Implications of COVID-19 on the Software Industry

Current Scenario of the Industry

The IT sector has been one of the most booming sectors for the rapidly growing economy of Bangladesh. The government has declared this as a thrust sector to meet its goal of a ‘Digital Bangladesh’ by 2021.^[12] The sector has witnessed 8.6% CAGR globally over 5 years reaching a value of USD 175-180 Billion, according to a study in 2017 by the Everest Group. Although the prominent destinations have been India and Vietnam, Bangladesh has been growing at a steady pace. Bangladesh has been able to leverage significantly lower costs compared to competitors and large entry-level workforce due to its demographic dividend;almost 95% of employees are  below 35 years in age.^[1]

As evident from the chart, the majority of the firms operating in this sector focuses on software development, which started back in the 1980s in Bangladesh. Although most companies operating now were established in the 1990s and 2000s. Tiger IT, Data Soft, Orbit Informatics, Dream 71 are some of the major players in this industry. ^[2] This makes the industry a relatively new one compared to the other industries. However, given the success of IT in India/Vietnam… it has been enjoying the focus of policymakers for the last few years. Growth and improvement of the industry is aligned with the Vision 2021 agenda of the government. 

The industry enjoys numerous incentives such as exemption of income tax, value added tax and customs duty and 10% cash incentive opportunity for exporters.^[3] The government has also established the ICT National Taskforce along with constructing numerous ICT incubation centers, and 33 Hi-Tech, Software and IT parks. ^[3]

Strengthened by such initiatives, the industry is flourishing. Currently, more than 250 companies export to almost 60 countries around the world. This allowed Bangladesh to earn USD 800 Million in exports in 2017 according to the State Minister of ICT, Zunayed Ahmed Palak. ^[5] A research by Bangladesh Association of Software and Information Services or (BASIS) in 2017 puts the local market size of the ICT sector at around USD 1.18 Billion.^[4] 

Impacts of the Crisis

Both foreign and local firms are the clients of these companies. Among them 43% of the firms cater to both local and foreign clients, whereas 48% operates in the local market and the rest 9% has exclusively foreign clients.^[6] Majority of the foreign clients are North American and European firms, whose geographic locations are the most at risk due to the outbreak. However, regardless of the nature of the clientele, the entire industry is likely to be impacted by the ongoing crisis. 

Firms catering to the local private sector

According to the World Trade Organization (WTO), global trade is set to fall by between 13% and 32% due to the COVID-19 pandemic.^[7] Bangladesh is an economy that lacks a diversified export basket. In the last FY (2017-18) RMG sector contributed to 84.21% of the country’s total export earnings.^[8] Many of the firms operating in the software industry provide their services to this sector. Among them Skylark Soft maintains accounts for top 50 factories. However, Skylark Soft has stopped receiving any order since January this year. Thus, this lack of revenue has resulted in negative profits for many firms like Skylark causing them to struggle financially.^[9]  

Firms catering to the foreign market

The companies dependent on foreign clientele are also being impacted significantly. The major export destinations for the industry are the USA and Europe. Both regions are facing severe consequences due to the outbreak. Firms operating in the software industry heavily rely on project basis business generation, rather than operating on a retain. Industries like travel, aviation, hotels, etc., are already experiencing a dip in  growth. Software development firms are dependent on such industries. According to a recent study, around 74% of the foreign buyers stopped placing orders in the last three months. Hence the ripple effect from other industries can cripple foreign client-focused firms unless proper initiatives are taken.^[9] 

Firms working with the government

A major share of the USD 1.5 Billion local market comes from the public sector. Months of May, June and July are considered the peak period for government purchases. However, everything is at a standstill due to the crisis this year. Although the government has plans to implement over 1,100 software applications for its different agencies and departments, hardly 11 have been implemented, according to a high ranking member of BASIS.^[10]

According to a recent survey by BASIS, 69% of the companies can run for a maximum of one or two months under such conditions, whereas 24% claim to be able to survive for a maximum of three to four months. Only the remaining 7% claim to be able to run for more than four months under such circumstances. ^[11] The government has been proactively promoting software education for the country’s youth. However, if the current dire situation sustains, there will be pay cuts and layoffs in the industry. According to the BASIS Vice President, such negative growth of the sector will result in a lack of job security. This will in turn discourage the youth to enter this sector. Simultaneously, the industry will lose skilled hands and lag behind in the global race. ^[10]

Debugging the Crisis

Financial Support

As mentioned above, the firms are struggling to carry their operational costs due to the lack of orders. This issue should be tackled immediately.BASIS is working with the government to design solutions to this burning issue. The government has already announced a stimulus package worth BDT 50 Billion in the form of 2 percent interest loans for the export-oriented industries. The loans are intended to provide necessary cash flow required for the salary expenses. The software industry, being an export oriented industry, qualifies for this special package. 

As for the firms operating in the local market, they can apply for the 4 percent interest loan from a package worth BDT 20 Billion announced for small and medium enterprises. The industry should collectively work with banks and the government to expedite the process of disbursement of these loans. This might provide the essential financial support needed to retain the skilled employees. 

Sustaining in the long run

However, financial aid or loans can only help in the short run. BASIS predicts that the lack of orders from foreign clients will at least continue for three to six months. The government has a mandate to digitize Bangladesh by 2021. Under the current crisis, digitalization of government procedures and processes is a burning need. Government should work with the firms to do so effectively. It will help the most promising industry in our country to sustain this plight. On the other hand, it will make the government more suited for this crisis. Only through proper collaboration of the industry and the government, this budding industry can be saved from an impending doom. Without the salvation of this industry, getting anywhere near the goal of a ‘Digital Bangladesh’ will be very difficult.

Rashik Alam, Trainee Consultant at LightCastle Partners, has prepared the write-up. For further clarifications, contact here: [email protected]