Among the FDI disappointments this fiscal is the particularly-abysmal showing by the telecoms sector. As per the SBP data for Jul-Oct 2018, net FDI in telecoms was a net outflow of $72 million, as opposed to a net inflow of $62 million in the same period last year. A phenomenon seen since FY16, the story of weaker inflows and growing outflows looks set to exacerbate in the remainder of this fiscal, unless a mega transaction comes to the fore.

It’s been a foregone conclusion that the era of multibillion-dollar telecom FDI is long over for Pakistan. In a stagnant market trying to run on the crutches of prior 3G and 4G investments, consolidation has been seen as one way to eke out better profit margins. In 2016, a heavily-indebted operator fell into the lap of the market leader. In 2017, the telecom towers started undergoing the chop of optimization. And in 2018, a telco sold 45 percent of its mobile-payment subsidiary to a Chinese payment major. (Meanwhile, some observers suggest that the market is ripe for further consolidation into a three-player market).

But those transactions haven’t really shaken the piñata that used to be telecoms FDI in the mid-2000s. The inflows, then, remain dependent on telecom auctions. On that count, it would be naïve to expect another mega-auction in the next couple of years. Operators would first milk their existing investments before they can justify more investment to their HQs. All that talk of bringing 5G, thus, is really premature.
In the age of forex crunch, the lackluster telecoms FDI would have been palatable had it not been for unusually-large profit repatriations by the sector’s foreign-sponsored stars.

The proceeds started bloating after the last major telecom auction (3G+4G licenses) took place in FY14. The dollar inflows from that auction arrived mostly in FY14 – the turnaround year that the sector had been waiting for.

In the four fiscal years since that auction took place (FY15-FY18), the net FDI in the sector totaled $322 million. In those same four years, the sector’s profit repatriation added up to $933 million – almost thrice the net FDI in the period. (In the four years prior to the telecom auction, the cumulative profit repatriation was less than $200 million).

Though the 4MFY19 profit repatriation has declined year-on-year, one needs to wait for the year-end to draw any conclusions from this latest data. In any case, it wouldn’t change the fact that the sector has become a source of net forex deficit for Pakistan.

Since that billion-dollar auction in 2014, the sector’s share in Pakistan’s overall profit repatriation has grown to average 14 percent, indicating that the sector has not only done well but it is perhaps doing better compared to the rest.

In FY18, telecoms happened to be the largest repatriating sector ($327 mn), coming ahead of the usual, leading sectors of power and finance. It was the investment back in FY14 and FY15 that helped secure the sector’s financials for the coming three to four years.

Now what? Rising profit repatriation in the presence of low net FDI creates a paradox. If the telco’s are indeed doing well in Pakistan, shouldn’t that attract new investment in the field? Not really! The 2014 auction made it clear that a Greenfield operator won’t enter the fray due to market saturation. This is pretty much in line with what is going in most of the emerging and frontier markets

However, the next opportunity lies in developing the digital economy, by erecting the supply-side infrastructure for cashless payments, online interfaces and efficient logistics. Towards that end, all eyes are fixed on the imminent entry of Alipay and Alibaba into this market.