3.2.1 Opportunities The digital opportunity in Pakistan arises from a mix of demographic and market factors coupled with the existing policy suite to promote digital adoption. An unsaturated, still developing digital market offering first-mover advantages for investors –Pakistan’s still developing digital economy offers an untapped consumer base and an unsaturated market to businesses and investors. –In many sectors, especially those using emerging technology, investors have the opportunity to make the most of first-mover advantage in this developing market. The exponential influx of FDI through funding in start- ups in the years 2020 and 2021 is indicative of this investment potential. Demographic dividend of a sizeable youth population that can drive digital adoption –Pakistan has one of the youngest populations in the world, with a median age of 23 years. Its significant youth bulge offers a large cohort of young people who are receptive to new technologies and the adoption of digital services. –A large youthful population cohort also implies that a human resource base can be developed with the requisite skills and capacity to support businesses. High mobile readiness and adoption enabling access to a growing digital economy –Pakistan is a mobile-first economy with 143 million mobile broadband subscribers36 and a 64% smartphone ownership rate.37 This means that the majority of Pakistanis can access basic digital services, while citizens owning smartphones can meaningfully engage with and support a developing digital economy, thereby offering businesses and investors a significant potential market. Fiscal incentives to stimulate investment and generate activity in the digital economy –The government provides fiscal incentives aimed at promoting trade, enhancing export competitiveness and facilitating domestic economic operations to attract investments and stimulate growth. –In 2020, a mobile phone manufacturing policy was introduced with tax incentives, including a 4% withholding tax exemption on domestic sales and reduced duties, to boost local production.38 However, the “Make in Pakistan” mobile phone initiative failed to boost local production, as manufacturers didn’t meet localization targets – even for packaging, leading to tax revenue losses of up to PKR 46.2 billion ($166.2 million).39 –While these incentives create a favourable investment landscape, their long-term sustainability and effective implementation remain challenges. The establishment of special zones to promote digital innovation and attract FDI –The establishment of special technology zones,40 special economic zones and export zones in Pakistan facilitate investment and drive economic progress. These special zones offer unique tax incentives such as an exemption from all taxes on income for a period of 10 years, maintaining foreign exchange (forex) accounts for investors, etc.41 So far, 18 STZs have been approved.42 3.2.2 Key considerations Growth in the digital economy faces several important considerations in relation to the four pillars of the Digital FDI framework. These range from policy direction and continuity to digital-centric regulations and implementation challenges. Understanding of the digital economy and institutional alignment –The digital economy has significant potential, and a more integrated approach to policy design and implementation is needed to realize this potential. –A multifaceted governance structure, with various federal and provincial agencies managing different components of the digital agenda, requires enhanced coordination and alignment. Policy and regulatory coherence –Ensuring predictable and well-structured policies can create a more enabling environment for digital innovation and sustainable growth. –Enhanced policy stability is needed to bolster start-up ecosystems and instil greater confidence among foreign investors, encouraging long-term commitments to Pakistan’s digital sector. Access to capital and the cross-border flow of funds –Start-ups, businesses and SMEs in Pakistan need better access to capital. A simplified regulatory environment and an economic climate that encourages investment can better support the ecosystem. Digital FDI Initiative: Digital FDI-Enabling Project in Pakistan 16

Digital FDI Initiative Pakistan 2025