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While the country’s digital economy has grown considerably since the pandemic years, its investment barometer presents an abysmal look at the moment, having been affected by both sectoral challenges and the downbeat macroeconomic indicators all around. As the budget season is here and the cash-starved exchequer looks to raise more taxes, it is important to not lose site of the bigger picture: the future of work and the necessary skill sets for the millions of youth increasingly depend on the digital economy.

As per the latest data from the central bank, the telecommunications industry’s net FDI (inflows less outflows) stood at negative $26 million during Jul-Apr period of FY23. While this figure is comparatively lower than the net FDI negative balance of $70 million in the same period last fiscal, it is mostly due to the result of lower outflows this time around. In terms of gross inflows, telecoms collectively attracted just $62 million in investment in 10MFY23, which was 51 percent lower than the same period last fiscal.

With rising cost of operating a business in Pakistan, escalating cost of borrowing even in foreign markets, and the freefall in PKR that mars local, organic returns in foreign currencies, the telco’s sponsors were bound to be wary to pour in more investments. Besides, there is, and has been, limited room or upside for operators to raise prices for end users to recoup investment returns. While telco’s have increased their tariffs in recent months, the nominal growth in topline has been unable to compensate for rising costs.

As a result, the operators’ focus has been more on preservation of operational footprint and managing liquidity instead of making higher investments in network expansion. As the current macroeconomic climate is likely to last a couple of more years before things get better, the concerned government authorities may need to provide forward guidance on issues that have been a drain on FDI. These include having an enabling taxation regime, regular spectrum auctions, fair license prices, right of way, etc.

Investment setback for the digital economy this fiscal is pronounced by the much-reduced FDI in Information Technology (IT) industry. During 10MFY23, IT’s net FDI recorded $35 million, which is much better than their telecoms cousins, but the figure is barely a quarter of the $$129 million which the IT firms attracted in the same period last fiscal. Gross FDI inflows for the IT industry slumped 67 percent year-on-year to $44 million, as both segments of software development and IT services showed weakness.

At this pace, both the IT and telecoms FDI are likely to end on a disappointing note by FY23 close, faring worse than last fiscal. (At the end of FY22, the net FDI was -$23 million for telecoms and $146 million for IT). If the current macroeconomic crisis prolonged, it may become difficult for foreign operators to remain committed with this market. While the overall investment sentiment may take years to recover, there are steps the government can take to improve operating environment in the digital sector in the short term.

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