Pakistan IT exports stagnate at $2.6 billion in FY23, missing target

KARACHI: Pakistan's information technology exports failed to grow in the fiscal year 2023, staying at $2.6 billion, the same level as the previous year, brokerage Topline Securities reported on Friday.

The country missed its ambitious target of $5 billion for the year, which was set by the Ministry of Information Technology and Telecommunication for the fiscal year 2022/23 ended in June.

Technology companies retaining a significant portion of their income abroad, economic slowdown, and exchange rate volatility have collectively hit hard Pakistan’s IT exports, the brokerage said.

IT export number only indicates the amount remitted back to Pakistan by tech companies and freelancers. It does not include income retained abroad.

“According to our channel checks, IT players are retaining a greater portion of their proceeds outside the country due to declining business confidence and volatility of exchange rate,” the brokerage stated in its report.

Prime Minister Shehbaz Sharif recently urged to boost the country’s IT exports to $25 billion within two to three years, which seems difficult as the target set for FY23 by the IT ministry was missed by almost half.

“This is something doable. This is difficult but not impossible. We have to achieve this target under all circumstances,” PM said addressing an IT seminar in Islamabad on Thursday. IT exports growth for FY23 has slowed down to its lowest level since FY16, as the inflows remained flat YoY to record $2.6 billion, which is way lower than 5, 10, and 15 year compound annual growth rate (CAGR) of 19.5 percent, 12.5 percent, and 16.3 percent, respectively.

Net (exports minus imports) IT exports in Pakistan increased by 15 percent year-on-year (YoY) in FY23. The exports have also been a victim of a global slowdown in IT spending. According to Gartner Research (technology consulting firm), worldwide IT spending slowed down to 2.7 percent in 2022 from 10.2 percent in 2021, according to the report.

In 9MFY23 (as per available data), IT exports of Korea, Sri Lanka, Bangladesh, China, and Philippines have recorded year-on-year (YoY) decline/growth of -24 percent, -13 percent, -12 percent, +1 percent, and +5 percent. This is compared to average growth of 26 percent in these countries in FY22.

India has been the only exception where growth in 9MFY23 stood at +20 percent YoY due to pivot to new services verticals and emergence of many smaller IT companies. Segment wise analysis indicates that computer services for FY23 remained flat at $2.1 billion and telecom services declined by 3 percent YoY to $490 million.

Computer services share in IT exports increased to 81.0 percent in FY23 from 40.4 percent in FY14. Computer services are further composed of software consultancy, export of software and other services etc. Telecom services are composed of telecom and call centers.

Net exports have witnessed 5/10 year CAGR of 31.4 percent/19.2 percent respectively. Main reason for the development is computer services exports increasing from $330 million inFY14 to $2.1 nillion in FY23 at a CAGR of 22 percent, the report stated.

The growth was magnified during the Covid-19 period of FY20-FY22 where computer services exports jumped to $2.1 billion in FY22 from $896 million in FY19.

During Covid, IT and telecom were declared essential services while other regional competitors faced lockdowns. IT companies and freelancers of Pakistan took advantage of increased global IT spending, especially in Middle East, to gain market share.

Pakistan currency devaluation in FY18 and FY19 also had an impact which made software developer of Pakistan cheaper compared to other Asian competitors, the brokerage said.

Computer services are mostly software based and require no raw material imports and very minimal equipment imports. Since the raw material for these exports are IT developers unlike a sector such as textile, which is dependent on imported cotton and machinery to generate exports.

As a result, IT services have become an important segment of Pakistan’s exports with share in total exports (goods and services) increasing from 2.7 percent in FY14 to 7.4 percent by FY23.