To many, the rise in repatriation of profits and dividend by foreign direct investors is a sign of investor confidence in the economy amid the many challenges the economy faces including the global pandemic. This would have made sense if FDI in the country was at least on an upwards trend. But, that is not the case; not only FDI is continuously tumbling, the growth in profit repatriation spells burden on the balance-of-payment figures.
FDI during 8MFY21 is down by significant 30 percent year-on-year at $1.3 billion, while the central bank’s data also shows that profit repatriation on foreign direct investments in Pakistan rose by 13.4 percent year-on-year to $986 million in 8MFY21, which is 76 percent of FDI. Another way to look at it is that the actual net foreign inflow in terms of FDI stood at $315 million, which is peanuts. This number was over $985 million in similar period last year.
Earnings of MNCs can either be reinvested in the host country or repatriated to parent companies in the form of dividends. Yes, growth in repatriation of profits and dividend by foreign companies shows that their earnings are increasing. But to believe that the investment climate is improving for the prospective foreign investors could be argued as its quite evident that nothing of that sort is happening in Pakistan. Moreover, reinvestment of profits in the host country could be a better indicator for a country such as Pakistan where foreign investment flows are thin.
Over the years, FDI situation in the country has deteriorated - or remained stagnant at best. Current activity on the FDI front remains banal lacking any significant growth as well as diversification, whereas the foreign investment regime is quite liberal allowing foreign companies to transfer of profit and dividend 100 percent in almost all sectors. FY20 overall, and a few months of FY21 did see a decline in profit repatriation, but that was likely not because of rise in reinvestments but due to lower earnings in a slow global and domestic economy due to the pandemic, and the currency depreciation.
Over the years, this trend of falling FDI amid rising profit repatriation has solidified. Also, it is not difficult to guess which multinational companies are shying away from reinvesting into Pakistan given that majority of the repatriation occurs in the food, telecom and communication, tobacco, and oil sectors, and financial businesses in general. The same trend can be seen in 8MFY21.
This has been a catch-22 situation where the authorities could place certain restrictions to stop the repatriation leakage, but they also need a liberal investment policy to attract FDI. However, what this offer is an opportunity to the government and the BoI that has been struggling and failing at attracting FDI. While hunting for new foreign direct investors, the authorities could also focus on incentives for the existing MNCs to reinvest in the country. Attracting the existing investors is a low hanging fruit that could result in better FDI flows as they invest in their existing sector or explore new portfolios.
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