However, it seems that the sector’s exceptional run has ended. According to the recent reports, the IT and IT-enabled Services (ITeS) export reached a figure of $1.087 billion in the first five months of the fiscal year 2023. When compared to the same period last year, the growth is mere 3 percent, alarming for a sector that has potential as well as record of double-digit growth.
The $233 million inflows in November meant that the month-on-month growth was also restricted to around 5 percent. Further, any significant improvement is not expected in December as the holiday season approaches the North American and European markets, two of the largest destinations for Pakistani IT exports.
At this rate, the sector would be closing the fiscal year 2023 with around $3 billion in exports. The expectations from the sector, not long ago, were different. The IT minister was confident that exports could reach the $5 billion milestone by 2023.
Doing and Undoing
As per experts, post-Covid, the IT sector saw a boom because central banks across jurisdictions printed money and pumped them into government-backed schemes for promotion of business activity. Some of that demand was channeled to developing countries, like Pakistan where IT resources are available at a comparatively cheaper cost.
However, as the interest rates started to rise across the globe and business activity slowed down, the trickle-down effect was felt by the IT sector in Pakistan. Yet, this is not the only reason for the slump in the sector’s performance. The restrictions on currency flow imposed by the State Bank of Pakistan has resulted in many of the companies setting up holding companies overseas to receive their total billings, a fraction of what is only remitted back to Pakistan.
The Industry has its own flaws which halt progress. The typical business model for IT businesses in the country is based on labor arbitrage. They hire resources locally and bill clients for their services (in a foreign currency) at a significant margin.
As a result, the development of utility products and applications catering to a larger market is limited. This leads to a lack of differentiation of local services when compared to competing regional economies.
“We as an industry are very reluctant to build and scale. Organic growth might not enable you to acquire that skill set; the M&A (mergers and acquisitions) will help the industry grow faster,” Asif Peer CEO and managing director of Pakistani software company Systems Ltd, addressed the Board of Investments conference earlier this year.
Additionally, the supply side issues restrict capacity of the sector to meet external demand. As per industry insiders, most IT graduates from local universities lack technical skills including basic communication skills which makes it difficult to hire “billable” talent.
This also explains why even after the rapid depreciation of rupee, the IT export hasn’t grown at the same level.
Gonzalo Varela, a senior World Bank economist, explained this phenomenon in a podcast interview: “The Pakistani exports react slowly to depreciation of currency as it takes time to scale up (Financing, Machinery etc.) whenever there is a surge in demand due to price competitiveness.”