Cheap labour export is not a wise strategy

The fiscal year closed with a current account deficit of $139 million. Although meagre, it marks a reversal from the previous year's surplus of $1.838 billion. According to State Bank of Pakistan statistics, the current account was cushioned by a $3.3 billion increase in remittances. The trade-in-goods deficit increased by approximately $6.6 billion, while the services deficit decreased by about $1 billion. The surge in remittances and IT export revenues provided much-needed dollar inflows that curtailed the impact of the rising goods deficit.

Imports of goods increased by $2.5 billion in Q4 over Q3, likely due to rising fuel prices from the raging Iran-US war. Approximately $5 billion in payments on petroleum imports were made in Q4, which was $1.5 billion more than in Q4 of FY25. While payments on crude and refined products surged, LNG payments dropped significantly in April and June 2026. The sharp spike in payments on petroleum products and its trickling impact on the economy adversely affected the balance of payment at the end of the fiscal year.

The IT sector reported export revenue of $4.6 billion, more than a 25% increase over the previous year. Growth was contributed by software development and business process outsourcing, with expansion into Asia-Pacific markets. Around 2.3 million freelancers generated approximately $1 billion in the first ten months of FY26, a quarter of IT exports. This rise makes it increasingly important to gauge the impact of concessions offered to freelancers. Although freelancing is a golden opportunity for certain IT workers, it can erode the effectiveness of the IT sector through brain drain if IT workers choose gigs rather than long-term employment due to tax exemptions.

Freelancers enjoy significant incentives with a 0.25% final tax regime for those registered and 1% for unregistered. This is similar to tax regimes offered to IT companies on export revenue. The export proceeds must be routed through formal and approved banking channels. Bangladesh offers full tax exemption to freelancers earning in foreign currencies. India, on the other hand, allows a freelancer to declare 50% of gross receipts as taxable income, presuming the other 50% was spent on business expenses, with a graduation ceiling of Rs75 lakhs if 95% of income was received through digital channels. Once a freelancer crosses this threshold, they graduate and are required to maintain full accounting books. Pakistan has no graduation scheme. The Philippines, one of the largest freelancing hubs, offers either 8% tax on gross earnings below a certain threshold or progressive rates. Indonesia has removed tax concessions for freelancers, aligning them with standard tax brackets. Malaysia allows freelancers to deduct business expenses before tax is collected on freelance income, which is treated as business income.

Although other countries in the region may not need to encourage the inflows of foreign currency to increase their foreign exchange reserves and reduce the possibility of another balance-of-payment crisis, the IT industry for Pakistan has proved to be a boon and has significant potential in generating much needed foreign exchange reserves. It is critical to ensure that the sector continues to develop.

IT companies in Pakistan face issues regarding talent retention and unequal tax burdens as freelancers have significant tax concessions as compared to the salaried employee in the IT sector who is taxed under the normal income slabs. PASHA finds a significant net pay gap of up to 44% even if gross earnings are identical. It also creates incentives for formal IT companies to hire short-term workers on freelancing-based contracts where salaries are paid from foreign sources, creating tax arbitrage and slippages as payments are made through offshore accounts. Formal IT companies face a 'brain drain' as talented individuals choose to work outside the formal corporate sector and prefer to work as remote online workers. This can lead to a mentorship deficit in the long-run as an IT employee works in a team of senior developers, nurturing future leaders. On the other hand, remote workers and freelancers often operate autonomously with limited guidance. They have limited to no perks, poor income stability and poor work-life balance. Although they generate foreign exchange, they are unlikely to work on scalable projects and create sustainable revenues. Conversely, formal IT companies capture high-value, enterprise-level global contracts that generate sustainable, multi-year foreign exchange inflows while expanding domestic employment with formal contracts and technical training.

In essence, freelancing is labour arbitrage, where cheaper labour is provided by highly skilled individuals to code programmes for foreign entities that likely hold all copyrights and brand value. Freelancers in low-income countries do the work for a fraction of the price offered in high-income countries, while clients earn significant profit margins. On the other hand, Pakistani IT companies, agglomerations of highly-skilled IT workers, are likely to build their own local talent, create brands, and generate domestic research and innovation that can retain margins domestically.

Policies must consider an income ceiling and introduce a graduation scheme where freelancers are encouraged to set up micro-IT firms, increasing agglomeration through teams and classifications. Lowering the tax wedge between IT workers and freelancers to reduce brain drain, while distinguishing between remote workers drawing salaries from a single source and freelancing, is also important. Policy must pivot from an open-ended tax holiday toward a time-bound incubation model that offers temporary tax concessions to launch young talent but enforces graduation thresholds that encourage established developers to form corporate entities, build domestic intellectual property, and scale projects.

THE WRITER IS AN ASSISTANT PROFESSOR OF ECONOMICS AND RESEARCH FELLOW AT CBER, IBA