Enhancing the Competitiveness of Pakistan's Computer Services Exports

Pakistan Business Council’s (PBC) series on the services sector. This report primarily focuses on Pakistan’s IT sector and its services exports under Classification 9.2, Computer services.

Global Computer Services Trade:

Globally, Classification 9, Telecommunications, computer and information services have witnessed the highest CAGR of 9.9% during 2016-2020. This classification represented 14.3% of the total services exports in 2020. Classification 9.2, Computer services contributed about 78.9% under Classification 9, Telecommunications, computer, and information services exports between 2016 & 2020.

Pakistan’s Computer Services Trade:

Value of Exports:

  • Exports amounted to $1,666.3 million in FY 21.
  • Exports were about 78.6% and imports 82.6% of the total trade under Classification 9, Telecommunications, computer and information services in FY21.

Growth in Exports:

  • Pakistan ranked 7th amongst the countries that witnessed the highest growth of 36.0% in Classification 9.2, Computer services exports between 2019 & 2020.
  • Exports grew by 50.3% between FY20 & FY21.

World Rank:

  • World: 31st in Exports and 40th in Imports amongst reporting economies in 2020.
  • Developing Countries: Pakistan’s Classification 9.2, Computer services exports rank 14th amongst the reporting developing countries.
  • South Asia: Pakistan’s Classification 9.2, exports rank 2nd in South Asia, India being the 1st.

Pakistan’s Computer Services Competitiveness Indicators

Market Share Percentage Change in Market Share Balassa 1965 RCA Greenway & Milner 1993 RCA RXA RTA RC
2019 2020
0.2 0.2 26.6 2.1 5.0 0.3 0.7 0.7

Pakistan has a low market share of 0.2% even though all the indexes show that Pakistan has a Revealed Comparative Advantage in Classification 9.2, Computer Services, not only in the world but also amongst developing countries as can be seen by the comparative indexes Relative Export Advantage (RXA), Relative Trade Advantage (RTA) and Revealed Competitiveness (RC) being positive.

Major Challenges Faced by Pakistan’s IT Services Sector:

Shortage of talent. There is currently a shortage of human resources, primarily due to a surge in demand and a general shortage of talent.

The domestic market is extremely challenging. Due to the several challenges in the domestic market, such as unfair competition with government entities, taxes, etc. many private sector firms find it difficult to obtain local business and thus, are not able to make a portfolio that is attractive to foreign customers.

There are limited large organizations in the Pakistani IT services industry. Smaller companies lack processes, skills and capability to handle big projects. There are lack of mergers in Pakistan, mostly due to the general mindset.

Technology parks in Pakistan do not have the facilities that are required. These parks lack facilities like subsidized electricity, space, other inputs, etc. like those available in countries like India, China, U.A.E. and Philippines.

Industry-Academia gap.  Curriculum is mostly outdated and has not been updated as per the requirements of the dynamic IT services industry. There is a human resource shortage in higher paying services like Block Chain, IoT, Data Science, etc. There are limited institutions in Pakistan catering to developing these skills.

Lack of exportable quality original software in Pakistan. Most of the companies in Pakistan that are providing software services are usually working on original software of a foreign company. The companies/ individuals that have made original software cannot just directly export it without creating a domestic base first, which is difficult in the present composition of the domestic market.

Lack of ethics among the young workforce. Most of the employers in the IT services industry have faced fresh graduates not showing up for an interview without informing beforehand.  It is mostly observed that young professionals do not serve the notice period required before switching jobs.

Courts in Pakistan are not equipped to handle IT related cases. In Pakistan, there are no specific courts/ judges designated to handle Cyber Crime. Cyber Crime Laws are present but the legal system is not equipped to handle related cases.

Pakistan’s Image is fragile. Political uncertainty, economic instability, and other crises in Pakistan when highlighted can damage the country’s image. Most of the International companies, when looking for service providers or for the location of back offices rely on news and country image.

Inconsistency of policies. There are sudden changes in policies as the political regime in Pakistan changes, e.g., the change in tax regime from exemption to credit, imposition of sales tax on imported laptops and computers, etc. This restricts businesses abilities to plan ahead.

Policies that discourage growth of IT companies. Tax Credit scheme led to harassment by the FBR and a rise in the compliance cost for most companies. Registering freelancers, on paper is a good step, but to avoid constant harassment by the FBR, many may have not registered.

Brain Drain. Due to unstable, inconsistent policies, and other issues, many Pakistan firms have set up offices in the U.A.E. and other locations outside of Pakistan. Due to high international demand, talent in the IT services sector has located abroad as well.

Rise in Costs. Due to the depreciating Pakistani currency, rise in taxation, and shortage of human resources. Continuous rise in costs will lead to a decrease in the IT services companies’ profit margins.

Disruptions in internet connectivity. These mostly occur during protests, heavy rains, religious processions lead to many IT services firms losing their reputation or business because for call centers, there is a need for continuous operations.

Difficulty obtaining financing. The Banking system is gradually recognizing the IT services industry; however, many banking institutions are focused on the goods sector rather than the services sector.

Pakistan’s laws have not been revised for the knowledge economy. Pakistan’s laws are focused on the agricultural/manufacturing sector. Labor laws such as compulsory EOBI, working hours of 9 to 5, need not apply to the knowledge economy, where health insurance is provided and working hours should be flexible.

Relocation & movement of HR from Pakistan to destination markets. Pakistan’s FTA don’t cover services and hence movement of persons. Easy movement of people is necessary to obtain projects/ business. Pakistan doesn’t have a strong lobbying in its major markets like the U.S.A. in order to boost its business.

Lack of Accurate statistics on the IT services industry. This hinders in policy making and long-term planning for the industry.

Difficulty in expanding business abroad. Due to restrictions by the SBP such as on investments abroad, limits the ability of Pakistani companies to expand in regional and global markets.

Major Recommendations:

Improve factor related Issues

  • Bridge the Industry-Academia gap.
  • The Banking Sector needs to be educated regarding lending to the IT services industry.
  • Government Backed Venture Capital Funds are required.
  • Local manufacture of hardware, computer, laptops and accessories need to be encouraged.
  • Encourage more women into the workforce.
  • Provide Subsidized Electricity, similar to what is provided to the export sectors.

Policy/ Legislation related Recommendations

  • Laws need to be devised for the IT services industry.
  • Specialized courts should be designated for handling cases related to the IT services Industry.
  • More inclusive representation in federal institutions and consultative forums.
  • Consistency of policies and their proper implementation.
  • Policies targeted at attracting talent from abroad.
  • Rationalization of the tax regime for the sector.

Recommendations for the Structure of the IT industry

  • Encourage the formation of large companies.
  • Accurate statistics on the IT services industry for policy making.

Encourage Domestic Demand

The Government needs to act as a catalyst rather than a competitor in the Domestic IT services market.

Enhance Trade

  • Set up a Special Economic Zone (SEZ).
  • FTAs should be signed to facilitate freedom of movement.
  • Need to focus on exporting High-end services.
  • Improve Pakistan’s Image and PR abroad.

The PBC is a private sector not-for-profit advocacy platform set-up in 2005 by 14 (now 96) of Pakistan’s largest businesses. PBC’s research-based advocacy supports measures which improve Pakistani industry’s regional and global competitiveness. More information about PBC, its members, objectives and activities can be found on its website: www.pbc.org.pk