July 30, 2024 (MLN): Pakistan, the Dollar-scarce nation has witnessed a major outflow of the greenback as overseas investors repatriated the highest dividends and profits since FY18 following the government's clearance of dividend backlogs.

The country’s central bank reported that in FY24, foreign investors fetched out a whopping $2.2 billion as returns, marking the largest outflow ever since the withdrawal of $2.3bn six years ago.

More interestingly, the year-on-year increase stands at a drastic 569.2%, largely due to the low base in FY23.

The depleting foreign exchange reserves in FY23 called for a potential save that did not materialize. Consequently, the government introduced restrictions on dollar outflows to prevent the foreign exchange from further flying from the country and bringing it closer to a mere default.

As a result, the repatriation figure dipped to $331 million in FY23, down by 80.3% compared to FY22, and one of the lowest figures ever recorded.

However, the restrictions were set to witness a drastic shift as, by the end of June 2023, Pakistan entered into the long-standing Staff Level Agreement (SLA) worth $3 billion with the International Monetary Fund (IMF).

As part of its conditions, the global lender called for eliminating all capital controls and shifting towards proper FX market functioning.

Additional pressure came from multinational companies, which had been complaining about and criticizing the central bank's restrictive policy while expressing their deteriorating confidence in the economy.

Although foreign pressure was a factor, the government eliminated foreign exchange restrictions primarily to satisfy the IMF, which, later on, resulted in the country securing an extended program.

Subsequently, the monetary impact of lifting constraints was observed throughout the fiscal year (FY24), particularly in the last couple of months, with May setting a historical record for the highest monthly outward remittance ever of $918.1 million.

On a cautionary note, the value of outflow in the review year has even exceeded the total foreign investment worth $1.52bn that the country fetched in FY24.

Sectorial representation of the SBP data shows that the major sectors that witnessed the highest repatriation include the Financial Business, Power, and Communications sectors.

Among these, the Financial Business sector repatriated the highest profits of $638.6m in FY24 to overseas. This shows that foreigners earned massive profits by investing in Pakistan's banking sector, which posted record profits in 2023.

Meanwhile, a country-wise break up revealed that firms and individual investors in the United Kingdom dispatched the single largest profit of $558.57m during FY24, compared to $20.14m repatriated in the same period prior fiscal year.  

Foreign nationals from the UAE and Netherlands ranked second and third in outward remittances.

What apparently seems to be a mere drain of foreign currency is only one side of the story as the other side reveals a more promising and potentially beneficial outlook for the economy in the near future.

SBP Governor Jameel Ahmed during the post-MPC Analyst Briefing held yesterday revealed that that there are no pending profit repatriation payments left.

This largely wipes out the concerns of the foreign companies regarding profit backlogs and boosts their confidence as Pakistan now allows them to freely repatriate their earnings.

Moreover, this elimination of restrictions has the potential to attract interest from other investors, as it makes Pakistan a more appealing source of investment.

Adding to the country’s support is Fitch’s recent rating upgrade, which signals to the globe that Pakistan has started its journey of stability and improvement.

Hence, with these repatriation figures breaking records, Pakistan demonstrates to the globe that it is a secure and profitable investment destination, which could lead to record-breaking foreign investment.

On the Dollar reserve front, Pakistan is slowing and gradually building its reserves as the SBP-held reserves increased by $4.92bn or 110% in FY24.

Outlook

JPMorgan has recently flagged concerns about the potential consequences of dividend backlogs, which may result in a weaker PKR in the near term.

Surprisingly, the agency believes that there may still be a few informal restrictions relating to the repatriation of dividends.

Assuming these are fully eliminated at the start of the Extended Fund Arrangement (EFF), then it could result in USD/PKR moving moderately higher over the coming months.

On the positive side, it would create a realistic economy without any formal or informal foreign exchange restrictions, providing transparency to investors and making it more attractive for their dollar-based investments.

Copyright Mettis Link News

Posted on: 2024-07-30T12:35:56+05:00