‘IT exports flat in Aug; startup funding cooling down’

Our Correspondent
Tuesday, Sep 27, 2022

KARACHI: IT exports jumped 14 percent in August 2022 to $227 million month-on-month (MOM), but were flat compared to the month last year, numbers showed on Monday, which came as no surprise given a global spending slowdown.

The IT exports also fell 13 percent from their peak of $260 million recorded in March 2022, while 2MFY23 IT exports clocked in at $426 million, almost flat compared to the same period last year, brokerage Topline Securities said in a note.

This is in line with the prevailing world trends. Gartner, a technology research and consulting firm, in a report said IT spending was expected to grow by 3 percent in 2022 compared to 10 percent in 2021.

“Skilled labour shortage is causing IT service providers to offer competitive salaries thus increasing the cost of IT services in an inflationary environment,” the report said. Industry officials in Pakistan are pinning the slowdown on global phenomena and domestic taxation measures.

To recall, the government withdrew the 100 percent tax credit regime with effect from July 1, 2022 from the income generated from export of software and IT services and had replaced it with withholding tax of 0.25 percent on export proceeds in FY23 budget.

For the month of August 2022, segment-wise breakdown shows telecom services exports decreased 32 percent year-on-year to $ 41.5 million, while overseas sales of local computer services increased 14 percent year-on-year to $185.1 million. The percentage shares of telecom and computer services were 18 percent and 82 percent, respectively, in total IT exports.

On a broader level the global IT industry operates across three verticals, which are hardware implementation, software implementation, and software/product development. The movement of this classification is from low to high value addition.

Trailing Twelve month (TTM) IT exports of Pakistan as of August 2022 increased 17 percent year-on-year to $2.6 billion compared to $2.2 billion in the same period last year. The IT sector has depicted a 5-year growth CAGR of 23 percent (FY18-FY22) and a 10-year CAGR of 19 percent. Therefore, the current growth trajectory is in line with historical trends.

Computer services require higher value-addition compared to Telecom Services, whose share is rising. Share of computer/telecom services now stands at 82 percent/18 percent as of Aug 2022 data as compared to 80 percent/19 percent in FY22.

This also compares favorably to the share of telecom/computer services of 61 percent/39 percent in FY17. Growth of IT companies and training of IT professionals have led to a rise in share of Computer services.

Slowdown in startup funding is expected to continue in 3Q2022. Few of the recent prominent funding deals in 3Q2022 as per CrunchBase include: One load (Series A–$11 million), Price Oye (Seed Round – US$7.9 million), SnapRetail (Pre Seed Round–$2.5 million), Neem (Seed Round – $2.5 million), and Mahaana (Pre Seed Round–2.1 million).

Pakistani Startups in 2Q2022 raised a total of $88 million across 14 deals. This translates into an average ticket size of ~$6 million per deal. That compared with $99 million raised across 19 deals in 2Q2021.

“For analysis purposes, we have not included deals with undisclosed amounts,” the Gartner report said. E-commerce was the most funded sector in 2Q2022 ($40 million), just like 2Q2021 when it had received funding of $32 million.

For 1H2022 startups have raised a total amount of $260 million across 30 deals compared to $114 million in 1H2021 across 26 deals, showing a growth of 128 percent year-on-year. Quarter-on-quarter, amount raised by startups dropped to $88 million in 1Q2022 against $172 million in 1Q2021. “This is in line with global trend where decline in startup funding has been seen due to rising inflation rates and fears of global recession,” the report said.