Pakistan Technology: IT Exports in Sep-22 down by 10% MoM

Information Technology (IT) exports of Pakistan for September 2022 declined by 10% MoM and by 4% YoY to US$206mn primarily due to lower computer services exports. IT exports peaked at US$260mn in March 2022 and since than it has been on a declining trend. This number is also below the 6-month rolling average of US$217mn. In 9M2022, IT exports are up 9% to US$1.95bn whereas IT Exports for 1QFY23 stand at US$633mn declining by 5% QoQ and almost flat YoY. This decline in IT exports for last few months is concerning as country’s foreign exchange reserves are falling and IT sector has been one of the better performing sectors.

IT sector exports has depicted a 5-year growth CAGR of 23% (FY18-FY22) and a 10-year (FY13-FY22) CAGR of 19%. Therefore, the current growth trajectory is below the historical trend. 

Decline in IT exports is reflecting global trend where IT spendings are likely to be trimmed in 2022. According to a report by Gartner (Technology Research and Consulting firm), IT spending is expected to slowdown to ~1% in 2022 compared to 10% growth in 2021.

Pakistan’s Finance Minister recently stated that it refused to withdraw 0.25% levy on IT exports terming it as minimal. However, the Finance Ministry has assured that IT professionals exporting their services would not be sent tax notices by the Federal Board of Revenue (FBR) and their tax returns would not be subjected to audit to minimize their cost.

To recall, government withdrew 100% tax credit regime and it was replaced with 0.25% turnover tax on export proceeds.

Besides this industry experts also believe that volatility in the value of Rupee has also contributed to decline in exports due to companies holding off selling their FX.

Over the years, share of higher value added computer services exports are increasing as it has increased to 82% in 1QFY23 as against 79% in FY21. 

Segment wise breakdown for the month of September 2022 indicates that Telecom Services decreased by 17% MoM and by 5% YoY to US$34.5mn and Computer Services decreased by 8% MoM and by 4% YoY.

The total share of these exports for the month stood at 17% and 83% respectively almost the same as September 2021.

Latest quarterly numbers also reflect the same trend with Telecom/Computer share of exports for 1QFY23 standing at 18%/82% compared to 22/77% share in 1QFY21.

The annual number presents a broader growth trend of value-addition with Telecom/Computer Services share standing at 19%/81% compared favorably to share of 39/61% in FY17.

Growth of IT companies and training of IT professionals has have led to rise in share of Computer services. This value addition is leading to higher Net Exports (Exports minus Imports) of the sector since Computer Services exports are mostly human resource driven.

Going forward, training of IT professionals, removal of key bottlenecks and revival of global economy will remain key for future of IT exports.

Slowdown in startup funding continued in 3Q2022 with US$63mn raised across 10 disclosed deals. This is compared to US$88mn across 14 deals in previous quarter (2Q2022) and US$ 173mn across 18 deals last year (3Q2021). For 9M2022 an amount of US$323mn was raised across 40 deals, which depicts a growth of 13% YoY. Despite the slowdown in two consecutive quarters funding for 2022 is expected to cross US$359mn achieved in 2021.

The most funded sector in 3Q2022 was Fintech (US$36mn) followed by Blockchain (US$14mn) and E-Commerce (US$12mn). Some of the biggest and most prominent deals from the quarter included US$17.6mn raised by Dbank, US$13.2mn by Revolving Games, US$11mn by OneLoad.

Dbank is geared towards financial inclusion and is Co-founded by Tania Aidrus former head of Digital Pakistan. Askari Bank participated as a Secondary Investor. Revolving Games is a blockchain based game developer and Pantera Capital, one of the biggest crypto funds, and Rockstar Games, one of the biggest gaming companies participated in the round. OneLoad had Series A stage funding and  is a product of Systems Limited associate company EP Systems.

3Q2022 saw Pakistan’s largest Tech acquisition (US$350mn) of Cloudways by Digital Ocean and Airlift, one of the most well funded startups shutting down operations.

Courtesy- Topline Securities

Posted in News Update.

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