After launching Roshan Digital Accounts for overseas Pakistanis to boost both home remittances and foreign portfolio investment (FPI) in government debt securities, Pakistan is now trying to boost foreign direct investment (FDI) and exports.

The purpose is to keep the balance of payments in shape at a time when geopolitical compulsions and a Covid-19–triggered global economic slowdown pose challenges for the heavily indebted country.

Pakistan’s total external debt and liabilities went up to $113.8 billion in September from $107bn in a year ago. The International Monetary Fund (IMF) has put on hold its $6.9bn loan, insisting that Islamabad needs to do more to fulfil the loan conditions. And, changing geopolitics has pressed Pakistan to return some foreign exchange loans worth billions of dollars it had obtained from two friendly nations of the Gulf region.

Ground geopolitical and economic realities are such that Pakistan needs to accelerate its own non-debt–creating foreign exchange inflows. But a huge gap still exists between non-debt–creating foreign exchange inflows and total foreign exchange outflows primarily due to the trade deficit and external debt servicing. This means that growth in remittances alone cannot help. Exports and total foreign investment must also rise.

Procedural relief in banking and regulatory regimes proves helpful only to an extent. It works well only if key factors shaping up the foreign investors’ perception remain positive

Home remittances continue to grow even though hundreds of thousands of overseas workers have returned home after a Covid-19– triggered economic recession hit the countries that led to massive job-layoffs in some sectors.

Remittances are growing amidst this situation partly because overseas Pakistanis returning home after losing jobs are bringing back home their lifelong savings and partly because Pakistanis still working overseas can now invest in dollar-denominated government debt papers. Roshan Digital Accounts and Naya Pakistan Certificates have made this possible for them.

Recently announced relief on energy consumption in peak hours, quicker refunds of tax rebates, lower import tariffs on inputs of export industries, extension in time periods for the settlement of bad loans and low interest rates are expected to lift sagging exports. But unlike remittances, exports might take a longer time to grow as global demand is yet to rise to pre–Covid-19 levels.

To accelerate demand recovery and eventual economic growth (after the last fiscal year’s 0.4pc contraction), a push to industrial growth is a must. That can be achieved more easily if the foreign stakeholders in Pakistan’s industries are facilitated. That can even bring in more FDI.

It is against this backdrop that the State Bank of Pakistan (SBP) recently announced a new set of rules for the repatriation of disinvestment proceeds from Pakistan. Foreign shareholders in Pakistani companies and foreign companies working in Pakistan can make outward payments out of the divestment proceeds with the approval of their banks.

Earlier, they needed prior permission from the central bank as well. Apparently, this is just a small step undertaken to facilitate foreign investors. But given the enormity of its scope, this measure, if implemented in letter and spirit, could serve as an incentive for attracting more of FDI.

Previously “a designated bank required prior approval of the SBP for remittance of disinvestment proceeds above market value for listed securities and above break-up value for unlisted securities”.

Now, “the bank designated by the company has been delegated the authority to remit the entire disinvestment proceeds to non-resident shareholders upon submission of required documents,” according to an SBP press release.

An SBP circular issued to banks in this regard also made it clear that the relaxed rules would also apply to outward remittances of the dividends. This effectively means that foreign shareholders in a company in Pakistan will now get dividend income earned from that country quicker than before. Earlier, when the outward repatriation of dividend income was subject to clearance from the central bank, foreign shareholders had to wait for dividend income transfer and that, at times, depressed their enthusiasm.

By making remittances of foreign exchange booked through disinvestment of company shares held by non-residents and by accelerating the transfer of their dividend incomes, the central bank has effectively set the stage also for non-resident Pakistanis to make more portfolio investment into the country’s equity market.

Roshan Digital Accounts and Naya Pakistan Certificates already enabled them to invest in government debt papers. If the relaxed rules for the repatriation of dividend incomes and disinvestment proceeds can encourage them to invest more in Pakistan’s corporate sector, that is so good. But whether the relaxed rules can encourage foreign nationals to invest more in Pakistan’s corporate sector will be the litmus test for the efficacy of the changed rules.

Foreign investors’ overall risk perception matters a lot. If they perceive Pakistan as a strong, viable destination for putting in foreign funds, the relaxed rules for the repatriation of funds would be an incentive. But as long as their risk assessments guide them to stay away from making investment here, the relaxed rules would only help some of them get out of the market smoothly.

When it comes to attracting and sustaining foreign investment inflows, procedural relief whether in banking or regulatory regimes proves helpful only to an extent. It works well only if key factors shaping up the foreign investors’ perception remain positive. Sadly, two of these key factors — consistency in policies and political stability — currently remain amiss.

Published in Dawn, The Business and Finance Weekly, November 16th, 2020