In almost the last two years, the State Bank of Pakistan (SBP) has taken quite a few initiatives to ease its foreign exchange regime to boost exports and attract foreign investments — direct and portfolio — as well as facilitate non-resident Pakistanis to bring in and take out their savings without any hassles. The latest in this series of actions taken by the central bank are revisions in its foreign exchange Manual to facilitate equity investment abroad by startups, fintech and exporters as notified earlier last month.

The new policy for equity investment abroad, for example, will attract foreign direct investment (FDI) through the establishment of holding companies by Pakistani fintech and startups, support exports by facilitating exporters to establish their subsidiaries or branch offices outside Pakistan. The changes will significantly improve the overall investment regime as well as foster new entrepreneurial culture in the country.

Following the changes in the foreign exchange regulations, the exporters will now be able to establish their subsidiaries or branch offices for promoting their exports without any approval from the SBP, and the banks will be allowed to remit funds up to 10 per cent of their average annual export earnings of the last three calendar years or $100,000 or whichever is higher abroad on their behalf.

The banks have also been allowed to remit $30,000 from the second year onward to meet the annual budgeted expenses of the representative office established or acquired abroad with an annual increase of 10pc in expense. This has met the longstanding demand of exporters in general and IT firms in particular, which were facing difficulties in running their foreign operations because of previous, outdated SBP regulations. The new policy will give exporters space to explore new markets and capture more export business.

The SBP’s revisions to its foreign exchange manual will significantly improve the overall investment regime as well as foster new entrepreneurial culture in the country

The amendments in the foreign exchange regulations seek to ease the anxiety in the heads of international venture capitalists who are willing to finance Pakistani start-ups and fintech but prefer to invest indirectly through holding companies established abroad by allowing the resident companies up to seven years to establish their holds abroad for raising capital. They can remit up to $10,000 for this purpose and the shareholders of the company can swap shares to mirror shareholding of the local company in the holding company. The holding company is required to bring the majority of funds raised from abroad to Pakistan until certain thresholds are met. This will enable Pakistani fintech and start-ups to channelise FDI into the country.

Further, the revisions allow resident individuals to now invest up to $25,000 during a calendar year in the listed securities abroad without approval from the SBP subject to the condition that their shareholding shouldn’t exceed 1pc of shares of the investee company at any time. Similarly, the banks may remit $50,000 during a calendar year on behalf of resident employees of subsidiaries of foreign companies in Pakistan for participating in the share option plans of their parent companies but the stake of an individual employee in their parent company should not exceed 3pc shareholding of the investee company.

Moreover, the resident individuals can now acquire the shares of companies abroad against their efforts and services — sweat equity — without any monetary consideration if their maximum shareholding does not exceed 20pc of shares of the investee company at any time. This provision will provide opportunities to individuals to bring dollars in the form of dividend and capital gains to Pakistan.

Besides actions to boost FDI, the SBP has implemented changes in its regulations to also facilitate portfolio investments in mutual funds, Exchange Traded Funds (ETF) and Real Estate Investment Trust (REIT) Funds through the rupee-based Roshan Digital Account (RDA) and Special Convertible Rupee Account (SCRA). The changes are expected to help the mutual fund and private equity fund industry to grow by attracting foreign investment, and facilitate overseas Pakistanis in particular and the non-residents in general to invest in funds in Pakistan. Further, the SBP has also allowed the private funds to provide private equity and venture capital fund management services and issue units of their funds to non-resident investors.

Nevertheless, the central bank has not amended the existing policy on investment abroad by resident companies and firms for the expansion of their business. Such companies or firms will continue to approach the SBP for approval through their banks.

The revisions in the foreign exchange manual were being demanded by both exporters, and startups and fintech companies with the latter standing to gain more as the previous regime had continued to pose constraints on their ability to raise capital for new enterprises for a very long time by discouraging potential venture capital, private equity funds and angels from betting on Pakistani entrepreneurs.

The Covid-19 pandemic has taught the policymakers across the globe that the lesser the burden of regulations the better for the economy and businesses. Pakistan has never been a favourite destination for foreign investors — especially in the export sectors — owing to a number of factors: the shortage of developed industrial land, too many regulations, a broken tax system, policy inconsistencies, security conditions and outdated foreign exchange regime.

The central bank has done much of its part. It is now time for the government and other regulators to do their part to create ease of doing business for companies, especially startups and fintech. The competition in the world will become more intense with every other country rushing to attract business and foreign investment. In the last year, the SBP has set an example for other regulators and government agencies by facilitating exporters and startups through new innovative initiatives. Others need to follow its example.

Published in Dawn, The Business and Finance Weekly, , March 1st, 2021