State of ICTs

With manufacturing sector entering a period of contraction amidst floods-induced farming losses, wider economic slowdown and inflationary pressures, how the services sector fares will have major bearing on whether the economy is able to eke out some GDP growth this fiscal. Within services, among the sectors that matter is the digital ones under the Information and Communication Technologies (ICTs) domain.

At the start of FY22, there is a mixed trend witnessed among different nodes of ICTs. All eyes are understandably on ICT exports, which have done well in recent years. But now there appears to be a slowdown. As per data from the State Bank of Pakistan (SBP), ICT exports had reached $426 million in Jul-Aug FY23, scoring only marginal growth of 1.4 percent year-on-year. Monthly average ICT exports this fiscal thus far slightly trail the average exports of $218 million per month back in FY22.

Within ICT exports, computer services (especially proceeds from software consultancy services and sales of computer software) showed healthy growth on a yearly basis. However, the increase was mostly offset by the decline in telecommunication services (especially long-distance and international (LDI) telephony revenues). It somewhat helped that call center exports showed double-digit growth.It remains to be seen how growing economic weaknesses in key IT export markets will affect proceeds in coming months.

Among the foundations of digital ecosystem, mobile broadband subscriptions (3G and 4G) stood at 120 million as of August-end 2022, as per data from the Pakistan Telecommunication Authority. This signified year-on-year growth of 16 percent – or roughly 1.4 million net additions per month in the year to August 2022. In terms of unique mobile broadband users, there are presumably 90 million adults holding mobile broadband connections, if the assumption that every third user is holding two subscriptions is valid.

However, there is a big slump in handset imports, resulting from the government’s prior import restrictions and lackluster consumer demand amid imported phones becoming expensive due to retail price hikes by vendors as well as PKR depreciation. As the per central bank data, mobile phone importsstood at $59 million in the Jul-Aug period of FY22, down by 79 percent year-on-year.

Back in FY22, average monthly imports of handsets was $145 million, whereas in 2MFY22 thus far, average monthly imports were less than $30 million. Is the country going to witness significant forex savings on this count this fiscal? Data from the Pakistan Bureau of Statistics (PBS) also show a large decline: the shipment-based mobile phone imports stood at $102 million in 2MFY23, showing a drop of 64 percent year-on-year.

Meanwhile, local assembly of the phones has gone considerably up, relative to imports of finished handsets. As per the PTA data, nearly 16 million mobile phones were assembled in Pakistan during the Jan-Aug period of 2022 (monthly average: 1.95mn), compared to roughly 25 million units in entire 2021 (monthly average: 2mn). The volume of commercial imports (CBU) has significantly declined this year, averaging less than 0.2 million units per month, compared to roughly 1 million units per month in 2021.

The mixed state of ICT affairs is reflected rather more drastically on the foreign investment front. As per the latest SBP data, net foreign direct investment (FDI: inflows less outflows) stood at $15 million for the telecommunications sector in Jul-Aug FY23(minor increase of $2mn vis-à-vis 2MFY22). FDI is expected to remain low without a new spectrum auction. Meanwhile, net FDI in IT sector nosedived to $10 million in 2MFY23, compared to $41 million in the same period of the last fiscal, showing how foreign investment deals are drying up. Let’s see what the coming months have in store for the country’s digital ecosystem.