According to recent data from the Ministry of Information Technology and Telecommunication, Pakistan’s IT exports amount to $5 billion, but only half of this amount is documented. While IT exporters attribute this underreporting to economic uncertainty, procedural issues, taxes, and lack of facilitation, critics argue that it may be a strategy to benefit from currency depreciation. The country’s IT exports have experienced significant growth of 146% in the past five years, reaching $2.61 billion in the last fiscal year. However, a 1% decline has already been observed in the first eleven months of the current fiscal year, raising concerns about the sector’s sustainability.
Despite the challenging economic circumstances, Pakistan’s IT sector has demonstrated remarkable resilience and consistent growth over the years. However, this growth is primarily driven by the talent and determination of the country’s youth rather than a business-friendly environment, as some government officials claim.
One of the major hurdles faced by IT businesses in Pakistan is the country’s ranking on the World Bank Ease of Doing Business Index. Pakistan fell 63 places between 2008 and 2015, and although some improvements have been made since then, the situation remains unfavorable. In 2020, Pakistan ranked 108 out of 190 countries, lagging behind certain African nations. The complexities of registering a business, obtaining electricity and credit, engaging in cross-border trade, paying taxes, and enforcing contracts contribute to the overall difficulties faced by entrepreneurs.
The lack of ease in conducting business operations in Pakistan leads many to rely on informal channels. Trust issues, scams, and low purchasing power plague the domestic market, while B2B companies struggle in the midst of the economic crisis, with some even limiting transactions to emergency payments. Digitization in public services is lacking, and a complex regulatory environment and challenges with the legal system further hinder business efficiency and consume valuable time.
Capital flow is another significant challenge for IT companies in Pakistan. Limited platforms for payments prompt freelancers to keep their earnings in digital wallets, and Fintechs focus more on individual consumers rather than B2B payment gateways due to the larger market segment. Bringing dollar payments into Pakistan is a major hassle for freelancers and corporate entities alike. The process often involves multiple attempts with different cards and payment gateways, and some jurisdictions still decline payments regardless of the efforts made.
International B2B transactions to and from Pakistan face obstacles due to factors such as the absence of a conducive ecosystem, regulations, and enforcement, which deter global firms like PayPal from entering the Pakistani market. The hovering cloud of the Financial Action Task Force (FATF) also inhibits aggressive action from both PayPal and the government, as it could become a tool for untraceable capital outflows. Founders often opt for foreign holding companies in jurisdictions that inspire investor and customer confidence, such as the United States, Dubai, Singapore, and the Cayman Islands.
The ease of sending money out of Pakistan is another challenge, with limited transparency and efficiency in capital transfers. Multinational companies with customers and vendors worldwide require the unrestricted flow of capital, but Pakistan’s capital constraints and complex processes hinder such transactions. Comparatively, registration and banking transactions are 60-70% easier and faster in the United States, highlighting the need for streamlining these processes in Pakistan.
Pakistan-based startups face difficulties in scaling to foreign markets, especially without venture capital funding and support from embassies. The negative economic reputation of the country, combined with a lack of participation in the international tech space, further complicates their efforts. Policymakers should come from within the core industry and involve international bodies like the International Monetary Fund (IMF) to develop flexible regulations that consider public feedback.
While some challenges may require long-term solutions to address inherent economic weaknesses and negative perceptions, prompt actions can be taken to improve the clarity and enforcement of regulations, facilitate foreign investment, and enhance ease of capital flow. By creating a business ecosystem that encourages value extraction and growth, Pakistan can unlock the potential of its IT sector and foster a more conducive environment for entrepreneurs.
