Falling reinvested earnings

That’s what rising profit and dividend repatriation by the foreign companies and MNCs portrays in particular context of the state of foreign direct investment in the country – and not just the sign of increased investor confidence in the country. Why? Increase in repatriation of profits and dividend back to their parent companies by the multinational players amid continuously falling FDI inflows as well as rising outflows is akin to eroding investor interest in reinvesting earnings in the host country, which is a better signal of investor confidence to attract new investors.

The latest available data on the central bank’s website shows that profit repatriation on foreign direct investments in Pakistan increased by over 14 percent in 10MFY21, while net FDI declined by 30 percent during the same period. This takes the total FDI net of profit repatriation from $1.58 billion to paltry $364 million (or 77 percent of net FDI) due to $1.2 billion profit repatriation on foreign direct investment! This low net balance of inward FDI (FDI minus profit repatriation) has been a trend for a long time where the damage is being done by both slipping FDI as well as rising profit repatriation as can be seen in the illustration.

Sectors that have been at the forefront in repatriating profits to their parent companies are mostly the large multinationals in the food, financial businesses, tobacco, and telecom sectors. The latest quarterly report of SBP highlights that where some sectors have seen a decline in repatriation due to a fall in their profitability – particularly the oil and gas exploration sector due to the crashing oil prices last year, these lower repatriations partially offset the higher repatriations by firms in other sectors, such as food and telecom. It also attaches the additional factor of the pandemic as a reason behind the rise in repatriation by the telecom sector, which is the rise in the sectors earnings due to sizeable increase in usage as work from home and distant learning becoming the norm in Covid-19. similarly, the rise in repatriation from food and allied sectors has been due to higher sales and higher corporate earnings.

Over the years, FDI situation has only deteriorated remaining minuscule and constricted, whereas the foreign investment regime is quite liberal allowing foreign companies to 100 percent transfer of profit and dividend in almost all sectors. There was some decline in repatriation in FY20 and the initial months of FY21; but that was not because earnings were being reinvested but because FDI has been much weaker as well as corporate earnings were marred by the pandemic globally. However, the high cycle is back, and it is anticipated that the year would close on high repatriation as demand for currency rises towards the end of the fiscal year as corporate entities repatriate profits and dividends.