EDITORIAL: One important element behind attracting investment is the ease with which capital enters and exits a country. This helps companies (mainly exporters) promote their products and explore new markets. It also facilitates businesses to enter into joint ventures or have equity stakes in companies abroad to raise capital. This certainly helps in creating and promoting a start-up culture by attracting foreign investors to the domestic market. Historically, Pakistan has had a foreign exchange regime where capital convertibility is easier than in those some other economies such as India’s; but it is not unfettered. However, the problem Pakistan perpetually faces is the shortage of foreign exchange reserves. With low levels of reserves, the repatriation of investment, especially by companies, has not been swift. Then Pakistan is slow to move to the modern world realities, and has not really been able to capture the Information and Communications Technology (ICT) export and venture capital potential.
State Bank of Pakistan is of the view that ease in capital flows can help attract investment and build the much-needed foreign exchange base; but it’s a chicken and egg problem. As with low and volatile reserves, SBP cannot move to a completely liberal regime at once. It has to ease regulations and regulator checks and approvals gradually. At the same time, the need is to have a diversified pool of lenders and investors at home to build foreign exchange reserves.
The government and SBP are trying to work on both options simultaneously. There are revisions sought in taxation laws and regulations. The state is looking to diversify the external funding options for financing its deficit. The federal cabinet earlier this week waived a number of taxes on income from debt securities channeled through external capital markets and other avenues. The idea is to replace external commercial borrowing with these avenues so that the cost of funds can be reduced by bringing down taxation on income. Most taxes levied on returns on government securities for resident Pakistanis have been waived for external investors. The government is mulling issuing Panda Bonds to attract Chinese investors along with issuing Eurobond and Sukuk.
With little or no tax, the investors will charge less interest on it. Tax revenues are going to be earned in PKR while the profit (interest) repatriation will be in foreign currency. It makes sense to forgo tax to save foreign exchange by offering lower rates. Recently, SBP offered attractive rates on Naya Pakistan Certificates to be issued to Roshan Digital account holders. The higher return is to attract foreign exchange savings that have other international avenues available for investment. All these elements are aimed at building foreign exchange reserves. Once a comfortable level is achieved in terms of SBP reserves, capital convertibility can be eased further. This is based on a multiple of monthly imports. Right now, SBP reserves are at $13.4 billion; these attained the highest level of $19.4 billion in October 2016. Some say that nothing below $20 billion is a comfortable level before SBP starts easing the capital convertibility further.
It is encouraging to note that the federal government is all set to relax equity investment abroad and from abroad. The limits to invest abroad by exporters for opening up marketing, liaison or office for other purposes are proposed at 10 percent of average annual export earnings for last three years with a maximum limit of $100,000. This will help in getting new customers and exploring new markets. The other area is to facilitate startups and venture capital. The divestment proceeds were allowed at the level of market cap or breakup value without SBP approval. That limit was found to be ridiculous for tech startups. Now that condition has been done away with there are other areas that require improvement – such as new structures introduced for establishing holding companies and operational companies. These will help companies raise capital from abroad. Some other options are also needed to be explored to ease the process of equity investment abroad. The government appears to be moving in the right direction. With a flexible exchange rate regime, a natural buffer can be created against frequent external account crises. The aim is to build up reserves and then let the economy and capital flow freely.
Copyright Business Recorder, 2021