Tuesday, March 28, 2023

Profit, dividend repatriation nosedives by 80% in July-Feb

Analysts say decline in outflows of profits and dividends mainly caused by shortage of dollars

A person shows US dollars at a currency exchange store in Manila, Philippines, October 21, 2022. — Reuters
A person shows US dollars at a currency exchange store in Manila, Philippines, October 21, 2022. — Reuters 

  • Foreign investors sent $4.9m back home in February: SBP data.
  • Profit repatriation on foreign direct investment drops to $188.1m in July-Feb. 
  • Pakistan needs to attract foreign investment for sustainable external account: analyst.

KARACHI: The repatriation of profits and dividends on foreign investments plunged by 80% to $225.1 million in eight months (July-Feb) of the current fiscal year due to the dollar shortage, The News reported Tuesday citing analysts. 

As per the data shown by the State Bank of Pakistan (SBP), foreign investors including those of the stock market and multinational corporations doing business in Pakistan sent $4.9 million home in just February only. 

When compared to the $2.9 million that was repatriated a year earlier, the amount is larger.

Last week, the central bank lifted restrictions on the import of hundreds of items. The question of when will they have priority to repatriate their profits and dividends is on the minds of overseas investors.

The SBP’s data showed that the profit repatriation on foreign direct investment dropped to $188.1 million in July-February FY2023 from $1.037 billion in the same period of the last fiscal year.

The outflow as payment against portfolio investment fell to $36.9 million, compared with $108.6 million in July-February FY2022.

“It is unfortunate that we have these capital controls in place. The reason is primarily the dollar shortage. However, these outflows should have been given priority,” said Fahad Rauf, head of research at Ismail Iqbal Securities.

Pakistan already receives minimal foreign investment, which creates more reliance on debt for external funding needs. It is extremely important for Pakistan to attract foreign investment for a sustainable external account, according to Rauf.

“These measures would discourage foreign investors, both existing and potential investors,” he added. The oil and gas exploration sector sent home $87.5 million in repatriated earnings in July-February FY2023, compared with $108.6 million in the same period last year, according to the SBP figures.

The outflows from the power sector fell to $32.2 million from $124.9 million a year earlier. Profit outflows from the financial businesses declined to $18 million from $182 million.

The country faces an acute shortage of foreign exchange and an International Monetary Fund deal is not in immediate sight. The forex reserves held by the central bank have stood at $4.6 billion — enough to cover only one month of imports.

Ehsan Malik, CEO of The Pakistan Business Council, said the SBP had to limit outflows, be it through administrative control over imports or by delaying the remittance of dividends, royalties and technical fees.

“This aside, a reason for the reduced outflow of profit is that some companies are not declaring dividends. Once a dividend is declared, the parent records it as receivable at the PKR/$ rate on the date of declaration.”

However, he added, as the remittance was delayed, it had to keep adjusting the amount receivable in dollars as the PKR kept slipping in value. “Beyond a few times, this becomes difficult to explain to analysts abroad. This is why companies are seeking permission to dollarise the declared dividends even if remittance is not immediately possible,” he said.

It could, for example, be done by issuing a special series of Naya Pakistan Certificates. Another way would be for the SBP to allow the pending dividends to be treated as repatriable share capital, allowing parent companies to add to their investment in Pakistani subsidiaries or in other companies in the country, according to Malik.

He further said the bulk of Pakistan’s FDI didn’t generate significant export earnings. If it hadn’t, there would have been a stronger argument for prioritising the remittance of profits. Some however had begun to indigenise inputs to reduce imports, Malik added.

He was of the view that one way for such companies to demonstrate responsibility was to start measuring and reporting progress on their year-on-year improvement in impact on the external account. It would be direct and indirect imports plus profit, royalties and technical fees payable to parent/group companies fewer exports, Malik stated. “As more inputs are indigenised and exports grow, the negative impact on the external account would subside. Of course, not all multinational corporations can do this.”

For the present, he continued, given a choice between receiving dividends on the one hand and their local subsidiaries being accorded priority to import inputs of that value on the other, most parent companies would opt for the latter.

Malik stated that returns on investment in Pakistan for most foreign investors had been good and they had learnt to ride the ups and downs of the country’s economy. “[However,] delays in remittances send a very negative signal to potential investors,” he said.