A report in press based on facts that during the current period the amount of dividend remitted out of Pakistan on foreign investment is more than the amount of investment. In the political discourse this matter will be taken as an adverse sign. It is so. However, in the following paragraphs, I will delve into the subject of foreign direct investment (FDI) and the amount of dividend remitted on such investments with reference to the nature of investment. There is no doubt that under-developed and developing countries, including emerging economies, require FDI to fill in the gap because of paucity of foreign currency required to meet their needs. However, the basic economic principle for such foreign direct investment is that on a national level such investment has to be accepted when it either generates an exportable surplus or reduces the import bill. For example, if investment is made in a chemical plant to manufacture chemical that is presently being imported is to be promoted for the reason that at the end of the day there will be a net saving of foreign currency even after remitting 100% dividend. However, if there is no saving in foreign exchange from that investment in the long run then ultimately the country hosting such foreign investment will become bankrupt. Pakistan is facing this grim situation. The current excess of remitted dividend over investment with no substantial increase in exports or reduction in imports is the first sign of a profoundly serious fiscal problem. There are ways and means to attract FDI and new technologies without getting into that bankruptcy trap. The recipe for this strategy is as follows: The first and foremost principle is that FDI should not be taken as a balancing figure for current account balance. During the days of Gen Musharraf there was a loud claim for a huge FDI without realising that later on dividends will be required to be paid in foreign exchange against such FDI. The matter that was required to be focused was whether or not there will be adequate generation of foreign exchange through exports or import substitution to pay for such dividends in foreign exchange. The FDI Pakistan received in the form of investment in Independent Power Plants (IPPs) is actually borrowing by the government of Pakistan as under the IPP contracts the GoP has guaranteed return on investment in addition to 100% recovery of variable cost. In simple words, this is not an investment in IPPs; it is akin to acquiring USD-denominated bonds at a fixed rate of return. The worldwide fixed return on investment hardly ever exceeds 5 to 6% and we doled out 17% return to the IPPs in the name of FDI. We often make loud noises or express deep concerns about the country’s burgeoning external debt which, as of December 2020, was around USD 115.7 billion. However, we do not discuss the potential foreign exchange liability which these IPP contracts and other arrangements such as lending from the Paris Club and the International Monetary Fund (IMF) bring to us. It is good that national financial statements are not made on double entry system of book keeping of accounts. Had that been the case there the financial statements would have been qualified for not being a going concern and facing bankruptcy.
The story of Pakistan’s economy from 1992 to 2018 is one of unscrupulous generosity in the matter of foreign exchange. Free flow of inward and outward remittances for individuals through the Protection of Economic Reform Act, 1992 and 100% ownership with 100% repatriation rights for remittance of capital and dividend even for companies engaged, for example, in selling water and beverages. It is a matter of record that industrial development of Pakistan from 1960 to 1970 was inherently free from this error. It was alleged that we created 22 rich families. It may be true that there was concentration of wealth. However, such investment did not mortgage Pakistan against repatriation guarantees for capital and dividend even in FMCG and other industries. This mistake will be repeated in the absence of a proper understanding of the fact that every now-developed country has limited capacity to engage in FDI. It is directly related to future availability of foreign exchange. Pakistan as a policy has not taken this fundamental issue in consideration. We used to criticise India for their conservative policies on foreign investment; however, the stark reality emerged when we realised that 70% of active ingredients for pharmaceutical companies in Pakistan are of Indian origin. We pay royalty and dividend to companies that import aspirin from India and earn profit in USD. This is a national crime. The message is loud and clear. Patriotism is not a slogan. It is a policy that prepares a state for next generations. Previous governments made wrong policies that should not be continued.
In summary this writer’s suggestions in this regard are:
IPPs contracts be converted from a USD Bond to an investment;
Benchmarking for cost of imported machinery for IPPs and other capital intensive investment through FDI to avoid possibility of transfer pricing. The price above the benchmarked amount is not to be allowed for repatriation purposes;
Trading activities directly or indirectly be restricted to be financed through FDI;
100% foreign holding should be allowed only in those sectors where there is equivalent saving of dollar through export or import substitution. Only for technological advanced industries;
Reinvestment of profit earned to a certain extent be made compulsory for 100% owned companies;
Deletion programmes for already existing industries like automobiles and other allied sectors;
Prescribe maximum amount paid for technical fees, royalty or management fee for respective industries.
There can be an argument that these are regressive steps. FDI with very high rate is not a tool to balance current account. It is a long-term strategy for transfer of technology, development of local skill sets, etc. Only those countries can economically survive that are self-sufficient in their foreign exchange resources. There is no possibility of uncontrollable deficits on that count for an unlimited time. The hard-earned foreign exchange of our workers abroad cannot be used to pay dividends, royalties and technical fees for biscuits, beverages, mineral water and basic medicines like aspirin and others. The whole game-plan for this sector requires an approach whereby our future generations will not be required to have constant begging bowls for foreign exchange support. Economic independence is the only meaning of independence in the modern world. The answer is ‘Make in Pakistan’ by Pakistani companies.
Copyright Business Recorder, 2021