Repatriation and falling FDI

[Luosifen]

Repatriation and falling FDI

Profit and dividend repatriation in the particular context of foreign direct investment (FDI) increased by 10 ...

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BR Research 30 May, 2022

Profit and dividend repatriation in the particular context of foreign direct investment (FDI) increased by 10 percent in 10MFY22 as per the latest available data on the central bank’s website. Top five sectors for repatriated profits and dividends in 10MFY22 were food and beverages, telecom, financial businesses, chemical and power that together accounted for over 65 percent of the total outflow during the quarter. While in terms of country of origin for the foreign companies, UK and USA together accounted for 32 percent of the repatriation on FDI while another 34 percent was sent back to China, Hong Kong, Netherlands, and Switzerland.

Previously, in FY21, repatriated profits and dividends increased by 24 percent year-on-year. The SBP’s second quarterly State of Economy report (2020-21) highlights that the Sectors that had a significant boost in earnings following the Covid-19 epidemic, such as multinational food, chemical, pharmaceutical, and cleaning supply corporations, as well as banks, saw higher profit and dividend repatriation.In contrast, sectors with lower profitability, such as oil and gas and refining, saw decreased profit repatriation in FY21. That trend has somewhat changed back to conventional breakup, as highlighted above.

Another factor for higher profit and dividend repatriation has also been the simplified process for repatriation of profit and disinvestment proceeds for foreign investors by the central bank. Under the new approach, commercial banks can make cross-border transfers without first contacting the SBP.

Rising profit and dividend repatriation by foreign firms and MNCs reflects improved foreign investor confidence in general. The laws place no limits on profit repatriation to attract foreign investors and allow 100 percent foreign ownership of companies to attract foreign investors. However, the FDI situation in the country is dismal and with the recent political uncertainty and volatility, the prospects have dimed further. FDI net of repatriation in 10MFY22 stood at a paltry $122 million. So, increase in the repatriation of profits and dividendsto parent companies by the MNC amid continuously falling FDI inflows, as well as rising outflows, is much more akin to eroding investor interest in reinvesting earnings in Pakistan.