Restrictions on free flow of capital in Pakistan lead to creation of grey market

Outdated arbitration rules, political uncertainty among obstacles to FDI 

Writing for Business Recorder, economist Ali Khizar suggested that Pakistan should remove restrictions on dollar outflows in order to attract long-term foreign investment in sectors focused on efficiency-seeking. 

He pointed out that a number of structural problems have caused foreign investors to leave Pakistan with negative returns, particularly in the banking and telecommunications sectors. Ali Khizar criticized semi-official curbs on repatriation of profits by multinational companies and argued that such moves to stop the outflow of dollars are counterproductive. 

Restrictions on the free flow of capital have created a grey market as local companies finance imports using dollars that they remit to Dubai through illegal channels. He urged policymakers to attract foreign direct investment (FDI) to export-oriented manufacturing rather than consumption-led industries. 

The current data shows a net foreign inflow of only $101 million in February, with net FDI in the first eight months of 2022-23 dropping 40% YoY to $784m, and repatriation of profits in the first seven months of the current fiscal year dropping to $220.1m, down 78.3% YoY. 

Mr. Khizar also criticized lopsided revenue policies that heavily tax the manufacturing sector while letting real estate and retail trade segments stay largely out of the tax net. Other panelists also discussed issues such as outdated arbitration rules, the negative effects of political uncertainty and poor security, and multiple stakeholders who prioritize their narrow interests over economic stability.

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