If it wasn’t already a matter of concern that net FDI inflows were down 3 percent in the seven months ending January 2018, the latest profit repatriation numbers speak ‘caution’ from a balance-of-payment perspective.
According to the central bank data, profit repatriation on foreign direct investments in Pakistan rose by 38 percent year-on-year in 7MFY18. Here is what it means for balance-of-payments account.
Net FDI inflow (which is gross inflow minus gross outflow) stood at $1.48 billion in 7MFY18, whereas profit repatriation in the same period was $1.17 billion. In other words, the net inflow - in so far as foreign direct investments are concerned – was $315 million in 7MFY18. This number stood at $679 million in the year-ago period.
A look at the illustration shows that the net balance of inward FDI (FDI minus profit repatriation) has been on a sequential decline over the last ten odd years. This is not only because of slowing FDI. But also, because profit repatriation has been picked up FY11 onward.
With international investments following its natural business and investment payback cycles, amid a liberal FDI regime that places no restriction on profit repatriation, this was bound to happen – something this newspaper has previously cautioned about a number of times.
Take for instance, the recent seven-month numbers where profit repatriation on telecom FDI was $166 million against the net FDI outflow of $26 million. Likewise, now that thermal power projects set up in preceding years are now yielding their dollar-backed returns, profit repatriation in the sector rose to $135 million in 7MFY18 ($79.6mn in7MFY17) against a net FDI inflow of $34 million in that sector in the same period.
Considering that FDI inflows are already thin in this country, there is no point toughening up the regulations on profit repatriations. Instead, in the interest of the already weak balance-of-payments position, the Board of Investments should come up with proposals that can encourage existing investors to reinvest their earnings in Pakistan within or outside the economic sectors they are currently operating in. To that end, the easing of taxation of inter-corporate dividends and surrender of losses under group relief could also help incentivise foreign body corporate.
Compared to those foreign players who haven’t yet invested in Pakistan, it is easier to attract those who already have their feet inside. Even if the government was able to lure investors to reinvest just 15 percent of the profit repatriated in the year to-date, net FDI inflow would have been 12 percent higher in 7MFY18 rather than 3 percent down. In the face of thin FDI in the country (as % of GDP), every little counts; even if it is small low hanging fruits plucked by attracting foreign firms to reinvest their earnings.
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