Pakistan is facing its worst economic challenges in recent memory. The foreign exchange reserves held by the State Bank of Pakistan (SBP) are hovering around the $4 billion mark as some impetus has been provided in recent weeks with the inflow of funds from China.
As reported by the SBP, the current account deficit was at $17.4 billion in FY22 and at $500 million in February 2022. This has decreased to $74 million in February 2023.
Correspondingly, the current account deficit in the first eight months of FY23 is almost at 1/3rd of the value reported during the same time period of the previous fiscal year. Export receipts and import payments have both reported a decline, with the latter declining at a faster rate.
The decline in imports is not only likely due to the several measures taken by the government to limit imports, such as the delay in opening of letters of credit (LCs) of the importers, but also likely due to the decrease in economic activities.
Similarly, exporters too, have reported constraints due to shortages of imported inputs and the fall in the capacity utilisation of the manufacturing sector. The uncertainty in economic conditions and the inability of the government to solve the issues as it delays its agreement with the International Monetary Fund (IMF) has created several challenges, especially on the balance of payment (BoP) front.
According to data of the Pakistan Bureau of Statistics (PBS), exports of goods in the first eight months of FY23 is 9% lower than the value reported in the same period of the previous fiscal year. The lack of exports has exacerbated economic conditions as Pakistan finds itself in the midst of another BoP crisis. One silver lining in recent years was the trend of the exports of Information and Communication Technologies (ICT) services.
According to the data extracted from ITC’s Trademap.org, exports of ICT services was at $2.45 billion in 2021. It had never crossed the $2 billion mark previously. It breached the $1 billion mark in 2017.
The exports had more than doubled in the last five years, which was due to significant investments in the sector.
The total exports of services from Pakistan stood at $6.5 billion in 2021. Imports of services were reported at $9.8 billion in 2021, creating a deficit of approximately $3.3 billion in the trade of services.
Interestingly, the deficit was more than $5.4 billion in 2017 and 2018, largely driven by transport and travel services.
The ICT services reported a surplus of more than $600 million in 2021, which makes its contribution as important as the contribution made by leather goods exporters. The recent years have proven the importance of the ICT sector in generating the needed dollar revenues for Pakistan. This sector can aid its escape from the vicious cycle involving a recurring BoP crisis.
Developing a viable ICT sector not only requires massive investment in communication infrastructure and in appropriate educational and training facilities, but also easier access to technologies such as computer hardware, software and mobile phones. According to the Digital Development Dashboard published by the International Telecommunication Union in 2022, 33% of the population in Pakistan has access to internet at home, while 12% of the households own a computer at home. Around 46% of the population owns a mobile phone with 82 of 100 inhabitants subscribed to a mobile network.
There are almost three million fixed broadband subscribers, a majority of them accessing the internet between the speeds of 2 to 10 Mbit per second.
In comparison, 24% of the population in India has access to internet at home and 11% of the households own a computer.
However, India has about 27.5 million fixed broadband subscribers, with more than 90% accessing it at speed greater than 10Mbit per second. Considering India’s success as an ICT export powerhouse, Pakistan must improve the quality of fixed broadband infrastructure. Although, the price to access internet through various medium in the US dollar terms in Pakistan is one of the cheapest, the price of the fixed broadband basket of 5GB is one of the highest relative to GNI per capita.
A 5GB fixed broadband basket is about 15.7% of GNI in Pakistan, compared to 3.3% in India. The cost of fixed broadband in Pakistan is much above the affordability target of 2%, making the provision of high-speed internet to households relatively expensive. The Digital Trade Restrictiveness Index published by the European Centre for International Political Economy (ECIPE) in 2018 ranks Pakistan as one of the most restrictive economies in terms of the applied tariffs on the imports of ICT goods.
Pakistan is also not a signatory to the World Trade Organisation’s (WTO) Information Technology Agreement. Accession to it would require elimination of customs duties on MFN basis for specified electronic goods.
Interestingly, Pakistan is ranked one of the most liberal countries in terms of the restrictions of foreign investment in the ICT sector. However, the protectionist policies on the imports of electronic goods, is unlikely to encourage foreign efficiency-seeking investment in this sector.
In addition, Pakistan has imposed measures involving content moderation regulations, data protection regulations and localisation requirements which can be overburdening for potential investors such that it deters new investments in the sector. For instance, a popular platform was repeatedly blocked by regulators in recent years, which suggests lack of clear and transparent policies to investors.
In essence, there is significant benefit to attain from the development of the ICT sector. The rise in exports in recent years highlights its importance to the economy, particularly as Pakistan faces severe challenges on its external economic front.
It is essential that the government encourages investment by facilitating ICT entrepreneurs to realise their potential.
The writer is the Assistant Professor of Economics and Research Fellow at CBER, Institute of Business Administration, Karachi
Published in The Express Tribune, April 4th, 2023.
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