Dollar Shortage Traps Multinationals’ Profits Inside Pakistan

Multinational companies face a problem in Pakistan: They can’t send profits back home from a country that’s running low on dollars.

(Bloomberg) — Multinational companies face a problem in Pakistan: They can’t send profits back home from a country that’s running low on dollars.

Between $1 billion and $2 billion in earnings from firms including Nestlé SA, Unilever Plc and Philip Morris have been stuck in Pakistan’s banks for almost 18 months, according to a Karachi-based chamber of commerce for multinationals. Central bank data showed that repatriation of profits and dividends fell by 88% to $331 million in the fiscal year that ended in June.

Snags moving money from Pakistan have hit many industries hard. Airlines are facing cash flow problems. And in the past two years, the value of the Pakistani rupee has plunged 42%, meaning every company forced to keep profits in the country is losing money. 

“Pakistan has faced this issue in the past but never of such a magnitude,” said Suleman Rafiq Maniya, head of advisory at Vector Securities Pvt., a financial brokerage firm.

The South Asian nation avoided a default by securing a deal with the International Monetary Fund in July, but it’s still struggling to recover. Factories are closing temporarily because they don’t have dollars to import raw materials, and Pakistan’s economic growth rate is at one of its lowest points since the country was founded in the 1940s. The State Bank of Pakistan has hiked interest rates to a record high to control Asia’s fastest inflation rate.

“It is not ideal at all,” said Aly Yusuf, the chief financial officer at Unilever Pakistan, adding that the UK-headquartered company has started discussions with Pakistani authorities on the outflow issue.

A spokesperson for Nestlé Pakistan wrote in an email last month that the food company is also maintaining a “regular dialogue with the relevant stakeholders.”

Pakistan’s central bank didn’t respond to requests for comment.

Recently, the situation has improved slightly with a $47 million outflow in August. The value of funds that foreign airlines want to send out of the country, for instance, has decreased since the beginning of the year, but still remains very high at $207 million, said Philip Goh, the regional vice president for Asia Pacific at the International Air Transport Association.

Companies say they’ve tried to adapt to the dollar scarcity by seeking out banks that have access to the currency or funneling money back into their operations in Pakistan. The central bank also now allows companies to invest profits in government securities so they don’t sit idle, according to Ehsan Malik, the chief executive officer at the Pakistan Business Council. These securities yield a return close to the record interest rate of 22%. 

“It’s not necessarily cash, which all of our foreign partners were interested in,” said Abdul Aleem, the secretary general of the Overseas Investors Chamber of Commerce and Industry. “It’s more of an assurance that they don’t lose their profit.”

Pakistan’s dollar shortage started last year after delays in accessing funds from an IMF program raised default prospects and halted usual financing lines. In January, depleted foreign exchange reserves dropped to their lowest level in a decade. Unlike in the past, the nation’s financial problems have persisted even after eventually securing support from the IMF.

Applying for currency repatriation in Pakistan is onerous, according to Goh from IATA. Airlines need an auditor’s certificate showing the amount to be remitted, which means airlines are having to undergo an audit monthly rather than annually. This adds to the operating cost in Pakistan, prolongs the repatriation process and pushes companies to rethink whether they want to even continue operations.

“Over time, if conditions persisting in a country make the economics of operation to that country unsustainable, it is reasonable to expect airlines to consider deploying their aircraft assets to better use elsewhere,” Goh wrote in an email.

Pakistan’s government, which is trying to lure foreign investment to the world’s fifth most-populous nation, is keen to prevent multinationals from pulling their business. It created a new investment council that gives tax breaks and aims to raise $25 billion both from Saudi Arabia and the UAE. 

Whether those steps are enough is an unresolved question, but many companies still see Pakistan as worth the bet, given its rapid urbanization and young population.

“We are hopeful that the situation will be improved in the long term to win back foreign investors’ confidence in Pakistan,” a spokesperson for Philip Morris (Pakistan) Ltd. wrote in an email. 

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