foreign exchange reserves in pakistan

Written by Mir Mohammad Alikhan 11:47 am Articles, Pakistan, Published Content

How MNCs Are Destroying the Foreign Exchange Reserves in Pakistan

The writer, Mir Mohammad Alikhan, reflects on the cause of plunging foreign reserves in Pakistan. Is it because of businesses’ proclivity for imports, like many believe it to be? That truly isn’t the case. Multinational corporations are actually the ones sending shock waves to the foreign reserves by importing a considerable amount of raw materials for their products and then selling them at prohibitive prices. Naturally, huge profits are made, which are declared as dividends before being converted into dollars and sent abroad to a parent company.
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About the Author(s)
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Mr Mir Mohammad Alikhan is a Wall Street trained investment banker and an author of 4 books and several hundred articles. His full bio can be found on MirMak.Pk.

The State of Foreign Exchange Reserves in Pakistan

It is a norm these days to blame Pakistani businessmen for hurting the foreign exchange reserves of Pakistan by being import-dependent businesses. Every channel, every economic analyst, every genius anchor keeps harping on how our dollar reserves are going down and how imports have increased tremendously during the previous 8 years.

How can an import-dependent economy be a double-edged sword? One, it depletes our foreign reserves. Two, it kills productivity locally. True. Very true, but the problem is not our imports alone. Imports can be curtailed with policy measures and some hard-hitting taxes, and the problem will be mostly controlled. But will our foreign reserves be safe then? Absolutely not.

The real culprits are the multi-national corporations (MNCs), a wolf in sheep’s clothing. Did you know that a multinational can send all its profits abroad every year, year upon year, to its parent company anywhere in the world by converting its rupee-based dividend into dollars? For example, if an MNC makes Rs 150 billion in net profits, it can declare it all as a dividend, convert it into dollars and send it back to its country of origin.

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The Irreparable Damage

One MNC can make up for what 2800 small corporations are worth of damage when it comes to sending foreign reserves abroad. A simple example, Unilever imports 75% of its raw material from overseas, according to its own CEO. Just imagine a behemoth like Unilever importing 75% of all the material for its products, hurting the foreign exchange reserves right at the beginning of the process before selling it within Pakistan at exorbitant prices, making huge profits, declaring those profits as dividends and converting them into dollars and sending them abroad without a single amount restriction.

Do not think for a second that I am singling out Unilever. I have no connection or beef with them. I am quoting its own CEO from an interview it gave to a local newspaper when it comes to repatriation of profits and its raw material imports. Every MNC without fail is doing the same thing, so much so that car manufacturers are importing most of their raw materials and parts from overseas.

One small fluctuation in dollar/rupee parity and the prices of the locally “assembled” not locally “manufactured” cars go through the roof. Nowhere in the world does this happen. We might as well allow all cars to be imported from overseas. Except for the people working at the auto assembly plants, how many other peripheral industries are created related to the auto assembling plants? When the parts are imported, not many in my view.

Reorienting Our Policies

We Pakistanis and our government are so eager for foreign direct investments (FDI) since our inception that we forget what is good for our own economy when someone shows up with $1 billion dollars. No country in this world has ever grown economically on FDI whilst forgetting the domestic economy. If you cannot protect your domestic economy plus your domestic financial markets while soliciting foreign investments, then you are hunting in a swamp full of snakes without an anti-venom insight.

Of course, the dividends have to be repatriated to the foreign businesses that invest in Pakistan. Of course, they have to make money when they invest. But of course, Pakistan has to be protected as well. Its economy has to be protected as well. We need a framework where there are limitations as to how much can be sent back in profits each year, especially for the first 10 years of any foreigner investing in Pakistan.

We are so afraid to legislate laws that protect our own interests because we are more concerned about pleasing foreigners or foreign investors. Unless and until a day comes when we become eager to please the domestic investors, pump up our domestic economy, give preference to our domestic businessmen, create a level playing ground for our domestic businessmen, create absolute ease of doing business for our domestic investors, the Pakistani economy is not going to grow. Period.

On to the Solutions

Now to the part of the solutions. The solutions are many if the will is there to implement them. We cannot rock the boat nor can we implement ad hoc policies. We need to have two sets of policies. One for the new investors coming in with the FDI and the other for the existing ones. Since the existing MNCs have been the biggest beneficiaries for decades, we need to have a different set of rules for them.

Perhaps only 40% of the dividends can be repatriated in the first few years, a certain percentage of retained dividends should be reinvested with a lower tax bracket and so on. For the auto sector, the rule should be that if you establish a plant in Pakistan, within a certain number of years, you should also manufacture the parts locally under the supervision of the foreign parent company so more jobs are created within Pakistan.

This way, foreign currency fluctuations will not leave a negative impact on the prices. I can write 50 solutions. And the ones in power know the solutions more than me and better than me. The question here is not whether the solutions exist. The question here is: do they want to implement the solutions?

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The views and opinions expressed in this article/paper are the author’s own and do not necessarily reflect the editorial position of Paradigm Shift.

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