IMPACT OF PROFIT REPATRIATION OVER EXCHANGE RATE

TARIQ AHMED SAEEDI (tariqsaeedi@hotmail.com)
Sep 29 - Oct 12, 2008

As Pakistan for years emerged as favorite destination for doing business attributable to mainly its deregulatory regime allowing international business to repatriate its profit to home nation, numbers of foreign companies directed investment strategy to harness lucrative field of its economy. While entry of foreign companies contributed in mainstream economic growth by expanding volume of country's gross national products, in absence of any ceiling exit of profits from the economy diminished national income besides affecting other economic indicators that include currency exchange value.

Proceeding financial years after FY01 have never experienced minus net factor income from abroad and witnessed growing tendency in it to have peaked to Rs. 2.3 trillion in last fiscal. Even though remittances received during gone financial year were enough to offset burden on macro economic performance of transfer payments of below a billion dollar, holding and reinvesting dividends for local productive use could have brought about positive economic change.

Total $921.4 million was transferred from the country in profit and dividends by different sectors during last fiscal year. Power sector clinched top position in terms of repatriation of profits. Dividends extending abroad from thermal, hydel, and coal based ventures were above $169 million.

Financial business was second in line in disbursing profits across border. Obviously, profitability in financial sector succeeded to canvassing domestic and international capital formation for it. In fiscal 2007-08, $142.5 million drained out of this sector. Transfer of profits from financial business is continuing to surge from $84 million in FY05 to $126 million in FY06 and to last year figure. However, in FY07 dividend transmission was slightly disturbed and it stood at $116 million.

Repatriation of profits from telecommunication, information technology and IT enabled services recorded steep fall in last fiscal to $96.8 million from $152.5 million in preceding financial year. Given the fact that 100 percent reparation is permissible in IT, downfall in transfer clearly indicates that chances of capital reinvestment had become bright in last fiscal in Pakistan and companies refueled capital in the system. It is worthwhile to note that as little as $17.4 million was repatriated from whole communications sector during FY06.

Economic experts opine that foreign companies should be asked to reinvest certain percentage of their profits in national economy. Ban on profit repatriation from host country is described as non tariff barrier and following implementation of WTO protocol, its signatories are gradually phasing out all such non tariff barriers. Being a member, Pakistan had no other option than to welcome doctrine of free trade proselytize its all previous endogenous and some well worked economic welfare concepts. Consequently, deregulation of investment attractive sectors: energy and petroleum, financial to name few took place.

Against protectionism and isolationism WTO promotes non-partisan trade practices within its member countries. It advocates that discrimination in trades on basis of national borders would hamper economic progress and henceforth interchanged capacities and interdependency are beneficial; too plausible to note. But where sovereignty of an economy or circumstantial experiences should be accounted for?

In developed economies, implementation of trade protocols pass through crosschecked prognostic process prior to go ahead. For instance, many developed nations have not completely withdrawn subsidies on agriculture despite being accorded to indirect subsidy removal compliance of WTO. Unlike Canada and US which has sufficient fiscal space to subsidize their primary export oriented industries, Pakistan's economy undergoing frugality propensity can only restore to cut in subsidy and expenditures with alacrity. Making available outlays to non development expenditures and indirect subsidy in short run is practically difficult amid inertia like situation of the economy.

Lack of industrialization and apathy towards instilling sustainability in sectors driving economic growth are two of very reasons behind overstretching fiscal gap in all successive governments. Although, national income is mounting, it is not reused in productive channels of the economy nor does per capita life standard improve. Agriculture which is the main contributor in gross development products was paradoxically evolved into informal trade sector nonetheless its potential of becoming major thrust in economic progress. Had it been developed in formal ways instead, the situation would have been in contrast.

Since repatriation of 100 percent profit is a real charm for investors, productive and manufacturing sectors in the nation must be put on the anvil whereby economic sustainability can be achieved in a subsequent effect to skill and knowledge transfer rather than mere technology transfer; that was what happened in case of telecommunication service provision.

Income-driven growth is a best resolution to all economic blight. Such growth will be a progeny of healthy industrialization.

By imposing NTBs like limits over flow of foreign exchange developing economies evidently can permit domestic utilization of profits in economic building. Above all, capital depreciation resulted from complete outflow of such profits sets on range of problems such as currency devaluation presently which was aggravated in Pakistan by drastic outflow of foreign reserves from the country owing to instability in governance.

Controlling whopping PKR-dollar difference has become a challenge for the policy makers. Pakistani currency depreciating its value against greenback is increasing cost of imports in the country and deficit in current account. The deficit has touched 1.6 percent of GDP in two month of current fiscal year while cumulative target of this year is 6 percent. Pak rupee lost its value against dollar by 16% since July and 27% January this year.