TELEPHONY INCHING TOWARDS SATURATION

SHAMSUL GHANI
(feedback@pgeconomist.com)
Aug 22 - 28, 2011

Has the $12 billion plus Pakistan's telecom industry peaked and lodged in the saturation zone? The industry data might well tempt some analysts to answer in affirmative, but perhaps it will be a bit hasty to draw that conclusion, merely on the basis of some dormant looking stats.

The teledensity is still moving upward. After taking long jumps during FY5-8 when it soared from 12 percent to 59 percent, the total teledensity has started to show a lot of constraint in recent years.

During FY9, it grew by three percent and followed the pattern during the next year by recording a growth of just two percent. The fact that it grew by four percent during FY11 gives us sufficient ground to postpone our final verdict regarding the future of the sector till such time the economic uncertainty dust settles down.

The comparatively improved world economic condition and the receding inflation tides that hit Pakistan during 2008 may have factored in the improved growth rate recorded during the just concluded financial year.

So, the telecom industry might well be on the course of a buoyant comeback. The only discouraging aspect about the phenomenal growth of telecom sector in Pakistan is the overwhelming dominance of cellular segment.

But, this issue is related to our low literacy rate according to which only four percent of our population comprises degree-holders. For a broad-based telecom and IT growth, we will need much better educational achievements.

CELLULAR BUSINESS DOMINANCE

YEAR TOTAL TELECOM INVESTMENT (MILLION US$) INVESTMENT IN CELLULAR SEGMENT (MILLION US$) PERCENTAGE OF CELLULAR INVESTMENT TOTAL TELECOM REVENUE (MILLION RS.) CELLULAR SEGMENT REVENUE (MILLION RS.) PERCENTAGE OF CELLULAR REVENUE
2003-04 835 666 79.8 116,827 27,840 23.8
2004-05 1,473 1,158 78.6 144,226 48,880 33.9
2005-06 1,731 1,421 82.1 194,562 89,896 46.2
2006-07 3,975 2,585 65.0 235,613 133,132 56.5
2007-08 3,136 2,338 74.6 278,509 182,122 65.4
2008-09 1,647 1,230 74.7 333,882 212,423 63.6
2009-10 1,137 909 79.9 357,712 236,047 66.0

The overwhelming dominance of cellular business is evident from the fact that out of total teledensity of 69 percent (as of June 2011), 65.4 percent is accounted for by the cellular segment.

The cellular subscriber's number, after hitting the 100 million mark in July 2010, has reached 108.9 million by June 2011. The growth the telecom industry and especially the cellular segment have registered during the last 6-7 years would not appear so promising when seen from another angle. Only a portion of foreign direct investment was utilized in the setting up of infrastructure facilities, while the rest was spent on marketing efforts.

The size of resultant capital formation did not reflect the size of actual FDI. Moreover, a major portion of FDI found its way back to overseas in the shape of import cost of telecom equipment and cell phones. Any worthwhile technology transfer too did not take place.

FY7 attracted maximum total investment in the sector after which the decline started. The unprecedented growth achieved by the telecom sector and its potential to further grow should underline some positive aspects of Pakistan's economy. However, the low level of capital formation attained during the boom process demands some corrective action to make the growth meaningful.

On external front, the sector attracted more than $5 billion of foreign direct investment (FDI) during FY6-8, but those were the days when Pakistan's economy was showing its real colors under a partially democratic rule that held a promise of political stability for the foreign investors.

The Wall Street investment bankers were tipping Pakistan as one of the next-11 leading economies after the BRIC countries. FY6 was the best year for telecom sector when it attracted the maximum amount of FDI. The subsequent years resulted in consistent shrinkage of FDI but that was the trend in total FDI which went through an evaporation process triggered by the change of government in Pakistan and the global financial crisis. Barring the boom years, telecom FDI has not lost much on percentage basis but in absolute terms the decline has been quite substantial.

FDI IN TELECOM SECTOR

FINANCIAL YEAR TOTAL FDI (MILLION US$) TELECOM SECTOR FDI (MILLION US$) PERCENTAGE
2003-04 949 207 21.8
2004-05 1,524 494 32.4
2005-06 3,521 1,905 54.1
2006-07 5,140 1,824 35.5
2007-08 5,410 1,438 26.6
2008-09 3,720 815 21.9
2009-10 2,199 374 17.0

The telecom revolution Pakistan has witnessed during the last seven years or so has brought dramatic changes in the social and economic sectors. Faster and cheaper communication has revolutionized the lives of people on one hand, and has substantially reduced the cost of doing business on the other.

Increased use of computer and internet technology has not only given wheels to the corporate sector but also made a positive impact on education and other sectors of economy.

Being an emerging economy, Pakistan has had been the focus of global investors since 2001. Telecom sector exploits gave a boost to the investor confidence. Opportunities in Pakistan's telecom market drew welcome attention of global telecom players who did make generous investments in this sector. It was unfortunate that restoration of a governance system, that has a poor record as far as Pakistan is concerned, dealt a blow to the investor confidence.

Failure of the succeeding government to adopt stringent fiscal measures and state bank's excessively tight monetary stance over an extended period put forth incalculable harm to the economy. It will take massive revamping of fiscal and monetary policies to woo back the disillusioned foreign investors.