FeaturedNationalVOLUME 18 ISSUE # 40

Remittance challenges

The dawn of the new financial year was greeted by a disconcerting 19.3 percent year-on-year decline in remittances for July, an inauspicious start that the outgoing government surely did not desire, especially as it marked the culmination of its term.

This unexpected drop carries significant implications, hastening the evaporation of the euphoria engendered by the Stand-By Arrangement (SBA). As sentiment pivots from driving market momentum to bracing for the impact of eroding economic fundamentals, attention is directed towards foreign workers’ remittances, a cornerstone of Pakistan’s current account. This abrupt drying up of this critical financial stream should serve as a clarion call within the finance ministry.

The commencement of the new financial year was marred by an unsettling 19.3 percent year-on-year drop in remittances in July, an outcome that certainly wasn’t ideal for the outgoing government, especially as it marked the conclusion of its tenure. The initial enthusiasm stemming from the Stand-By Arrangement (SBA) will now dissipate faster, replaced by a shift in sentiment from driving market momentum to preparing for the deterioration of economic fundamentals. Foreign workers’ remittances constitute a cornerstone of the country’s current account, making the sudden depletion of this vital resource a cause for serious concern within the finance ministry.

Various explanations are being offered from different quarters, ranging from the customary post-Eid decline to a slowdown in earnings abroad. However, since Pakistan has limited influence over the economic performance of other countries, which ultimately affects individuals’ income and their ability to send money home, the focus should be on addressing whether exchange rate challenges are still deterring the utilization of formal banking channels and contributing to the drop in remittances.

On an annual basis, there was a 22% decrease in the monthly remittance inflow, as it amounted to $2.8 billion in the same month of the previous year. This decline is evident from the data. Cumulatively, over the course of the last fiscal year, remittances totaled $27 billion. This figure is 13.6% lower than the $31.3 billion registered during the same period in the previous fiscal year, reflecting a decrease of over $4.25 billion.

Experts attributed this trend to the government’s decision to maintain the US dollar exchange rate at 220 last year. This policy led to the emergence of an informal grey market, which diverted some inflows away from formal channels. During the year, both January and February 2023 saw remittance inflows below $2 billion. This was due to uncertainty in the currency market and a significant disparity between the exchange rates in the inter-bank and black market. The unofficial cap on the exchange rate was lifted, resulting in an increase to Rs 269 against a dollar as of February 13, 2023, compared to Rs 230 on January 26, 2023.

As the exchange rate situation improved, there was growth in home remittances. Moreover, higher inflows were recorded in March 2023, driven in part by remittances during the Ramazan and Eid periods.

July witnessed remittances amounting to $2.03 billion, marking a 7.3 percent decrease from June’s $2.2 billion. June had been the sole month to experience an increase since the peak of $2.5 billion in March, signifying an apparent and consistent downward trend on a month-to-month basis. Nevertheless, it remains uncertain how much the finance ministry can tangibly influence this situation. Currently lacking direction, the finance ministry is further burdened by the ongoing debate over the prerogatives of the caretaker setup. The extent to which this setup collaborates with a sovereign central bank to ensure transparency and stability in exchange rates, along with cross-border transactions, holds considerable importance.

However, remittances are just a single, albeit crucial, component of the larger current account equation, and the nation grapples with a pressing reserves crisis. Unfortunately, foreign investment, often overshadowed in discussions here, plays an equally significant role in other nations, even those considered allies of Pakistan. Hence, it would be prudent to concurrently focus on enhancing both remittances and foreign investment. Notably, both these objectives require similar frameworks, aimed at streamlining processes and bolstering the safety of incoming foreign capital.

In accordance with economic theory, such reforms are self-reinforcing; stability, particularly in terms of returns, tends to attract greater inflows.

Regrettably, these critical matters have not held a prominent place on recent administrations’ priority lists. While the urgency to secure loans for short-term solvency is understandable, given the current flirtation with sovereign default, governments remain culpable for not initiating comprehensive reform agendas.

Present crises accentuate the significance of long-term strategies, and progress can only be achieved if efforts are invested in generating more revenue than expenditure annually.

The decline in remittances serves as an undeniable warning that the government cannot afford to disregard. As Pakistan enters an uncertain phase with an active International Monetary Fund (IMF) programme and a caretaker government in charge, the recent past has demonstrated, repeatedly, the fragility of such arrangements. They can collapse unexpectedly, remaining in limbo for protracted periods. The urgency to bolster reserves independently has never been more pressing. For now, however, there is little to do but await the next month’s figures and observe the formation of the interim government.

As Pakistan stands at a crossroads, transitioning to a new phase with an active International Monetary Fund (IMF) programme and a caretaker government at the helm, the decline in remittances rings a resounding warning that the government cannot afford to overlook. Recent history has shown, time and again, the precariousness of such arrangements, capable of collapsing without forewarning and remaining in a state of suspension for prolonged periods. The imperative to fortify reserves autonomously has never been more pronounced. For the moment, however, little can be done except to await the upcoming month’s remittance figures and to observe the gradual formation of the interim government. In the face of mounting challenges, both anticipated and unforeseen, Pakistan’s financial resilience will be tested, necessitating astute strategies and resolute actions to secure stability and pave the way for sustainable economic growth.