Should Pakistan join the IT Agreement?

Amid declining ‘export in goods,’ government policies on ‘export in services’ demand an urgent rethink. Within services, the Information & Communication Technology (ICT) services hold great promise. (For more, read ‘A case for services exports,’ published June 16, 2017). Boosting those exports would need, among other things, cheaper IT hardware, so that Pakistan’s IT services exports are more competitive.

However, Pakistan’s continued tariff imposition on ICT equipment, when most other nations have let go of them, is an impediment. The influential Washington-based technology think tank, the Information Technology & Innovation Foundation (ITIF), recently published a report suggesting Pakistan would economically benefit if it eliminated tariffs on ICT products in line with the global Information Technology Agreement (ITA).

Specifically, ten years after joining the ITA, Pakistan’s GDP will be 1.3 percent higher than if the country did not join the ITA, as per the report. That’s an increase of roughly $5 billion. Two decades on, Pakistan has remained out of the ITA, even as the list of countries, which includes many regional and developing economies, has swelled to 82.

For background, 29 WTO members joined ITA in 1996, to completely remove tariffs on some categories of ICT products, including personal computers, semi-conductors, and telecom equipment. In 2015, the original ITA was expanded to cover more tariff lines as more nations joined. Of the 82 current members, 29 are signatories to the original ITA (ITA-I) and 53 are signatories to the expanded ITA (ITA-II).

ITIF’s argument is that ITA-enabled trade growth is partly responsible for making ICT products cheaper over time – the main factor being Moore’s Law on computing power efficiency. It further claims that as an ITA-signatory nation starts to eliminate tariffs on ICT imports, cheaper ICT products lead to more adoption of ICT products. That in turn leads to productivity gains, as businesses, public sector, and individuals perform their tasks and transactions more efficiently. All of that feeds into higher GDP growth.

That narrative is compelling. Yet ITIF could have strengthened its case by conducting a country-study instead of using a hotchpotch of data from different countries to make its case. But local policymakers must still take notice. Pakistan has consistently ranked low in global ICT rankings, chiefly due to low ICT usage among its public and private sectors. Cost of computing devices and other ICT hardware is an impediment to mass adoption.

Question is: why hasn’t Pakistan – a country which doesn’t really have an indigenous ICT hardware industry to protect, but one which is struggling to expand Internet to rural areas – joined the ITA yet?

The immediate downside of signing up is the tax-revenue loss. The ITIF reported that Pakistan has a 5.4 percent effective realized tariff rate on ITA-covered ICT products. Should Pakistan join ITA, it would lose $2.65 billion in tax revenues over ten years. But some 58 percent of the foregone revenues can be recovered as higher ITA-attributable growth leads to growth in goods and services tax and income tax

Going by the ITIF report, joining the ITA wouldn’t be revenue-neutral for Pakistan – at least in the first decade. But ITIF doesn’t take into account possibility of higher software/IT services exports resulting from cheaper hardware. Also somewhat likely is that growing domestic ICT usage – hence, local scale – may allow local firms to become part of global value chains (GVCs) of big ICT equipment manufacturers.

It is not clear how serious the federal government is in joining the ITA. Back in October, 2016, the Prime Minister’s Office notified a high-ranking committee to provide recommendations on Pakistan’s accession to the ITA. The committee – chaired by Secretary Commerce, with secretaries of Revenue, IT & Telecom, and Industries & Production, and Dr. Manzoor Ahmed, ex-WTO Ambassador, as members – was specifically tasked to review ITA’s implications for Pakistan’s e-commerce and software sectors, chances for global IT supply-chain integration, revenues foregone, and economic gains.

As per documents available with BR Research, the committee’s hastily-prepared report – which was yet another mélange of sporadic facts from across the world, without having a country focus – wasn’t unanimous in its recommendations. The Ministry of Commerce and the Ministry of IT both supported ITA accession (ITA-I). The ex-WTO Ambassador supported joining both ITA-I and ITA-II. The Industries ministry supported ITA “in principle”, without taking a position on whether Pakistan should accede to it.

It was the FBR that came out “strongly opposed to acceding to the ITA”. It was concerned about “serious revenue implications”, “foreclosing” the option of localization of ICT products, and negative impact on balance of payments. Arguing against a binding multilateral agreement, the FBR recommended the IT sector to utilize the recent policy of duty-free imports of equipment and machinery under the Special Economic Zones regime. And if that’s not enough, it said “targeted fiscal measures can be considered”.

Many months later, in the month of June 2017, the PM Office issued another notification to the committee members. The notification made clear that the PM viewed the ITA as an opportunity rather than a threat, as joining the regime could help accelerate economic growth, attract investment in technological industries, and make the e-commerce sector grow. Another round of consultations was ordered under the command of Secretary Commerce, with the report to be presented within two weeks.

Things must move forward now. A middle ground already exists, to satisfy all stakeholders. Pakistan can first join the ITA-I – which has a limited number of ICT tariff lines – and watch its fiscal and economic impacts for some time before deicing on ITA-II, the expanded regime.

That view is echoed by Commerce Secretary Younus Dagha, who told BR Research last week, “We are supporting the idea for signing ITA-I. It will be an important milestone to expand IT business and investment in the country. For ITA-II, we propose to enter into negotiations along with other countries to safeguard the growth of domestic IT sector.”

If the PM is indeed supportive of ITA accession, he seems impeded by the fiscal ranks in bureaucracy. FBR is a victim to short-termism, as taxmen have to comply with annual targets. But potential tax-loss is not too huge. And it can be recouped as economy may benefit from cheaper ICT hardware.

Pakistan will have difficulty becoming a hub for ICT product manufacturing. But it still has a chance to make its IT services exports viable. Joining the ITA, of course, is no panacea, but it can help in that regard.