Multinational companies (MNCs) are in a tight spot.

One can argue that they signed up for problems like high inflation, low economic growth and poor infrastructure when they set up local operations years ago. But the latest economic downswing has produced three challenges for foreign companies operating in Pakistan.

The first is their inability to send dividends to their overseas shareholders for the last year, thanks to the official restrictions on dollar outflows amid low foreign exchange reserves.

Secondly, an unprecedented loss in the value of the rupee against the dollar is rapidly eroding the value of their unpaid dividends. Rupee-based dividends, repatriated to foreign headquarters on a future date, will translate into a smaller dollar figure given the roughly 40 per cent devaluation in recent months.

And finally, MNCs are unable to import raw materials — like their local counterparts — which has put their business continuity at stake.

‘One positive thing that’s come out of this crisis is that everyone is trying really hard to indigenise’

“Our estimate is that the pending dividends amount to $1.5 billion. Not a dollar has gone out as dividend for the last year,” said Amir Paracha, newly elected president of the Overseas Investors Chamber of Commerce and Industry (OICCI), in a recent interview with Dawn.

The holdup in dividends is causing “serious reputational damage” to the country. That’s why OICCI has come up with two stopgap solutions for the dividend problem.

The chamber representing 208 blue-chip MNCs has asked the State Bank of Pakistan (SBP) to allow partial dividend payments in the immediate run. These “symbolic” payments in “small tranches” will give heart to the foreign sponsors that things are getting back to normal in Pakistan, Mr Paracha said.

Another proposal that OICCI will soon present to the SBP envisages that all accumulated dividends be dollarised to protect their “real value”. The proposal will give the central bank a window of 18-24 months while ensuring that the foreign shareholders don’t lose out any further because of the rapid devaluation. The SBP will bear the currency risk under this proposal, the OICCI president said.

Pakistan has a liberal foreign investment policy that allows 100pc profit repatriation. MNCs repatriated $1.6bn to their overseas headquarters in the calendar year 2021. The repatriated amount dropped to $220.1 million in the first seven months of 2022-23, down 78.3pc from a year ago.

As for the curbs on raw material imports, the OICCI president said MNCs have adopted different ways to deal with the problem.

For example, many large companies “sensed” the impending problem back in November 2022 and over-ordered their inventories. Unilever Pakistan Ltd, where Mr Paracha serves as CEO, was one such “cash-liquid” company.

“We’re surviving until now. We’ll ask the SBP when we run out of the stock,” he said.

Another way for MNCs to circumvent the import curbs involves inter-company loans. The SBP allows imports that are otherwise banned provided that the importing company is using dollars borrowed from its overseas headquarters.

Yet another practice that MNCs have been using to import industrial raw materials amid official bans consists of the International Finance Corporation (IFC) — a World Bank Group organisation focused on private-sector development in emerging economies — issuing dollarised loans.

The importing company gets dollar-based liquidity in the immediate term for bringing in raw materials, but the loan increases the cost of doing business in the long run, he said.

MNCs have drawn heavy criticism from economists for operating in mainly consumption-oriented sectors of the economy, like telecommunications, food, personal care products, banking etc. They sell products and services within the domestic market and generate rupee-denominated sales and profits. Subsequently, they repatriate their profits to their overseas sponsors in dollars, bringing the country’s already strained balance of payments under further pressure.

Mr Paracha acknowledged that there’s merit in the argument about the lack of export-oriented foreign direct investment.

“There’s a growing realisation now. That’s why most MNCs are focusing on indigenisation of both raw material and production,” he said.

He said firms like P&G, Nestle and Unilever have switched to local production by up to 90pc. In the case of Unilever, Mr Paracha said 99.9pc production is in local factories. Similarly, up to 60pc of Unilever’s raw material is locally sourced versus 30pc just four years ago.

“One positive thing that’s come out of this crisis is that everyone is trying really hard to indigenise,” he said.

Published in Dawn, The Business and Finance Weekly, March 27th, 2023