Profits sent by multinational companies (MNCs) to their headquarters abroad slumped by 80% to $225 million in the first eight months (Jul-Feb) of current fiscal year mainly due to the shortage of US dollars in the domestic economy.
MNCs had dispatched $1.15 billion to their headquarters in the same period of last year, reported the State Bank of Pakistan (SBP) on Monday.
Businesses are facing financial constraints in the wake of economic crisis and political instability, which have forced some of the foreign companies to suspend business activities fully or partially. These companies include global airline Virgin Atlantic and logistics firm DHL.
The International Air Transport Association (IATA), an association of global airlines, has reported that its member carriers are struggling to repatriate funds from Pakistan, which have accumulated to $290 million since January.
In response to queries of The Express Tribune, Pakistan Business Council (PBC) CEO Ehsan Malik said “the country faces an acute shortage of foreign exchange while a deal with the International Monetary Fund (IMF) is not in sight.”
“In these circumstances, the SBP has to limit the outflow, be it through administrative control over imports or by delaying remittances of dividends, royalties and technical fee. This is a reason for the slow outflow of profits.”
Delay in remittances “sends a very negative signal to the potential (foreign) investors,” he pointed out.
Financial expert Adnan Agar was of the view that in addition to the slowdown in profit repatriation, Pakistan’s faltering economy had badly impacted business activities, which kept earnings low. “This is also a key reason behind the lower repatriation.”
He recalled that a number of foreign car manufacturing firms had been lying closed since long due to a virtual ban on the import of auto parts. Moreover, a notable drop in demand for petroleum products and electricity has dented their sales.
Of the total profit repatriation of $225 million, Hong Kong-based MNCs repatriated $84.3 million to their headquarters, followed by Chinese firms that sent home $34.4 million. US firms dispatched profits and dividends amounting to $26.3 million.
UK-based companies repatriated $15.1 million while UAE-based business concerns sent home $11.5 million.
Sector-wise, oil and gas exploration firms repatriated $87.5 million in profits and dividends to their homeland, followed by the mining and quarrying sector that sent $33.1 million. The power sector repatriated $32.2 million.
Malik elaborated “once the dividend is declared, the parent company records it as receivable at the rupee-dollar exchange rate on the date of declaration.”
However, if the remittances are delayed, the parent firm has to keep adjusting the amount receivable in dollar as the rupee continues to lose ground. It is difficult to explain this continuous change in exchange rate to the analysts abroad.
“This is why companies are seeking permission to dollarise the declared dividends even if remittances are not immediately possible. It can be done by issuing a special series of Naya Pakistan Certificates,” he suggested.
“Another way for the SBP is to allow the pending dividends to be treated as the ‘repatriable’ share of capital, which the parent companies will add to their investment in Pakistani subsidiaries or inject into other companies in the country.”
Malik said that the bulk of foreign direct investment (FDI) in Pakistan was not generating significant export earnings. “If it could, there would have been a stronger argument for prioritising repatriation of profits and dividends.”
One way for such companies to demonstrate responsibility is to start reporting year-on-year improvement in the impact on external account. This will include direct and indirect imports plus profits, royalties and technical fee payable to the parent/ group companies less exports.
“As more inputs are indigenised and exports grow, the negative impact on the external account will subside. Of course, not all MNCs can do this,” he said while suggesting a possible solution to the crisis.
When given a choice between receiving dividends and the local subsidiaries being accorded priority in the import of inputs, “I think most parent companies would opt for the latter,” he said.
Published in The Express Tribune, March 28th, 2023.
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