What hinders IT sector growth?

By Ajmal Khan Yousafzai

ISLAMABAD: Pakistan’s information technology sector has the potential to increase its exports by $10 billion in the next three years, which can help the country to earn foreign exchange and create jobs. However, various policy and regulatory barriers are hindering the growth of IT sector. This article attempts to delineate these barriers for informed decision-making by the stakeholders.
In several ways, the State Bank of Pakistan’s (SBP) regulatory policies are one of the biggest hurdles to the growth of IT sector. First, the process of opening a bank account for freelancers is complicated. Second, foreign exchange control mechanisms do not allow free movement of foreign exchange for IT sector firms and freelancers.
As a result, most IT firms and freelancers have opened bank accounts in the UAE, Singapore and the US. This means that Pakistan is losing out on this huge potential due to stringent foreign exchange policies. Third, the central bank has failed to facilitate foreign investors in establishing venture capital funds. In a recent roundtable of investors organised by the National Incubation Centre (NIC) Islamabad, Learners’ Republic and other partners, the SBP’s regulatory policies emerged as a major reason for a lack of investment in the IT sector.
The conference report states, “Regulatory policies of the State Bank of Pakistan and other regulators are not conducive to attracting FDI (foreign direct investment) in the country. These regulatory constraints inhibit entry, proper utilisation and exit of funds for any foreign investor seeking to invest in startups/VC firms in Pakistan.â€
Fourth, efforts to establish a payment gateway have not been successful. Considering this, the SBP should devise policies to allow for free movement of foreign exchange by IT sector firms as there are huge financial and economic benefits of removing regulatory hindrances.
Urban development authorities
Pakistan’s urban planners, managers and politicians have also hindered the growth of IT sector through rigid land-use policies that restrict mixed uses in cities. Development authorities in Islamabad, Karachi, Lahore and Peshawar have banned the use of residential spaces as offices. In other words, it is illegal to invite a few friends and develop software together. This is a barrier to innovation and entrepreneurship in the IT sector and does not serve any policy agenda.
The only reason such planning practices were introduced in Europe after the industrial revolution was to push pollutant industries out of cities. Thus, disallowing an IT firm to operate in F6 sector of Islamabad or in Hayatabad, Peshawar or DHA, Karachi makes little sense and hinders economic growth. Moreover, urban development authorities should take the initiative to establish co-working spaces for the IT sector by using their own land. However, such initiatives are rare.
One example is the recent project of the Metropolitan Corporation Rawalpindi (MCR), where the Rawalpindi Division commissioner helped to develop such a facility in the heart of the city. This facility will now be outsourced to a private partner for operation and management. Urban development authorities should also follow this practice for establishing Special Technology Zones in each city. Commercial land use in our cities is around 2%, which needs to be increased to at least 15% in the next three to five years. This will reduce property rents, increase revenues for the cities and spur innovation.
Higher Education Commission
IT education in Pakistan needs an overhaul in terms of its content to make it more relevant to the industry’s job market. Currently, IT graduates face employment challenges. We can take inspiration from the international short training programmes that help students to earn $3,000-5,000 per month through freelancing boot camps.
Such training offered as part of a higher education curriculum can facilitate speedy employment for the youth. An alternative can be government-sponsored short IT courses and boot camps for all IT majors.
Labour, tax regulations
A majority of the labour and tax laws have been developed for manufacturing and traditional retail industries, which create problems for IT sector firms. For example, any firm having more than five employees needs to register with the Employees Old-Age Benefits Institution (EOBI). Realistically, no IT professional would end his career with a pension of Rs5,000 per month. So, this requirement is impractical.
Similarly, the distribution of sales tax on goods and services between federal and provincial governments creates many problems for the IT sector. It is sometimes difficult to distinguish between goods and services for an IT sector product. This encourages corrupt behaviour such as bribing tax authorities. In other cases, IT firms may end up entangled in legal cases. Thus, there is a need to update labour, tax and other regulatory laws.
The government has relied on various task forces for undertaking an analysis that can contribute to policymaking for the IT sector, but such experiments have failed. There is a need to establish a cabinet committee to resolve such issues with submission of a monthly progress report to the cabinet for action.