The tech industry could transform Pakistan’s economy
Pakistan’s new government has consistently grappled with a formidable opposition movement and policy paralysis after it ousted Prime Minister Imran Khan through a no-confidence vote. Economic free-fall cornered its leaders into making unpopular decisions, such as imposing price hikes and “super tax.” But is it enough to save the economy while one-third of the country is flooded?
Islamabad must think long-term. For Pakistan’s economy to stabilize in future years, an increase in exports and the inflow of revenue in the form of investments is critical. Currently it is reliant on support from financial institutions or economically-sound friends. The country’s forex reportedly fell to $9.7billion in the current fiscal year, leaving the government on the verge of economic default without support from IMF.
Amid this economic turndown, there is one sector which can potentially help Islamabad begin to stabilize its economy and escape future economic crises—the tech sector. While the overall trade deficit continues to increase for Pakistan, tech is the only sector which has a trade surplus of 75%. Interestingly, the growth trend for Foreign Direct investment (FDI) into this sector has been positive since 2017. The net flow of FDI was $65 million alone earlier this year. However, if the sector is allowed to grow at the current rate, the trend suggests it can contribute more than 30% of the total exports of Pakistan.
But the growth of the IT sector in Pakistan is falling short despite this tremendous potential. For one, the regulatory framework is not conducive to the industry’s growth. In January, former Prime Minister Khan announced incentives—including tax holiday and startup fund. However, the government changed before these announced incentives could be implemented leaving them in limbo. Since 2020, the government has introduced new tax regimes for both local and export companies each year.
For Pakistan to be mapped on the global digital economy, it must facilitate the organic growth of industries through supportive policies, such as ease of doing business.
A business-friendly investment climate is critical for building a mature tech ecosystem. Barriers such as complex bureaucratic red tape hamper ease of doing business for companies. For instance, whether a company is able to set up dollar accounts and retain forex through export proceeds determine investors’ choices for bringing revenue into the country.
Pakistan’s regulatory landscape lags behind regional countries. India, the Philippines and even Bangladesh provide income tax exemptions for at least the first five years. It is worth noting that investors dive not only into growing markets but also consider whether the host country will facilitate business operations and growth. Without introducing similar policies, Pakistan’s IT sector will fall by the wayside.
India is a classic example of a country which has benefited from consistent policies to boost its tech industry. When India opened its economy to the world, it started government initiatives like the Software-Technology-Parks, facilitating the tech sector to export IT services to the world. These initiatives were introduced in line with the government’s software export scheme. This sort of strategic thinking complemented by policy facilitation brought FDI worth $81 billion to India in FY21.
Not all is lost for Pakistan. The government has previously introduced incentives for the industry, signalling a willingness to facilitate tech-driven off-shore services and ensure ease of doing business. For instance, monetary rebate was introduced to encourage the growth of IT export remittances. Similarly, the Special Technology Zone Authority bill sought to provide investors with institutional facilities at subsidized prices and tax concessions. Similarly, this year the government has exempted the capital gains tax on venture capitalists–a tax levied on profits of VC company funding startups in Pakistan.
While Pakistan is headed in the right direction, the intent has to be followed through with policy implementation. For Pakistan to be mapped on the global digital economy, it must facilitate the organic growth of industries through supportive policies, such as ease of doing business. The single window operation is a prime example of automating the process of registrations and approvals for companies. Similarly, one of the challenges faced by companies in applying for rebate schemes was to do the documentation process in months-- a process which should only take a day or two. With the process automated across government authorities involved, benefits outweigh the cost.
The tech industry has huge potential to transform the economy of Pakistan. In the last year alone, the export proceeds crossed $2.6 billion. While the government has shown intent to facilitate the industry, a well-articulated, strategic policy for the growth of the tech sector might give Islamabad the economic autonomy it seeks. Islamabad may have bigger priorities right now but without taking steps to foster sustainable industries, it will find itself in an eternal cycle of crises and bailouts.
- Kashoon Leeza is a policy analyst focused on tech and foreign policy in the South Asia region. She has previously worked with the government of Pakistan on matters of national security and foreign policy.