FeaturedNationalVOLUME 19 ISSUE # 9

Remittance realities

The trajectory of remittances flowing into Pakistan has taken a worrisome turn since January 2022. Despite being a vital component of the nation’s economic landscape, recent trends reveal a decline in inflows, raising red flags.

The World Bank’s projection of a 10% decrease for the current fiscal year intensifies concerns, particularly as Pakistan ranks sixth globally in remittance recipients. This decline not only prompts economic worries but also challenges the traditional sources of remittances, with European countries now playing a more prominent role. Additionally, focusing on percentage increases rather than total inflows introduces ambiguity, demanding a closer look.

The monthly inflow during the first three quarters of 2023 was lower than both the previous year and 2021. From January to November 2023, remittances amounted to $23.96 billion, marking a decrease of $3.83 billion compared to the same period in 2022 and $4.6 billion compared to 2021.

The World Bank, in its report titled “Leveraging Diaspora Finances for Private Capital Mobilization,” has projected a 10% decrease in remittance flows to Pakistan for the current fiscal year. This revelation is concerning as remittances hold significant importance for Pakistan and play a crucial role in shaping the country’s economic landscape.

On the global stage, Pakistan ranks sixth among the top countries receiving remittances, with a remittances-to-GDP ratio exceeding 7%. The decline in remittances raises concerns about its potential impact on the economy, posing a particular challenge to external financing. For example, Pakistan’s external funding needs for the current fiscal year are estimated at $28.7 billion, covering $24.6 billion for debt repayments and $4 billion for financing the current account deficit.

In December 2023, home remittances saw a 13.4% increase compared to the same month the previous year, reaching $2.4 billion against $2.099 billion. Three key observations need attention.

Firstly, the decline in remittances in December the previous year can be attributed to the flawed policy of the government. It attempted to control the rupee-dollar parity without sufficient foreign exchange reserves, which led to multiple exchange rates, with a significant differential between the hundi/hawala rate and the interbank rate, reaching as high as 40 to 45 rupees per dollar. This fueled the resurgence of the illegal hawala mechanism.

This policy, implemented in 2013-17, resulted in the country experiencing the highest-ever current account deficit of $20 billion in 2018. The foreign exchange reserves were propped up by massive borrowing, the consequences of which the country continues to face. Therefore, comparing inflows in 2023 with 2022 data, especially after the agreement on the Stand-By Arrangement with the International Monetary Fund in June 2023, which included a reversal of control over the rupee-dollar parity, may not be a perfect analogy, but it certainly highlights significant changes.

It is concerning that inward remittance inflows during the first six months of the current fiscal year are lower than the corresponding period of the previous year – $13.4 billion this year against $14.417 billion in 2022, reflecting a decline of nearly 7%. It’s crucial to note that Dar took office on September 27, 2022, and the control of the rupee did not begin until October 2022, so the recent rise in remittance inflows should not be a source of comfort for stakeholders.

Moreover, there is additional concern regarding the recent increase in remittances being sourced from European countries, diverging from the traditional major contributors, Saudi Arabia and the United Arab Emirates. These two nations have historically been primary sources of remittances for Pakistan, even though there has been a substantial decline in inflows from both countries during the first six months of the current year—8.9 percent from Saudi Arabia and 10.9 percent from the UAE. Notably, Saudi Arabia has altered its policy by allowing more categories of workers to reside with their families in the kingdom, a shift that is expected to negatively impact remittance flows back to Pakistan.

Adding to the apprehension is the observation that focusing on the percentage rise rather than the total inflow seems to downplay the post-Covid-19 significance of remittance inflows as a percentage of desired foreign exchange earnings, especially since they surpassed exports in fiscal year 2021.

In December 2021, remittance inflows reached a high of $2520.4 million, contrasting with the $2381.5 million in December 2023—a decline of nearly 6 percent. This decrease occurred despite the announcement by the Caretaker Finance Minister on September 15, 2023, stating that an unbudgeted 80 billion rupees would be allocated to revitalize the flow of remittances through official channels. While twenty billion rupees were released to the State Bank of Pakistan the next day, with no further reported disbursements, there is no update on how the allocated funds were spent. It remains unclear whether the rise in inflows in December 2023 is seasonal, a result of the disbursed funds, or compliance with the IMF’s prior Stand-By Arrangement condition to ensure a market-determined exchange rate.

While acknowledging the necessity of presenting data positively for economic team leaders, especially when percentages are highlighted in the context of lower totals, it is crucial to strike a careful balance. This approach should consider the limitations it may impose on the ability of the economic team to implement timely and appropriate mitigating measures.

In dissecting the intricacies of Pakistan’s remittance landscape, it becomes evident that the recent surge from European countries, coupled with declines from stalwart contributors like Saudi Arabia and the UAE, requires urgent attention. The shift in dynamics, influenced by policy changes and geopolitical factors, poses a threat to the nation’s economic stability. Moreover, the tendency to highlight percentage gains while neglecting total inflows adds a layer of complexity to the narrative. As we navigate through these challenges, striking a balance between positive portrayal and pragmatic action becomes imperative for the economic leadership, ensuring the sustainability and resilience of Pakistan’s financial ecosystem.