With numbers for two-thirds of the fiscal year now in, the country’s information and communications technology (ICT) industry is sending worrisome signals on its overall performance in the eight months of the fiscal up to February 2023. As ICTs are a prominent contributor of non-debt equity inflows (e.g. IT exports) and drive digital development and economic modernization, the government needs to look into the specific challenges that are being faced by different sectors and segments within the ICT industry.

This fiscal, ICT exports have slowed down considerably compared to recent years. Based on the data from the State Bank of Pakistan (SBP), exports of ‘Telecommunications, Computer and Information services’ stood at $1.72 billion in Jul-Feb FY23, up by just 2 percent year-on-year. At this pace, FY23-end ICT exports may not go beyond $2.7 billion, against the $3 billion target. There is significant growth variation among different segments, as global slowdown in IT spending is impacting services differently.

For instance, within the core IT segment, the exports of ‘software consultancy’ increased by 3 percent year-on-year to $511 million, whereas exports of ‘computer software’ jumped 12 percent year-on-year to $398 million.In the ‘telecommunications’ segment, the exports of core telecom services (LDI telephony revenues earned by local telecom operators from foreign carriers) declined 5 percent year-on-year to $187 million, whereas exports of call centers were slightly up by 2 percent year-on-year to $138 million.

Meanwhile, the penetration of ICTs in the country is expected to be impacted by the deep decline in handset imports. As per the shipment-based data from the Pakistan Bureau of Statistics (PBS), the mobile phone imports declined by 68 percent year-on-year to reach $448 million in Jul-Feb FY23. The SBP’s payment-based data show an even bigger decline of 93 percent year-on-year for mobile phone imports to come down to a mere $89 million in 8MFY23. It resulted in forex saving of $1.14 billion!

The massive slump in handset shipments seems to be an outcome of a host of factors, including the government’s machinery-import-related restrictions introduced last summer, massive PKR depreciation, erosion in customer purchasing power due to high inflation amid rising unemployment, and upward price revisions by major, popular brands. As there are indications that import restrictions may be gradually lifted, it remains to be seen whether the handset imports will respond accordingly in the coming months.

Just as in many other industries, the foreign direct investment (FDI) in the ICT industry has also been negatively impacted due to internal and external factors. As per the SBP data, in the telecommunications sector, there was a net FDI outflow (inflows being less than outflows) of $46 million in 8MFY23, as opposed to net inflows of $92 million in the same period last fiscal. Meanwhile, the IT sector brought in net inflows of $31 million in 8MFY23 – however, this figure was down by 71 percent year-on-year.

At this pace, both the telecom and IT net FDI scorecards are likely to fare worse by FY23-end, compared to net FDI in FY22which was -$29 million for telecommunicationsand $148 million for IT.Foreign firms that that are engaged in these sectors seem to face difficulties in transferring their returns to respective HQs. As per the SBP data for Jul-Feb FY23, the profit repatriation in the telecommunications sector was down by 90 percent year-on-year to $7 million, whereas it was zero for the IT sector (compared to $37mn in 8MFY22). Such controls further erode the case for new investment amid rising cost of doing business.