According to Ministry of Information Technology and Telecommunication data presented before the Senate Standing Committee in March this year, Pakistan’s total IT exports stand at $5 billion but only half of it is documented.
IT exporters would claim economic uncertainty, procedural issues, taxes and lack of facilitation while critics argue it’s done to benefit from the currency depreciation. So, what is it?
Pakistan’s IT exports grew 146 percent in the last five years from $1.06 billion in 2017-18 to $2.61 billion in the last fiscal year, but it has already shown a 1 percent decline in the first eleven months of FY 2022-23 over the previous year.
The IT sector has been one of the few export categories that have shown consistent growth over the years despite how dire the economic circumstances are. But that speaks more about our talented youth and their determination rather than the friendly business environment as some in the government would tell you.
Ease of Doing Business:
Pakistan fell 63 places on the World Bank Ease of Doing Business Index between 2008 and 2015, and despite subsequent improvement, the situation still isn’t good.
In 2020, Pakistan ranked 108 out of 190 countries, even behind certain African countries. This index takes into account the ease of everything from registering a business, getting electricity & credit, trading across borders, paying taxes and enforcement of contracts.
The more we streamline the formal channels the less people will depend on the informal channels”, stated Hamiz Mushtaq Awan, co-founder at VC firm Plus21 Capital.
He said that it happens because there is a stark difference between the ground realities and what’s defined legally for example, your banker can make it difficult for you to send capital out practically although it may not be legal.
He further stated that registering a company in Pakistan is still not streamlined than other competitive markets in the region. Awan recalled his experience with registering a business in Pakistan when he was asked to present a stamp, a letterhead and a business sign in front of their building which he said was ridiculous in the 21st century.
There are two types of IT companies, one operating in the domestic market and one involved in exporting their products or services. There are further two categories depending on whether the company is serving the B2B or B2C market. Companies directly serving consumers include transportation & food delivery apps and eCommerce stores.
For those, our market is entirely messed up with a lack of mutual trust, scams and low purchasing power while B2B companies are also not doing any better under the prevailing economic crisis with even some big names reportedly limiting transactions to emergency payments only.
Coming to the ease of doing business, the entire business operations can be found as inefficient and pathetically time-consuming due to the inherent lack of digitization in the public services, complex regulatory environment and challenges with the legal system.
Exchange rate fluctuations and disparity between open market and interbank also give people a reason to be concerned so they want to hold their assets in something that does not fluctuate that much. Our banking system also lacks the same level of trust as its American counterparts where despite back-to-back failures recently, FDIC made sure to protect the customers.
Challenges in Capital Flow
There are not many platforms enabling payments, so freelancers prefer to keep the money in these digital wallets unless necessary. Fintechs are catering towards individual consumers and less towards B2B payment gateways because the former is obviously a larger market and exporting businesses are few comparatively.
Actually, it’s a lot easier to register a company in Pakistan comparatively with Dubai but from that point onwards, Pakistan falls far behind in ease of doing business” stated Amir Akhtar, startup mentor and co-founder Logigates.
He added that bringing dollar payments into Pakistan is one of the biggest hassles one has to go through regardless if he is a freelancer or a corporate entity. He also said that clients often have to try multiple cards and payment gateways for a single payment and payments from some jurisdictions will still be declined doesn’t matter how hard they try.
International payments are often routed from multiple banks and with both parties unaware of the middle bank, neither is able to get the right update on the status of the money causing a ton of friction in the business operations. But from our conversation with the business community, that’s how the ridiculously traditional SWIFT wire transfers still operate in the 21st century and may not have a lot to do with Pakistan.
On top of that, there are multiple factors hindering Fintechs to play their role in international B2b transactions to and from Pakistan. Global firms like PayPal still avoid Pakistan because it’s not a really lucrative market for them given the abundance of scams and lack of a conducive ecosystem, regulations and enforcement for that matter.
Another factor is the hovering cloud of FATF that prevents both PayPal and the Government from aggressively following up on the matter because PayPal is a two-way street and can end up becoming the standard untraceable tool to throw dollars out of the country. But sometimes founders opt for foreign holding companies for other reasons as well.
“Founders prefer to have a company in jurisdictions that are more trustworthy and inspire confidence in investors and customers”, stated Awan.
He added that locations like the United States, Dubai, Singapore and the Cayman Islands are considered ‘gold standards’ as the laws are well understood and in any future dispute, all parties involved have clarity on how it will play out.
He also pointed out that even if bringing in the capital goes smoothly, there is no easy or transparent way for sending the money out of Pakistan. A multinational company can have customers and vendors everywhere so it needs the free flow of capital but if they bring its capital to Pakistan, it may not be able to transfer it elsewhere with efficiency or may not be able to do it all due to the capital constraints.
Drawing parallels with America, Awan added that the whole processes of registration and banking transactions are 60-70 percent easier and faster than in Pakistan. He said that while registering a company is still not so simple in the United States, it’s only so if you are unaware of what you’re doing. Moreover, there are layers built over government institutions that have all of these steps are lot streamlined.
Pakistan-based startups face huge difficulties in scaling to foreign markets especially if they are not VC funded due to bad economic repute and lack of support from our embassies. It is not just that we are getting punished for being Pakistanis but another problem is that we never ever participated actively in international tech space in any capacity and international trade offices never thought about doing something in that regard.
“The people in power corridors fundamentally are old-minded and so are unable to develop the required flexible regulations,” added Akhtar.
He said that the policymakers should come from within the core industry and these policies should be open for public feedback and also involve international bodies like IMF and their input in these processes
He also argued that foreign banks are often far more supportive than Pakistani ones while our banking institutions and fintechs will not be able to solve this problem alone as they need to connect with foreign players or have third-party integrations and take State Bank of Pakistan on board as well to make sure that at least the companies registered with Pakistan Software Export Board (PESB) get their payments smoothly.
Moreover, countries are offering so many incentives with respect to taxes and nationalities and revising them every year with Canada being the most recent example which extended its immigration incentives to tech professionals. What’s to stop people from setting up their shop somewhere else given that service-based IT businesses are fundamentally not capital-intensive?
On the other hand, we are here busy spreading fear in the ecosystem by casually turning the internet on and off. It makes the founders to think about limiting their Pakistan chapter to a mere back office and prioritizing foreign destinations for having their cream leadership and future investments.
Chicken and Egg Problem?
The biggest reason these problems still keep existing is that the processes are designed for those less than 1 percent who exploit this rigidity and barriers in the system” stated Ahsan Jamil, Managing Partner at SAI Venture Capital.
He added that the current policies incentivize informal channels and frauds but they should be framed for the majority which is looking to do clean and good business. He also said while few companies like Systems have been able to do international acquisitions, it is not that easier for the rest to get capital out and nobody wants a business in that environment.
For a minute it may look like a chicken and egg problem as we cannot possibly bring the dollars or keep them in without removing the barriers and incentives but the government circle fears that it can potentially trigger an untraceable exodus of dollars out of the country.
But look a little closer and ‘it’s a lot black and white than that’ added Jamil. He said that if we want to grow and grow big, anything that is supposed to be a deterrent, it has to be short-lived. It’s not the right mindset to tell people that if they add value to the ecosystem, they will be unable to extract that value out.
The bottom line is while some of the bottlenecks like our inherent weakened economic outlook and negative reputation may take decades to resolve, some of the problems regarding clarity and enforcement of regulations especially for foreign investors and ease of capital flow in and out of the country can be fixed promptly with right intentions.
Actual IT professionals in Pakistan are less and there are many disposable IT based companies and earnings are highly dynamic. With the launch of PSEB freelancers lose more trust on govt. At first they claim registration is for zero tax than they impose breaking their promise and assume professionals will trust on them. Let the freelancer doing their jobs regardless of payment issues. Govt is the biggest issue for us.