Ban on profit outflow lifted as reserves rise
KARACHI: Pakistan has lifted an unannounced ban on foreign companies freely sending their earned profits to their headquarters abroad, following increased supplies of US dollars in the domestic economy, sending a strong message to global investors to resume initiating new investment projects in the country.
The State Bank of Pakistan (SBP)’s latest data shows multinational companies (MNCs) repatriated a 17-month high of $163.7 million in September 2023.
This marks a 447% increase compared to the approximately $30 million sent in September 2022 and a 247% rise compared to the $47 million repatriated in August 2023. Over the past 18 months, the repatriation of profits had remained low, ranging from $2 million to $60 million per month, primarily due to the country’s critically low foreign exchange reserves and the looming risk of default on foreign debt payments.
Representatives of foreign companies in the country estimated that approximately $1.5 billion to $2 billion in accumulated profits and dividends remained undispersed over the past year and a half, despite Pakistani laws allowing foreign investors to repatriate 100% of their profits to their homeland. The supply of foreign currency has improved due to a government crackdown on currency smuggling and hoarding, as well as encouraging overseas Pakistanis and traders to use official channels for remittance transfers.
The International Monetary Fund (IMF)’s $3 billion loan programme, which concluded in June 2023, has also contributed to the gradual recovery. In the first quarter of fiscal year 2023-24, repatriation increased by 266% to $213 million compared to $58 million in the same period the previous year.
The petroleum refining sector reported the single largest profit repatriation of nearly $54 million in the quarter compared to zero in the same quarter last year, while the financial sector sent close to $37 million compared to a little over $5 million the previous year. The transport sector dispatched nearly $22 million, marking a significant increase compared to less than $2 million in the corresponding quarter of the previous year.
Mining and quarrying, transport equipment (automobile), and power sectors also sent notable amounts of profit to their headquarters. The United Arab Emirates (UAE) and Chinese companies emerged as the top two profit senders in the quarter, dispatching $69 million and $19 million to their respective homelands.
The SBP’s annual report for 2022-23 indicated a decline in profit repatriation to $331 million in FY23 from $1.7 billion in the previous year. The drop in repatriation can be partially attributed to foreign exchange constraints and a decline in profits for some foreign corporations due to a slowdown in the domestic economy.
According to the central bank, the decline in profit repatriation was led by financial firms, followed by communication (particularly telecom), power (especially thermal power), and the food sectors.
Additionally, in a move to strengthen controls against money laundering and terrorist financing risks, banks and microfinance banks offering branchless banking services are now advised to perform biometric verification of account and wallet holders for cash-in and cash-out transactions at branchless banking agents’ locations starting from January 31, 2024. This requirement supplements the biometric verification already specified for other transaction types and customer categories.