More dollars parked abroad than remitted

The time around the elections is a stark reminder of how big the gulf between the rulers and subjects is. While political leaders brag about their past performance with quite an audacity, the actual experience of the masses proves those words to be hollow. Currently, you get the same vibe from the Ministry of Information Technology and Telecom, where the difference between their social media shoutouts and the weekly internet outages can be hard to reconcile.

Lately, the ministry has been boasting about its performance across social and mainstream media, from the e-rozgar scheme to the Pakistan Startup Fund. It has also eagerly taken credit for the increase in Information and communications technology (ICT) exports, which rose 22.7 per cent to $303 million in December 2023, crossing the $300m mark for the first time.

While this is indeed welcome news for the industry, it’s also important to put this growth and the absolute number in context. And as it turns out, that context is quite partisan along political lines, with the vote of no confidence being the key event. From May 2022 onwards, Pakistan’s ICT exports went off rail, ending a 32-month-long run of impressive growth.

Between September 2019 and March 2022, the 31 full months when PTI was in power, the ICT exports grew 34.5pc sequentially per month and did not once decrease over the same period of the preceding year. In absolute terms, they started out at $104m and closed at $260m.

An estimated $2.7bn never made it back to the country, compared to official exports of $2.6bn, in FY23

Unfortunately, the political and economic uncertainty that came afterwards was too much for the industry, and there was a noticeable decline in proceeds. Or at least the money remitted back to the country, even if the actual sales maintained their growth trajectory.

Come May 2022, ie the first full month of the PDM government, that streak was broken, and the ICT exports slipped 7.04pc sequentially. Since then and until December 2023, which includes the caretaker setup, the year-on-year growth rate per month has averaged a disappointing 2.96pc. So, while there are signs of the industry regaining momentum, at least part of it has to do with a low base.

Assuming there hadn’t been any interruption and the growth trajectory had continued, monthly ICT exports would have breached the $300m mark back in August 2022 versus the actual figure of $228m. Needless to say, this counterfactual is a very simplistic exercise and not a robust model. But the point is that the recent performance only seems impressive if we strip it from the historical context and data.

Let’s not miss the forest for the trees though. While political uncertainty did impact the flow of dollars into Pakistan, the more pressing issue here is that a sizable chunk of ICT proceeds are never remitted to the country and instead parked abroad. For years, industry professionals have claimed that the actual exports are far more than what the data reports. But to what extent?

The recent performance of the IT sector seems impressive only if we strip it from the historical context and data

While plenty of big numbers, in billions of dollars, are thrown around regularly, we created an intuitive framework for estimating Pakistan’s undocumented exports.

But before getting to that, the bigger question is, how big is our IT industry? In theory, it should be the average revenue per employee (ARPE) times the total workforce employed by the sector. Though extremely important, neither of these two data points are reported by any regulatory or trade bodies.

Luckily, Systems Limited — the largest IT company in Pakistan — is publicly listed and had an annualised ARPE of $25,182 in 2023. Since bigger organisations usually have economies of scale at play, we discounted it by a factor of 0.5 and ended with an industry-wide average of $12,591. Meanwhile, our internal projections based on the Labour Force Survey of 2017-18, as well as marketing material from the ministry, put total employment in the sector at around 600,000.

Using these two figures yields the total IT sector at around $7.5 billion. Of this, roughly 70pc — or $5.3bn — come from exports, as per estimates reported by Pakistan Software House Association in its last Salary Survey. Given that the official exports in FY23 were $2.6bn, according to the State Bank, the differential, i.e. about $2.7bn, of proceeds never make it back home.

Put another way, more dollars are parked abroad than those that are remitted. It’s a big gap and indicates how the IT sector may not be any more documented than the overall economy.

There are plenty of explanations for this, from taxation concerns to regulatory bottlenecks. While many of them have been taken up by the relevant regulatory authorities, it’s about time something is done to address the root cause: the private sector doesn’t trust the local currency or institutions with its money.

The writer is the co-founder of Data Darbar

Published in Dawn, The Business and Finance Weekly, February 12th, 2024