The digital revolution is transforming Pakistan’s economy. The Digital revolution has become a major source of income from abroad.
In the last fiscal year, total exports of digital services stood at $2.6 billion. It has shown an average growth of 40% over the past four years. Growth in the digital ecosystem is still in its early stages. The Chamber of Commerce and Industry of Foreign Investors (OICCI) estimates its potential at $10 billion.
By comparison, India leads the world with information technology (IT) exports of $150 billion. While annual IT exports from the Philippines were $30 billion in 2021. This sector should be a priority and the government should focus on addressing key areas related to payment gateways, tax treatment, and international certifications.
The government has revoked the tax exemption granted to the IT sector until 2025. It would be counterproductive for the growth of this priority sector.
One way the State Bank of Pakistan (SBP) can reduce money in circulation is through digital financial inclusion and incentives for mobile banking solutions.
They should also put on the table solutions on how large holdings of dollars on land (discussed in detail in yesterday’s article) introduce into the banking sector without causing capital flight.
One possible solution may be a limited-time exemption for citizens to invest in Roshan Digital Account (RDA) Products. We need to recognize and appreciate the fact that political concessions will be driven by the country’s economic needs. The export and foreign exchange flows are at the center of the plate.
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Unfortunately, we did not see these aspects pronounced in previous political actions or stimulus packages. Future political actions will revolve around such obvious economic compulsions.
IT and digital sectors offer immense potential for foreign exchange. It flows through service exports. Web 3.0 becoming a reality, we must be prepared to explore the possibilities of leveraging. The currency flows through regulatory actions which are currently beyond the reach of the formal system.
While no specific regulations are required for Web 3.0 as such, central banks are. But, working on the Central Bank’s Digital Currency (CBDC) or writing regulations on cryptocurrencies and their use cases. Several countries have started pilots, including China, Sweden, Nigeria, India, etc.
Some countries are looking to attract digital asset owners to the formal currency system. For example, Switzerland introduced crypto banks and a couple of pilots are underway. This is being tested to solve the problem of digital custody and legal ownership of cryptocurrency. In addition, an amendment was proposed to the regulation of electronic money. Payments include cryptocurrencies by using Stablecoins or Bitcoins for payments in the UK.
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Payment networks Visa and Mastercard are also starting to experiment with issuing cards. It is for specific cryptocurrencies in select countries for premium customers. Visa had started bitcoinblack in Dubai and Mastercard is testing a similar idea in Indonesia.
Digital currency is the future, particularly in our case, where 68% of the population is under the age of 30 and we must prepare for it. It is necessary to work on regulations so that this reality fulfills in our favor if we want to meet our surplus foreign currency requirements.
The most critical element in narrowing the external financing gap is to ensure recent growth in exports and remittances sustains over the medium term. The fiscal year 2022 was a historic year for Pakistan, as both exports and remittances recorded at around $31 billion each. There is concern that we will not be able to maintain these levels in the current year. It is due to fears of a global recession, growing energy shortages, and the reversal of subsidies.
According to the World Bank, Pakistan’s export potential is more than $88 billion. We are hampered by low productivity in agriculture and manufacturing. The report identifies energy tariffs as a major impediment. Average tariffs on final goods in Pakistan are 50% higher than the average for South Asia. It is nearly three times higher than the average for East Asia.
The other important area identified is the cost of doing business. Customs duties and tariffs increase input costs for our export industry. All these measures are, at best, of a medium-term nature. The immediate result, but, is to identify opportunities. It would provide a much-needed respite for financing external account deficits.
While we wait for the IMF and friendly countries to bail us out once again, we must develop a homegrown reform agenda. Our economic charter should focus on boosting our productivity and competitiveness. It is leading to sustained growth in exports of goods and services. The economy charter should also commit to ensuring policy coherence. It is especially in priority sectors. Priority sectors are information technology and engineering/export light industries.
In the short term, we must address our large external funding needs by boosting inflows into GDR accounts. We must address giving incentives to both overseas Pakistanis and land-based currency holders.
This is the second of two articles; the writers are former governors of the State Bank of Pakistan. He is also the president and CEO of the Bank of Punjab.
