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Pakistan’s world market share of computer services exports remains...

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.


US banks set aside billions as buffer against bad...

July 15, 2020: Three major US banks have set aside an additional $23 billion as a backstop against bad loans, highlighting the brittle state of the US economy due to the coronavirus pandemic, the companies said Tuesday.

                  Even amid gradual signs of a rebound as businesses reopen, the measures to contain COVID-19 have caused a devastating hit and millions of lost jobs in the world's largest economy.

                  That has raised fears companies will find it hard to pay their debts and households will not be able to pay their home mortgages, car loans and credit cards.

                  The three banks suffered a collective hit of $5 billion from bad loans in the latest quarter, and while executives said they hoped that would mark the deepest hit from credit issues, they acknowledged that the health of the loans depends on the evolution of COVID-19.

                  The virus cases and death toll have worsened in the US since the end of the quarter on June 30, leading officials in California, Texas and other states to revive restrictions after reopening their economies.

                  "The pandemic has a grip on the economy and it doesn't seem likely to loosen until vaccines are widely available," said Citigroup Chief Executive Michael Corbat.

                  Corbat said consumer spending in states with bad COVID-19 trends had declined somewhat in recent weeks, but not as much as in the "darkest days" earlier in the spring.

                  JPMorgan Chase beefed up its reserves with another $8.9 billion, more than the backstop in the first quarter, and now expects a more "protracted" economic recovery, Chief Financial Officer Jennifer Piepszak said.

                  JPMorgan Chief Executive Jamie Dimon said the bank was "prepared for all eventualities as our fortress balance sheet allows us to remain a port in the storm."

                  Meanwhile, Citigroup added $5.6 billion in reserves also due to "deterioration" of the outlook, as well as downgrades in loan quality due to the virus, the bank said in a statement.

                  And Wells Fargo put another $8.4 billion in reserves in the second quarter, pointing to the "unprecedented" nature of the pandemic.

                  The reserve increases led to steep drops in profits at JPMorgan and Citigroup, although the banks benefitted from improvements in some divisions, such as trading.

                  However, Wells Fargo reported a loss of $2.4 billion, compared with $6.2 billion in profits in the year-ago period. The bank, which unlike the others does not have major trading division, said it was cutting its dividend to 10 cents a share from 51 cents.

                  Wells Fargo Chief Executive Charlie Scharf said the bank is "extremely disappointed" in the decision, but "our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter."


                  - Trading is a bright spot -           


                  At JPMorgan, net income fell 51 percent to $4.7 billion, translating into earnings-per-share that topped analyst forecasts. Revenues jumped 15 percent to $33.8 billion, its highest ever for a quarter.

                  While the bank reported a loss in consumer and commercial banking, it garnered a big profit increase in its corporate and investment bank division, while trading revenues soared amid volatility in financial markets.

                  Conditions in May and June were eased by a flood of government funding, but while the bank expects more stimulus will be forthcoming, that is not certain, Piepszak said in a conference call with reporters. And the bank expects double-digit US unemployment to persist through the middle of 2021.

                  At Citigroup, net income fell 73 percent to $1.3 billion, while revenues rose five percent to $19.8 billion, boosted by higher revenues in its institutional clients' group that offset a decline in consumer banking.

                  Wells Fargo said its exposure included loans tied to problem industries such as oil and gas, real estate and entertainment recreation.

                  Shares of JPMorgan rose 0.36 percent to $98.21, while Citigroup fell 3.9 percent to $50.15 and Wells Fargo slumped 4.6 percent to $24.25.


Japan’s economy to shrink 4.7% in 2020/21: Central Bank

July 15, 2020: Japan's economy will contract 4.7 percent in the year to March 2021, the central bank said Wednesday, projecting a recovery the following year but warning deep uncertainty remains.

                  The fresh outlook, with policymakers giving a range of shrinkage from 5.7 to 4.5 percent, is a downgrade from an April projection of a 5.0-3.0 percent contraction.

                  The Bank of Japan stayed hopeful about a future recovery but said the outlook was shrouded by possible future waves of the virus, which made calculations difficult.

                  "Japan's economy is likely to improve gradually from the second half of this year with economic activity resuming, but the pace is expected to be only moderate while the impact of the novel coronavirus remains worldwide," the BoJ said in a statement.

                  The bank said it expected the global economy to steadily recover, projecting Japanese GDP would expand 3.3 percent in the year to March 2022, before logging 1.5-percent growth in the following fiscal year.

                  But it also stressed that "the outlook... is extremely unclear" with its assumptions involving "high uncertainties".

                  Officials also see Japan's core consumer prices falling 0.5 percent for the year to March, well below the government's target of stable 2.0 percent inflation to foster sustainable growth.

                  The central bank said it would maintain its massive monetary easing programme, leaving short-term rates at minus 0.1 percent while keeping long-term rates around zero percent.


Pakistan, Hungry ink pact to avoid double taxation, fiscal...

July 15, 2020: Pakistan and Hungary signed a ‘Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income’.

The protocol was signed by Hungarian Ambassador to Pakistan Istvan Szabo and Dr. Muhammad Ashfaq Ahmed, Member (Inland Revenue Operations)/Additional Secretary on behalf of their countries on Tuesday.

The organization for Economic Cooperation and Development (OECD) had approved changes in the Article on Exchange of Information in July 2012 to include provisions concerning cooperation between the tax administrations of the two contracting states.

The present article embodies the rules under which information may be exchanged to the widest possible extent to include taxes other than the income tax.

Radio Pakistan

Asian markets mostly up on vaccine, stimulus hopes

Jul 15, 2020: Fresh hopes for a virus vaccine and another round of US stimulus lifted Asian markets on Wednesday, though gains remained tethered by the reimposition of containment measures and China-US tensions.

Investors took their lead from Wall Street's pop higher, which came after US biotech firm Moderna said the final stage of human trials for a COVID-19 vaccine would start at the end of the month, after a report said its first stage tests had been a success.

The news follows an announcement from Pfizer and BioNTech that two of four candidates for treatment had received "Fast Track" designation from US officials.

Providing added support was optimism the US would add to its stimulus after reports said top Republicans were reconsidering their opposition to it, including on extending supplemental unemployment benefits.

The trillions of dollars pledged by the US and other governments and central banks around the world have been a key driver of the rally in stock markets from their March lows.

And analysts expect that cash will probably fuel further gains, with Stephen Innes at AxiCorp saying even weak corporate earnings would be unlikely to derail that.

"A market that has ignored virus resurgence concerns and US-China tensions... is suddenly supposed to start worrying about earnings. That never made a great deal of sense to me.

"Sure, there may well be some profit-taking due to the run the market has been on, but we then go back to the wall of money argument time and time again. Booking profits are all very well and good, but the way this market seems to be heading, it is not clear you will be able to repurchase those stocks so readily again."

- 'Needless layer of uncertainty' -

Tokyo went into the break 1.4 percent higher, while Sydney and Singapore also added more than one percent.

Hong Kong gained 0.6 percent while Seoul, Taipei, Jakarta and Wellington also rose.

But Shanghai and Manila fell.

Nervousness continues to permeate trading floors, however, as infections spike around the world, forcing countries that had been emerging from lockdowns to enforce new measures to contain the pandemic and jolting the economic recovery.

Officials in Hong Kong, which had gone weeks without a new infection, fear the city is about to be hit by a third wave, while Florida, which was one of the first states to lift restrictions, saw a new daily record of deaths Tuesday.

China-US relations -- already hit by a series of issues including trade and Huawei -- were strained further by Donald Trump's decision to remove Hong Kong's special trade status, and his signing into law of an act authorising sanctions on banks over China's clampdown in the city.

Beijing responded to the Hong Kong Autonomy Act by saying it would "make necessary responses to protect its legitimate interests, and impose sanctions on relevant US personnel and entities".

"In the longer term, this adds another needless layer of uncertainty to already frosty Sino-US relationships, especially with regards to trade," said Justin Tang, head of Asian research at United First Partners.

"Against the backdrop of COVID-19-related disruptions, an escalation of trade wars will plunge supply chains into further disarray."

- Key figures around 0250 GMT -

Tokyo - Nikkei 225: UP 1.4 percent at 22,912.24 (break)

Hong Kong - Hang Seng: UP 0.6 percent at 25,635.22

Shanghai - Composite: DOWN 0.4 percent at 3,400.92

West Texas Intermediate: UP 0.6 percent at $40.51 per barrel

Brent North Sea crude: UP 0.5 percent at $43.12 per barrel

Euro/dollar: UP at $1.1409 from $1.1392 at 2040 GMT

Dollar/yen: DOWN at 107.25 yen from 107.28 yen

Pound/dollar: UP at $1.2580 from $1.2551

Euro/pound: DOWN at 90.70 pence from 90.76 pence

New York - Dow: UP 2.1 percent at 26,642.59 (close)

London - FTSE 100: UP 0.1 percent at 6,179.75 (close)


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