THE digital revolution is truly transforming Pakistan’s economy and has become an important source of income from abroad.
In the last fiscal year, total exports of digital services stood at $2.6 billion with an average of 40pc growth per annum over the last four years. The growth in the digital ecosystem is still in its early stages and Overseas Investors Chamber of Commerce & Industry (OICCI) estimates its potential at $10bn.
In comparison, India leads the world with information technology (IT) exports of $150bn, while Philippines’ annual IT exports were $30bn in 2021. This sector should be a priority and the government must focus on addressing key areas related to payment gateways, tax treatment and international certifications.
The government has revoked the tax exemption given to the IT sector till 2025, which will be counterproductive to the growth of this priority sector.
One way the State Bank of Pakistan (SBP) can bring down the money in circulation is through digital financial inclusion and incentives for mobile banking solutions.
They also need to bring to the table solutions for how large onshore dollar holdings (discussed in detail in yesterday’s article) can be brought into the banking sector without causing a flight of capital.
One possible solution can be a limited-time exemption for citizens to invest in Roshan Digital Account (RDA) products. We need to recognise and appreciate the fact that policy concessions shall be driven by the country’s economic needs, with export and forex flows being at the centre of the plate. Unfortunately, we didn’t see these aspects being pronounced in previous policy actions or stimulus packages. Future policy actions shall revolve around such obvious economic compulsions.
Not only do the IT and digital sectors offer immense potential for foreign currency flows through service exports, but with Web 3.0 becoming a reality, we need to be prepared to explore possibilities of harnessing those foreign exchange flows through regulatory actions, which are currently out of reach for the formal system.
While there are no specific regulations required for Web 3.0 as such, central banks are, however, working on Central Bank Digital Currency (CBDC) or writing regulations on crypto currencies and their use-cases. In fact, several countries have started pilots, including China, Sweden, Nigeria, India, etc.
Regarding regulations on crypto currencies, there are a few countries that are looking to attract digital asset owners into the formal forex system. For example, Switzerland introduced crypto banks and a couple of pilots are underway. This is being tested mainly to solve the issue of digital custody and legal ownership of crypto currency. In addition, an amendment in the regulation on electronic money and payments is being proposed to include crypto by use of Stablecoins or Bitcoins for payments in UK.
Interestingly, Visa and Mastercard payment networks are also starting to experiment with issuing cards for specific crypto currencies in selected countries for premium clients, e.g., Visa had started bitcoinblack in Dubai and Mastercard is piloting a similar idea in Indonesia.
Digital currency is the future, particularly in our case, where 68pc of the population is below the age of 30 and we need to gear up for it. In fact, there is a need to work on regulations to make this reality deliver in our favor if we are to meet our exceeding foreign currency requirements.
However, the most critical element to limiting the external financing gap is ensuring that the recent growth in exports and remittances is sustained over the medium term. FY2022 was a landmark year for Pakistan, as both exports and remittances were recorded at around $31bn each. There are concerns that we will not be able to sustain these levels in the current year due to fears of global recession, growing power shortages and roll back of subsidies.
According to the World Bank, Pakistan’s export potential is over $88bn, but we are hampered by low productivity in agriculture and manufacturing. The report identifies power tariffs as a major impediment, saying that average tariffs on final goods in Pakistan are 50pc higher than the average for South Asia, and almost three times higher than the average for East Asia.
The other major area identified is the cost of doing business, with customs tariffs and duties escalating input costs for our export industry. All these measures are, at best, medium term in nature. The immediate requirement, however, is to identify opportunities which provide a much-needed breather in financing external account deficits.
While we wait on the IMF and friendly countries to bail us out one more time, we must develop a homegrown reform agenda. Our charter of the economy must focus on boosting our productivity and competitiveness, leading to sustained growth in the exports of goods and services. The charter of the economy must also commit to ensuring policy consistency, especially in priority sectors, such as IT and light engineering/export industries.
In the short term, we must address our large external financing needs by boosting inflows into RDA accounts, giving incentives to both overseas Pakistanis and onshore holders of foreign currency.
This is the second of two articles; the writers are a former governor of the State Bank of Pakistan, and the president and CEO of the Bank of Punjab, respectively.
Published in Dawn, August 19th, 2022