is a reflection of the global increase in IT
How to boost IT exports and
promote import substitution
Writer : Syed Ali Imran
Pakistan heavily relies on the textile industry
for its exports, with 55% of its exports coming
from this sector. However, the textile industry
is dependent on factors such as the availability
of cheap cotton and export orders from
countries that require finished or semi-finished
products. Any increase in cotton prices or a
decrease in export orders, due to factors like a
recession or reduced consumer buying power,
can negatively impact the industry. To
mitigate these risks and diversify its export
base, Pakistan should explore opportunities in
the IT sector. Unlike the textile industry, the IT
sector does not require expensive machinery
but relies on human capital to generate
software codes and energy resources. By
focusing on improving embedded engineering
techniques and developing hardware cum
software products, Pakistan can significantly
increase its IT exports and reduce its
dependence on imports.
India, Pakistan's neighbouring country, has
already achieved great success in IT exports,
reaching approximately $178 billion in the
fiscal year 2022. Out of this, IT services
accounted for $104 billion. Pakistan has the
potential to replicate this success and also
benefit from import substitution, which would
help save foreign exchange. The IT minister
has revealed that Pakistani IT companies hold
approximately $1-2 billion outside the
country. Efforts are being made to create
arrangements that would encourage these
companies to bring back their funds. However,
fiscal policies also need to be revised to
facilitate this process. The growth in IT exports
spending, with worldwide IT spending
projected to exceed $5 trillion by 2024. This
presents a significant opportunity for Pakistan
to tap into this growing market and boost its
exports.
Let us first address some immediate problems
before delving into the solutions for the issues
faced by this industry. The Director of
Operations at Digitel, who oversees Data
Center solutions and business transformation
through automation, highlighted that the
industry operates in various segments.
However, the major segments include
Technology, which is used in daily life and not
limited to communication sector only, Services
ranging from Digital Marketing to Software to
embedded engineering, and Automation,
which is crucial for daily business operations.
These segments are not only directly or
indirectly linked to exports but also contribute
to import substitution. For example, digital
marketing and social media platforms have
the potential to generate foreign exchange
and create white-collar jobs for the youth who
possess universities, have knowledge and skills
but struggle to find employment in an
economically uncertain and inflationary
environment. The technology required for
these segments, such as laptops, cameras,
and microphones, is imported. However, a
one-time import at subsidized rates can
stimulate economic activity, leading to not
only the export of IT-based solutions but also
the integration of local and foreign
commodity markets. This integration would
allow small-scale sellers to sell their products
and services, ultimately contributing to the
country's GDP.
Data Center technology is currently heavily
reliant on imported equipment, but there is
potential for local production if a targeted
subsidy policy is implemented. While Pakistan
is currently under the IMF regime for the next
3 to 5 years, it is worth noting that the Biden
administration has introduced the Inflation
Reduction Act in the USA. This act aims to
make the country self-sufficient in green
energy production, reducing reliance on
Chinese Solar Panels and wafers. In my
opinion, if a proper plan is discussed with the
IMF regarding how Pakistan can control this
targeted subsidy and the benefits it will have
on the Current Account, it could potentially be
exempted.
Now, let's shift our focus to Data Center
Technology and Business Transformation. The
cost of implementing this technology ranges
from Rs.10 Million to Rs.500 Million,
depending on the size and usage of the
business. The major components of a data
center, such as racks made of steel, are
currently imported. However, these racks can
be produced in Pakistan by importing a
sophisticated molding machine, which costs
around Rs.20 Million. These racks require
certifications before installation, and
fortunately, certification bodies are available
in Pakistan. It is worth noting that imported
racks cost around Rs.600,000, whereas locally
certified racks cost only Rs.150,000.
Additionally, these racks have potential export
markets in Central Asian Republics and
Afghanistan. The life cycle of these racks
ranges from 1 to 3 years, depending on the
gauge. After this period, they can either be
recycled or replaced, which can further
contribute to exports. Moreover, for local use,
producing these racks domestically will save
foreign exchange by reducing imports.
IT companies that offer embedded
engineering solutions, such as Data Center
infrastructure, also require logistics for
transportation. These logistics services can be
provided at subsidized rates. Another crucial
component is the Colling Unit, which is
imported to create a safe and rust-free
environment for these technologies to
function efficiently and have a longer lifespan.
If the government supports the manufacturing
of these units within Pakistan, where our
white goods industry has the capability to
meet this requirement, it could focus on
providing subsidized loans for one-time import
of machinery that can aid in producing these
units locally. However, some parts may still
need to be imported, where we may not have
a comparative advantage. Another widely
used component is the UPS (uninterrupted
power supply), which is preferred to be
imported as the locally available options are
not up to the mark. In such cases, regulating
and supporting the UPS industry can instill
confidence in end users to rely on domestically
produced units, thereby saving foreign
exchange. It is also worth mentioning that
during discussions, it was revealed that the
main boards used in biotechnology can be
produced locally when replacements are
needed for overhauling or troubleshooting
hospital or laboratory machines. However, it is
important to note that these are main boards
and not wafers or microchips, in which China
and Taiwan have a clear comparative
advantage. Producing these boards in
Pakistan could cost around 10% of the import
cost, saving foreign exchange in the process.
If we were to summarize the problems faced
by IT professionals, they can be generalized as
follows:
1. There is no centralized database for
freelancers and IT exporters.
2. The taxation on IT export services is
significantly higher compared to our
neighbouring country, India.
3. IT studies are not given enough attention or
focus to increase exports.
4. IT companies and freelancers often struggle
to obtain bank credit due to insufficient or
inadequate documentation, which may be a
result of tax evasion or other reasons.
5. There is a lack of subsidized bank credit for
the export of machinery for import
substitution and exportable production.
6. IT companies do not have access to
subsidized credit schemes like the Export
Facilitation Scheme, which is available to
industries like textiles. It is a notable fact that
a mid-sized IT company may require Rs.4
million per month for working capital.
To address these problems, the following
solutions can be considered:
1. The government should support IT-based
organizations and bodies in creating a
centralized database.
2. Tax reforms similar to those in India should
be introduced to alleviate the burden of
taxation on IT export services.
3. More IT parks and tax-free zones should be
established, specifically for universities
focusing on IT studies. This will help us remain
competitive with India and enable us to offer
competitive pricing.
4. Once the aforementioned reforms are in
place, banks will be more willing to provide
credit to IT companies. Proper documentation
or government-backed refinancing facilities
can be implemented to facilitate financing for
registered IT companies and freelancers.
Currently, the ISAAF scheme is available for
SMEs, but the loan amount should be
increased from Rs.10 million to Rs.30 million
specifically for the IT sector. Additionally, an
Export Finance Scheme for the IT sector can be
introduced to address the working capital
requirements for export-based activities.
The Government of Pakistan can introduce
Invoice Credit Insurance for IT exporters
through its special purpose bank, EXIM Bank.
This initiative aims to provide a Bank Master
Policy to commercial banks, allowing them to
offer cheap funds for working capital to IT
exporters without requiring collateral. As IT
companies primarily deal with intangible
assets, such as software and services, they can
offer invoice discounts instead of tangible
assets at large. By insuring invoice bad debts,
the Bank will be encouraged to support IT
exporters, while exporters will be motivated to
maintain proper documentation, contributing
to the GDP of Pakistan and attracting foreign
exchange. However, the taxation percentage
will also play a role in bringing the foreign
exchange to Pakistan’s exchequer.
To facilitate this process, the State Bank of
Pakistan (SBP), EXIM Bank, the Federal Board
of Revenue (FBR), and other regulatory
institutions need to work together. They
should provide prudential regulations
relaxation and tax reductions for IT exporters
who voluntarily comply with documentation
requirements and aim to increase exports by
25% annually if provided with such support by
federation.