ISLAMABAD: A combination of economic, political and other external factors make Pakistan less attractive to foreign information technology investors, besides, policy barriers, limit market entry, increase costs, and reduce capacity to compete.
This has been stated in a report, "Economic Policy for Export Competitiveness Digital Pakistan: A Business and Trade Assessment" of the World Bank (WB), prepared in collaboration with Gallup Pakistan.
The report stated that high duties on imports constrain access to high-quality inputs needed in downstream IT-sectors.
Pakistan still applies duties on imports of digital products at an average of 13.7 percent, increasing production costs for all sectors in the economy, particularly in context in which digital technologies can help the economy function to some extent, while preserving social distancing.
The report noted that Pakistan ranks 37 (out of 50) in AT Kearney's Global Services Location Index 2019, below India (1), Sri Lanka (25) and Bangladesh (32), mainly due to a poor score in the business environment.
Macroeconomic instability, together with security considerations, is a key reason for overall low foreign investment, and it is very low in the IT sector.
Furthermore, there is a security-risk perception that works against Pakistan, thereby making it difficult for Pakistani companies to attract business from abroad.
As measured by the ICT Development Index (IDI) compared to other countries in the world Pakistan ranks low.
Although Pakistan's IT industry has grown into a moderately-sized sector, it comprises mostly domestically-owned firms with very few foreign operations. Of the top 10 exporters, only one is foreign.
The reduction should be gradual and focus on products included in the WTO's Information Technology Agreement.
On domestic taxation, there are two related issues: a) taxation policies; and b) tax administration and practices (governance).
This issue requires urgent attention from the authorities at the central and provincial levels. Pakistan will benefit from simplification and better coordination of tax authorities.
This report analyses the recent trends in Pakistani Information Technologies (IT) and Information Technologies-enabled Services (ITeS), as well as obstacles confronted by firms.
The impact of obstacles (i.e., trade costs) confronted by firms increase the costs of selling services, and may reduce capacity to compete both in the local market (Pakistan) as well as overseas (exports).
These obstacles include direct costs generated by policy barriers that limit market entry, but can also include infrastructure deficiencies, geographical location, and institutional capacities, and/or obstacles imposed by regulatory measures.
Among the latter obstacles, include difficulties in accessing the information necessary to operate in a market, the predictability and stability of the business environment in a particular market, and the quality of the decision-making process and administrative procedures of competent authorities in the domestic and export markets.
Pakistan maintains relatively restricted digital trade policies, as measured by the Digital Trade Restrictiveness Index (DTRI).
Pakistan's main digital trade policy obstacles are found in the area of fiscal restrictions, while the establishment restrictions in digital sectors are relatively low.
Pakistan appears in the top 5 list of countries most restricted for tariffs, trade defense, taxation, and subsidies policies.
Pakistan maintains a simple average MFN applied tariff rate of 9.7 percent on digital products, with peaks of 35 percent.
The country also has an anti-dumping measure in place on imports of phthalic anhydride (which is an input used to make PVC for cables) from India, Iran, Italy, Thailand, Brazil, China, Indonesia, Republic of Korea, and Hong Kong.
It further added that taxation remains challenging in Pakistan.
Representatives from the IT sector noted that the lack of tax harmonization for services industries across the provinces creates a heavy burden in terms of duties, as well as in compliance.
Dealing with tax authorities is costly for firms in terms of time and financial resources, and was identified by the private sector during field interviews as one of the most challenging areas in their business.
This is due, in part, to the complex nature of modern business models required by ICT/digital firms, but is also due to existing tax regulatory environment and enforcement approaches.
Although Pakistan does not have any full data localization requirement, it nonetheless places some restrictions regarding data.
The country has significantly stricter rules regarding content access compared with some of its peers, such as Thailand, Indonesia, India, and Russia.
Pakistan appears to control foreign commercial services content to its domestic market, and the government has provided a mandate for filtering legal content.
A related concern for Pakistan's IT services exports is the surge of stricter data regulations applied by various countries in the world.
Restrictive data policies such as data localization measures, and other services that are produced with the help of advanced software, will discourage the growth of high value-added and content-intensive activities.
This also means that Pakistan is likely to suffer, if it were to implement these policies itself, as it would reduce services trade between countries.
While privacy and data protection are important legitimate policy objectives, they should be achieved in the least restrictive manner to allow for the development of the industry based on internationally-recognised principles, it added.
Currently, Pakistan's IT services firms face obstacles in foreign markets, while trading. In most part, these obstacles are of a trade facilitation nature as they relate to the regulatory requirements that exist in export markets.
They are an entry barrier for Pakistani firms because they create compliance costs when entering the market, for instance, work permit regulations or entry visa requirements.
The latter is the single most crucial item identified by Pakistani exporters that report this factor as an obstacle.
By contrast, regulatory predictability, timeframes, and applicability of regulations in foreign destinations are less of a problem for Pakistani exporters.
Engagement with trading partners will be critical for dealing with visa restrictions. Pakistan's IT services firms also face obstacles in the home market.
Survey results showed that the two most important domestic obstacles relate to electricity shortages and IT infrastructure.
The latter includes the country's telecom network market as well as IT-goods that are necessary as an input for producing and exporting IT services.
The next two most significant obstacles that firms face in Pakistan are of a regulatory nature: insufficient intellectual property right protection and the entry of foreign competitors in export markets.
The former is something that Pakistan policymakers can change in the short-term domestically.
A change in the latter would also depend on policymakers in the export markets, and last generation trade agreements are an instrument that could help to overcome these challenges.
For non-exporting firms in Pakistan that rely on the domestic market, reported obstacles relate to the domestic enabling environment.
The ingredients for a successful reform strategy should include interventions in three policy areas: a) regulatory capabilities and governance; b) sector-specific policies; and c) complementary supporting policies.
Also, digital trade policies take place at two levels.
At the national level, domestic policies play a critical role in reducing trade costs and enhancing competitiveness.
But domestic policies by themselves do not open foreign markets; they need to be complemented by international policies aimed at helping the private sector to thrive in the global economy.
In this context, every domestic policy should be complemented by international initiatives at the multilateral, regional (SAR and beyond), and bilateral levels.
Copyright Business Recorder, 2020
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