KARACHI: Profit repatriation out of Pakistan has declined from average $135 million/month during FY22 to $30 million/month during 7MFY23 (July-January 2022-23) over efforts to contain SBP foreign exchange reserves. In January 2023 alone, repatriation declined to all-time low at $2.9 million.

With all efforts to improve State Bank of Pakistan’s (SBP) foreign exchange reserves position, a lot is also being done to contain outflows as much as possible.

Profit repatriation refers to the process of transferring profits earned by a foreign subsidiary of a multinational company back to the parent company’s home country. This is typically done to distribute profits to shareholders, to reinvest in the parent company’s operations, or to pay off debts or expenses.

“While administrative controls on imports, incentives to exporters and debt roll overs are doing their part to minimize any decline in reserves, another moving part – Repatriation, albeit relatively smaller than the aforementioned factors, is also apparently bearing the brunt,” Amreen Soorani at JS Global Capital said.

Deferment of profit repatriation has provided some support to SBP’s foreign exchange reserves in the recent months, where repatriation has declined from an average of $135mn/month during FY22 (total: $1.6bn) to $30mn/month during 7MFY23.

“The same has however begun to create issues for foreign investors of Pakistan as for the month of January 2023 alone, repatriation levels stooped to all-time low in recent history to $2.9 million, almost reflecting a halt in outflow of funds going back to respective home countries,” Soorani added.

Profit repatriation can involve several different methods, including dividend payments, interest payments on loans, or the sale of assets between the subsidiary and parent company. It can be subject to taxes and regulations in both the host country and the home country, and can sometimes be a contentious issue in international trade and investment negotiations.

“While among the key portions of repatriation is corporate dividends, we tabulate Dec-2022 quarter announced dividends of KSE-100 companies that would potentially have material foreign shareholders, assessing an additional backlog and filter 19 companies.

Accumulated data for these companies so far report outstanding dividend payables of Rs52bn, a 4x increase from Rs13.8bn as at Dec-2021. At respective year-end PKR/USD rates, the outstanding dividend payable amounts to $231mn, 3x up from $78mn even with 22% PKR depreciation during CY22,” Soorani said.

Moreover, dividends of these companies announced with Dec-2022 results accumulate to another Rs34bn. Adding Dec-2022 quarter dividends at current PKR/USD rate (20% down since the start of CY23), outstanding dividends to foreign shareholders increase by $122mn. For perspective, Dec-2022 quarter dividends would further increase the backlog by more than 50%.

These numbers are less substantial when compared to other scheduled payments such as imports and debt obligations due for the coming months that accumulate to billions in US$. Consistent delay in the smaller US$-based flows and piling of the outstanding dividend payables, however, reflects the graveness of the country’s external position, making timely nod from IMF and receipt of flows from other global lenders crucial than ever.

In addition to capital market investor confidence deteriorating from Pakistan’s weak external balance, the prolonged delay in allowing repatriation is also likely to impact prospective and existing foreign direct investments in Pakistan.

The delay in flows from Pakistan is among the triggers for the recently announced exit of Virgin Atlantic airlines, within two years of running its shop in Pakistan.