July 15, 2020 (MLN): The World Bank, in collaboration with Gallup Pakistan, has released a report that focuses on the recent trends in the Pakistani IT sector and the obstacles confronted by IT firms.
According to the report, these obstacles include direct costs generated by barriers to market entry, such as limits to foreign participation or limits to competition (monopolies). But they can also include obstacles due to infrastructure deficiencies, geographical, cultural, and institutional differences, and/or obstacles imposed by regulatory measures
Pakistan is the second highest exporter of ICT services from South Asia, behind India, with more than US$1 billion of exports. Although export growth has been robust in the past few years, Pakistan’s world market share of computer services exports has remained low, at around 0.2 percent. With a stable base, low cost of operations, a growing domestic market, and a reasonably strong network of Pakistani workers across the world, the industry has the potential for more growth. However, skills mismatch and poor infrastructure problems, high tariffs and inefficient tax regimes, and poor perception as an IT investment destination due to economic and other factors, are holding the industry back.
Pakistan’s digital policy regime is relatively restrictive. According to the DTRI, the policy regime of Pakistan is above the average restrictiveness level of the countries that cover the bulk of digital trade in the world. That leaves scope for the country to tap into the opportunities that digital trade provides. Pakistan has been showing an upward trend for digital and digital-intensive services, and firms do use and adopt foreign technologies either through licensing or through inward foreign direct investments. However, at present, Pakistan’s digital trade is below its potential based on its level of development in comparison to other peer countries, due, in large part, to its restrictive digital policy environment.
Since FY10, Pakistan’s ICT services exports grew at 10.8 percent per annum from US$433 million to more than US$1 billion in FY2018-19. The share of computer services within ICT services exports increased from 44 percent of total ICT exports to 73 percent in FY19, with an annual growth of 17.3 percent. In computer services, software consultancy services grew sharply by almost 32 percent from FY2009-10 to FY2017-18, while the growth of software exports was moderate at 12.6 percent. Though call center exports have been growing steadily, the export amount is much less than computer services and stood at US$104 million in FY2017-18
Pakistan’s global market share in computer services has been very small and relatively stagnant. The export of computer services was only 0.2 percent of total computer services exports in the world in 2018. Even if the informal export estimate of US$1.5 billion is considered, the world market share of Pakistan still stands at just 0.7 percent.
Pakistan’s ICT services exports have also increased in absolute numbers and have also been more successful than some in peer countries. UNCTAD provides numbers on trade development in ICT services for developing countries. This source confirms Pakistan’s favorable position regarding the exports over time in these services: Pakistan shows an upward pattern. Moreover, compared to various peers, Pakistan is doing relatively well. Together with Sri Lanka, the country shows a continuous upward movement.
Enabling Factors and Policy Environment
Pakistan maintains relatively restricted digital trade policies, as measured by the Digital Trade Restrictiveness Index (DTRI). The DTRI is an indicator that measures applied digital restrictions for ICT goods, digital services and investments, standards in digital sectors, as well as for the cross-border flow and domestic use of data. The DTRI has many categories of restrictions varying from (a) fiscal restrictions such as tariffs and trade defense; (b) establishment restrictions such as Foreign Direct Investment (FDI) restrictions and restrictive intellectual property rights (IPRs) measures; (c) restrictions on data varying from restrictions on the cross-border flow of data to intermediate liability policies; and (d) trading restrictions, such as quantitative trade restrictions and restrictive standards in digital trade.
Pakistan's main digital trade policy obstacles are found in the area of fiscal restrictions, while the establishment restrictions in digital sectors are relatively low. Pakistan appears in the top 5 list of countries most restricted for tariffs, trade defense, taxation, and subsidies policies. Pakistan maintains a simple average MFN applied tariff rate of 9.7 percent on digital products, with peaks of 35 percent. Adding up the regulatory and additional customs duties – also applied on imports – brings total customs duties to 13.7 percent on average. The country also has an anti-dumping measure in place on imports of phthalic anhydride (which is an input used to make PVC for cables) from India, Iran, Italy, Thailand, Brazil, China, Indonesia, Republic of Korea, and Hong Kong.
Taxation remains challenging in Pakistan. Representatives from the IT sector noted that the lack of tax harmonization for services industries across the provinces creates a heavy burden in terms of duties, as well as in compliance. Dealing with tax authorities is costly for firms in terms of time and financial resources and was identified by the private sector during field interviews as one of the most challenging areas in their business. This is due, in part, to the complex nature of modern business models required by ICT/digital firms, but is also due to existing tax regulatory environment and enforcement approaches.
Although Pakistan does not have any full data localization requirement, it nonetheless places some restrictions regarding data. The country has significantly stricter rules regarding content access compared with some of its peers, such as Thailand, Indonesia, India, and Russia. Pakistan appears to control foreign commercial services content to its domestic market, and the government has provided a mandate for filtering legal content.
Currently, Pakistan’s IT services firms face obstacles in foreign markets while trading. In most part, these obstacles are of a trade facilitation nature as they relate to the regulatory requirements that exist in export markets. They are an entry barrier for Pakistani firms because they create compliance costs when entering the market,
Pakistan’s IT services firms also face obstacles in the home market. Survey results showed that the two most important domestic obstacles relate to electricity shortages and IT infrastructure. The latter includes the country's telecom network market as well as IT-goods that are necessary as an input for producing and exporting IT services. The next two most significant obstacles that firms face in Pakistan are of a regulatory nature: insufficient intellectual property right protection and the entry of foreign competitors in export markets. The former is something that Pakistan policymakers can change in the short-term domestically. A change in the latter would also depend on policymakers in the export markets, and last generation trade agreements are an instrument that could help to overcome these challenges.
For non-exporting firms in Pakistan that rely on the domestic market, reported obstacles relate to the domestic enabling environment. Furthermore, regulatory requirements, rising wages, skills availability, and labor market regulations are also identified as important obstacles by non-exporting IT firms.
IT and IT-enabled services exports have become one of the most successful international activities in recent years. The survey explores reasons why there are IT firms in Pakistan that do not yet engage in global operations, despite proven opportunities and real success stories in the country. For instance, 37 percent of non-exporting firms prefer to focus on the domestic market. Thirty-five percent consider their lack of exportable services as a reason for not engaging in international business. For 30 percent of non-exporting firms, access to information on opportunities for exporting, as well as regulatory barriers and complexity of regulations, are two critical explanations for not participating in export activities.
Policy recommendations
Under the right policy direction, Pakistan is likely to experience fundamental changes in its economy, steering to a more innovation-based, knowledge-intensive way of producing and trading. In addition, the outbreak of the Covid-19 pandemic emphasized the importance of IT and IT-enabled services as crucial inputs to continue producing while preserving social distancing.
It is still unknown what the post-Covid19 business landscape will look like, but IT and IT-enabled services will play an even more prominent role than they do today. In addition, automation and artificial intelligence will play a more significant role in this industry by introducing significant changes in business models and strategies.
To ensure Pakistan is ready to embrace that new environment, its IT/ITeS and digital trade policy framework needs to be right. The ingredients for a successful reform strategy should include interventions in three policy areas: a) regulatory capabilities and governance; b) sector-specific policies; and c) complementary supporting policies. Also, digital trade policies take place at two levels.
At the national level, domestic policies play a critical role in reducing trade costs and enhancing competitiveness. But domestic policies by themselves do not open foreign markets; they need to be complemented by international policies aimed at helping the private sector to thrive in the global economy, the report added.
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