for IT and ITeS. The deadline is FY23, which will close in June 2023.

Setting this target in the recent past, the government had also made public an action plan to achieve it.

It is time for the government to accelerate implementation of the action plan. Pakistan’s IT and ITeS exports, according to a May 2020 World Bank report, “are primarily in medium to low value-added software activities such as enterprise planning, application development and integration.”

Obviously, the country needs to move gradually towards high value-added activities, broaden the base and increase the quality of its medium to low value-added services. This cannot happen unless tax issues of the IT and ITeS sector are resolved, entrepreneurs in the sector get free access to venture capital and obstacles to marketing of IT products and ITeS are identified and removed.

That requires effective coordination between various stakeholders including the federal and provincial governments and their agencies, the State Bank of Pakistan and commercial banks plus representatives of IT and ITeS business entities.

Financing

Financial and investment constraints continue to hamper the growth of IT and ITeS sector and thus result in slower exploitation of its export potential. First, venture capital financing is very low.

Most of the time IT and ITeS startups raise seed financing not through venture capital financing of domestic banks but from international organisations that provide such financing.

Sometimes the financing flows into joint ventures wherein organisations and groups of Pakistani individuals living within the country or settled abroad participate.

This has to change and banks and other financial institutions should meet financing requirements of the IT and ITeS sector.

It is heartening to note that business tycoon Arif Habib of the Arif Habib Group has recently provided pre-seed funding to e-commerce startup InstaMall.

Although the amount of financing remains undisclosed, the very fact that it comes from an established private sector business group shows the private sector is keen to explore the growth potential of IT and ITeS sector.

If more private sector conglomerates begin to join hands with startups, export earnings of the IT and ITeS sector can reach close to the targeted level of $5 billion in 2023.

Despite a significant progress in the past decade in the area of digitisation and promotion of IT and ITeS activities, one area where Pakistan lags far behind neighbouring countries is capital expenditure (capex).

Between 2010 and 2019, capital investment by private IT sector companies in Pakistan (as a percentage of their total revenue) stood at 23%, far lower than 31% in Iran, 28% in Indonesia and 26% in both India and Bangladesh, according to a GSMA report.

In the report, it has been projected that between 2019 and 2025, $67 billion would be spent on mobile networks in South Asia. But only $3.5 billion or 5.2% of the total projected investment would be made by mobile phone operators in Pakistan. This shows the need for Pakistani government to persuade the mobile phone operators to make more investment in business expansion.

Exports of IT and ITeS cannot be accelerated without first increasing investment in the mobile phone industry.

THE WRITER IS AN ELECTRONICS ENGINEER AND PURSUING MASTER’S DEGREE