LAHORE: Pakistan’s offical IT exports numbers are showing a trend of slowdown due to a mix of policy issues at home, the waning of pandemic-induced digitisation and a global recession that has brought about a slowdown in the digital spend at companies that outsource IT-related work to Pakistan.
To make the situation worse, IT companies are believed to be disinclined towards bringing money into Pakistan and blurring the line between the actual exports from the country and what is brought into Pakistan against those exports.
According to the numbers published by the State Bank of Pakistan (SBP), growth in Pakistan’s IT increased by 5% on a yearly basis to $233 million. While there is growth, this growth has come down 10% from a peak of $260 million recorded in March 2022.
According to Topline Securities, broadly, there is a slowdown in IT exports with growth rate averaging 6% in the last six months of 2022 (June to November), compared to average 17% year on year growth in the six months before June (December to May). The slowdown is also likely going to lead to the government missing its $3 billion target of IT exports this year.
For the first five months of the ongoing fiscal year (July to November), IT exports totalled $1.09 billion, a puny growth of 3% year on year. The beginning of the slowdown coincides with the departure of Imran Khan administration earlier this year, which some of the IT company officials said was very supportive of the cause of the IT industry.
The reasons for the decline could be multifaceted, however. In fact, a high-ranking source in the government circles speculated that the actual exports could be on the rise and the fall in numbers could simply be companies choosing not to bring money into Pakistan.
The source elaborated that IT companies’ actual exports would be higher because customers abroad ask companies in Pakistan to have a company in another jurisdiction for easy recourse in case of a legal conflict.
“If I have a tech company in Pakistan and a customer in Canada, the customer would want to have a company in Delaware to sue me there,” says the source. “Clients abroad also find it easy to not send money to a developing country because we make it difficult for them to send money and the companies here also do not want to receive money from them in Pakistan.”
As a consequence, the company in Pakistan providing IT services to a client abroad would set up a company, say in Delaware, and sign contracts from the company there. If the company in Pakistan provides services worth $2 million to the client abroad, they would only send a fraction of the invoice value back, say $400,000 for operational expenses, which are recorded as remittances here against IT services but might not necessarily reflect the actual export value.
This could end up in fluctuating IT exports remittances and the decline could have one of its causes that companies simply chose to bring less to Pakistan because they could get better returns through an investment management company in the country where the money was parked. The arrangement of bringing money into Pakistan becomes frustrating if dollar payments are to be made and the rules do not allow the outflow of dollars from the country.
The fall in remittances could be attributed to a few other factors too. Ovais Khan, head of delivery for MENAP region at Systems Limited says that the declining trend in the growth of IT exports is because of the uncertainty and the government’s focus on the IMF and foreign reserves, the IT industry, that enjoyed a privileged status because of its potential, is not the focus of the government.
Overall, costs of doing business have increased and the soaring inflation rate has resulted in the death of smaller companies as well as talent moving abroad. Secondly, the surge in IT exports in the last two years was because of Covid induced digitisation that brought Pakistan to a global map because of reasonably cheap labour. “There is a trend of a slowdown now since the pandemic induced digitisation was expected to last longer but it isn’t going to,” says Ovais.
The surge was also because of the Ukraine conflict that led to IT companies in European countries, as part of severing ties with Russia, moved their IT-related projects to countries like Pakistan. “Most of the IT companies in Pakistan do not export their own products,” says Usman Butt, founder and CEO of Lahore-based RepairDesk. “They take projects from foreign companies and hence any impact on operations of foreign companies directly affects IT businesses in Pakistan.”
The slowdown in the global economy recently has led to foreign companies cutting down their growth budgets, which would have a direct impact on companies they work with in Pakistan.
“There is a global recession and companies are going towards cost cutting. This will naturally bring a slowdown in IT spending and affect businesses in Pakistan,” says Raza Saeed, founder and CEO of Lahore-based IT company Confiz.