Current Economic Crunch and the State of Our Industry

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Current Economic Crunch and the State of Our Industry
Current Economic Crunch and the State of Our Industry

Pakistan is going through a challenging economic crisis and is struggling to meet its required balance of payments to avoid an economic deficit. The bud­get deficit in the outgoing year 2021-22 is expected to be around Rs 5,200 billion. Circular debt in the power sector is going to be Rs. 2,500 billion. The trade deficit has increased by 58% to about $45 bil­lion, whereas the current account deficit would be around $16 billion. At the same time, the Pakistani rupee has been gradually declining against the US dollar, falling to Rs.240 from Rs.180 per dollar. As a result, a hike in the policy interest rate to 13.75%, has led to the inflation rate rise to 14%.

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In Fiscal Year 2022 (FY22), the Pakistani IT industry made a record-breaking remittance in the IT sector of $2.616 billion, shattering the records of all the previous years. Last year, revenue from the IT sector of Pakistan was $2.108 billion, which has increased by 24% this year. But things have taken an unat­tractive turn over the last couple of months.

Recent financial results announced by the sector paint a pretty grim picture of the gravity of the

situation as industry-wide revenues took a toll while high operating costs pulled the plug on profitability. Some of the issues that are highlighted by the tele­cos are new, while others have been hindering the profitability and growth of OEMs for a long time.

“Hike in power and interest rates’’

As the energy situation has deteriorated in the past few months, telecom operators have also faced the brunt of it. Cellular tower sites consume a consider­able amount of energy, and power outages coupled with cost hikes have put the Cellular Mobile Opera­tors (CMO) in a terrible fix. Although power outages are not a new phenomenon, the telcos have been tackling this problem by arranging backup power supplies, primarily through generators. The telcos think that rising fuel costs, which have caused en­ergy prices to go up, have hurt their profits and that the situation is getting worse and worse.

Last year, revenue from the IT sector of Pakistan was $2.108 billion, which has increased by 24% this year. But things have taken an unattractive turn over the last couple of months

2022 has brought with it a significant increase in en­ergy prices across the country, which is causing sig­nificant problems in terms of profitability for tower­cos and increasing costs for operators.

Operating costs shoot up due to excessive generator fuel and maintenance costs. More reliance on gen­erators means more frequent refueling and more pilferage. For a low ARPU market like Pakistan, this is a matter of grave concern for all telecom

operators.

“A Hike in Interest Rates ’’

Further, the interest rate hikes have also added to the Telco’s vows. For instance, Ufone financed its purchase of spectrum last year by availing of a long-term debt facility. Jazz has also taken on more debt because equity financing is expensive, especially in a country like Pakistan where the risk premium is very high.

The telcos think that rising fuel costs, which have caused energy prices to go up, have hurt their profits and that the situation is getting worse and worse

The credit rating agency has estimated that the in­terest rate hikes over the last year alone have creat­ed an incremental cost of around PKR 19 billion for the telecommunication sector. The telco is less able to handle these shocks because its top-line growth has been slow in the past, growing at an average rate of about 4% over the past five years.

There is a consensus in the industry that the average revenue per user (ARPU), which is around $1, needs to increase manifolds for the survival of cellular op­erators. There might be some relief on that front after the recent tariff hikes by the CMOs Yet, this won’t be enough to see a turnaround in Pakistan’s telecommunication sector. Rate hikes can only go so far, and too many of them could hurt the economy’s ability to grow in the future.

“Astronomical spectrum and license fees in dollars ’’

Also, a major pain point for the sector is the spec­trum and license fees. The three aspects of it that the players sought relief from; the spectrum being priced in dollars, the high spectrum price (almost doubled when compared to 2004), and a small win­dow of five years to pay the fee.

Comparable economies in the east and India are some of the examples that are quoted when pre­senting the case for spectrum fees in PKR. The in­dustry has also asked for the time it takes to pay for a license to go from 5 years to 10 years.

If we consider the sustainability of the business, the key cost elements are in U.S. dollars, which is insane for a country like ours. Initially, when internation­al investors entered the Pakistani market, it made sense, but now they have become local players here. In an environment where the Rupee is rapidly devaluing against the dollar,you cannot pay your annual license fees and your spectrum fees in dol­lars. According to JAZZ, it is the first time in their history that revenues have fallen, in dollar terms, for four quarters straight when compared to the previous year.

“State Bank refusal to approve the import of IT equipment ’’

About 85 customs headings, such as cars, cell phones, IT equipment, home appliances, fruits and dried fruits (except those from Afghanistan), crockery, private weapons and ammunition, shoes, chandeliers and lighting (except energy savers), headphones, and loudspeakers, were all completely banned from being brought into the country.

Under the “Emergency Economic Plan,” the govern­ment has banned the import of non-essential items. This has had a huge effect on the IT industry, lead­ing to massive smuggling, the use of unofficial trade channels, and the avoidance of duties and taxes.

The credit rating agency has estimated that the interest rate hikes over the last year alone have created an incremental cost of around PKR 19 billion for the telecommunication sector

After telecom sector imports were not approved by the State Bank, industry leaders stepped forward and urged the government to look into this matter with immediate measures. They wrote a letter to the government industry department in which in­dustry leaders reiterated that telecom equipment is not a luxury item and is not manufactured locally. Because of this, telecom companies (Telcos) have no choice but to import all of this equipment in or­der to improve and grow their networks and keep up with the quality of service requirements set by the PTA in their licenses.

Sustainability issues haunt all major operators, and a sense of desperation is prevalent amongst the industry players

“The Way Forward ’’

Over the past few years, the telecom sector has been facing the challenge of deteriorating profitabil­ity. Sustainability issues haunt all major operators, and a sense of desperation is prevalent amongst the industry players.

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The currently implemented regressive taxation re­gime has already proven disastrous to the IT indus­try’s growth. This year’s targeted exports of USD 3.5 billion are also not being achieved due to the in­troduction of an inefficient tax regime. Rather than facilitating the IT industry with more and better incentives to catalyze the existing organic growth, the previously announced one and only benefit, i.e., the “tax exemption” committed till 2025, has been abruptly reneged and revoked. If nothing else, this is a bad idea for a new export-driven sector that is growing quickly.

The demand for a significant reduction in spectrum prices and a shift to pricing in PKR is unlikely to be met. The reason for this is a simple one, Pakistan, like many other developing markets, relies on these one-off dollar payments to bridge the balance of payments gap. The only thing the government can possibly meet is the suspension of USF and Ignite contributions. As per the regulations, all CMOs con­tribute 1.5% of their gross revenues to the Universal Development Fund and 0.5% to the Ignite Fund.

Pakistan, like many other developing markets, relies on these one-off dollar payments to bridge the balance of payments gap

The telcos need to introspect as well. They have been slow to innovate, which is now coming back to bite them. But, of late, the major players have acknowledged the need to be dynamic and are pur­suing a 4G multi-play strategy, meaning an operator shouldn’t just remain a pipeline, but a destination as well for its customers.

By using the network’s dig­ital apps, users should spend more time on the net­work, which would bring in more money.

The immediate remedy for this situation might come in the form of a mobile tariff hike, which the PTA indicated in its official communication earlier this month. However, the long-term solution to this would be a strategic one given that the telcos can’t control energy prices, which are likely to increase further.

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