Profit repatriation

The first month of FY18 was good for FDI, having more than doubled year-on-year, thanks largely to the nearly $90 million Malaysian investment in telecom towers. Anyhow! July also saw profit repatriation on FDI grow 13 percent, which means that profit repatriation (on FDI) net off net-FDI flows is in the positive territory ($80mn) so far, as against minus $40 million in same period last year. That does not mean necessarily that everything will be hunky dory in what remains of the year.

Having consistently grown over the last decade profit repatriation stood at $1.7 billion in FY17, accounting for about 72 percent of total net FDI received in the same year. The year before profit repatriation accounted for 66 percent of the FDI.

As such there is nothing wrong with this repatriation. Pakistan’s FDI regime is liberal and needs to be liberal to attract the much-needed foreign savings into the country at a time when domestic savings are abysmal. And with FDI regime being liberal, one can’t ask investors to stop repatriating.

But the government could do one thing to at least slow down repatriation and ease pressure on foreign exchange: govern better. BR Research’s interaction with overseas investors leads us to believe that one of the main reasons behind sharp growth in profit repatriation is an unfavourable overall economic environment/sectoral policy. Some of these apply to most sectors, such as taxation policy or electricity deficit; others are specific such as pricing policy in the case of pharmaceutical sector. 

Another big reason being that businesses set up by foreign investors in preceding decade lead to short-to-medium term saturation (such as in financial business, and telecom sectors), and they are now maturing with stable revenues stream.

The answer therefore is easy if you take it logically: fix the economic/sectoral environment; tap the FDI potential of the non-traditional sectors (since some traditional ones may be saturated in short/medium term); and offer various types of carrots to existing investors to lure them into retaining their earnings within the country.