The remittances crunch

The inflow of remittances to Pakistan has yet to show a satisfactory trajectory since January 2022. The monthly inflow of remittances for the first three quarters of 2023 was lower than both the previous year and 2021. The count of remittances from January to November 2023 was $23.96 billion, reflecting a decrease of $3.83bn compared to the corresponding period in 2022 and $4.6bn compared to 2021.

The World Bank, in its report titled “Leveraging Diaspora Finances for Private Capital Mobilisation,” has projected a 10 per cent decrease in remittance flows to Pakistan for the current fiscal year. This revelation undoubtedly raises concerns because remittances hold a paramount significance for Pakistan and play a pivotal role in shaping Pakistan’s economic landscape.

In the realm of global financial flows, Pakistan ranks sixth among the top countries receiving remittances, with the remittances-to-GDP ratio exceeding 7pc.

The decline in remittances prompts concerns about its potential impact on the economy. The dramatic drop in foreign workers’ remittances signals a further blow to the economy, particularly on the external financing front. For instance, Pakistan’s external funding needs are estimated at $28.7bn for the current fiscal year, including $24.6bn for debt repayments and $4bn for financing the current account deficit.

The increasing cost of living in Saudi Arabia and the United Arab Emirates poses a potential obstacle to sending additional foreign exchange back home

The decline in remittances not only widens the current account deficit but also puts pressure on the foreign exchange reserves held by the State Bank of Pakistan (SBP).

The SBP’s liquid foreign exchange reserves stand at $7.8 billion as of December 22, 2023. This figure is notably lower than the $20bn held by Bangladesh. The stock of foreign exchange reserves held by SBP is approximately equivalent to one month’s worth of import bills.

Notably, the forex reserves, below the three-month imports threshold, continue to indicate a currency under pressure. The constant strain on forex reserves invariably exerts pressure on the forex market, leading to an inherent instability in exchange rates.

For Pakistan, 2023 has swiftly earned the dubious distinction of being labelled the “year of financial mismanagement” due to a 20pc decline in the rupee against the US dollar. This decline is higher than the average fall of 13pc per year over the last five years and the average of 8pc per year over the past 10 years.

The consequences of declining remittances are evident, as they not only affect the real sector but also disturb the country’s financial position. The downward trajectory raises questions about the underlying factors that cause this worrisome trend. The decline in remittances can be attributed to a range of factors.

In the realm of global financial flows, Pakistan ranks sixth among the top countries receiving remittances, with the remittances-to-GDP ratio exceeding 7pc

Fueled by political instability, the current economic instability is causing exchange rate instability. The unstable exchange rate can create a gap between the open market and interbank market exchange rates. The widening gap inadvertently has led to a decline in remittances through formal banking systems and a subsequent increase from the informal sector.

Recent research indicates that remittances to Pakistan from informal sources have surged to a staggering $10 billion, further increasing the gap between open market and interbank market exchange rates.

The economic turmoil of 2023, sparked by political instability, not only triggered the balance of payment crisis but also worsened public confidence. The lower confidence of consumers, entrepreneurs, and investors ended with the slowdown of the real estate sector.

The slowdown was further fueled by the revision of the Capital Gain Tax and the inclusion of Deemed Income Tax as a wealth tax in the Finance Bill for FY24. Overseas Pakistanis also remit funds to engage in real estate investments. The potential decline in remittances is attributed to the slowdown in the real estate sector.

The ongoing global monetary tightening, which has led to higher interest rates in the international market, presents an opportunity for remitters to earn better returns. As a consequence, this surge in returns has inadvertently led to a decrease in remittances flowing into Pakistan.

Remittances are also declining due to the slow global economic growth and weakness in labour markets in several high-income migrant-hosting countries, particularly the United States and Eurozone countries. The slow global growth can be attributed to the war in Ukraine, conflict in the Middle East, exchange rate and oil price volatility, and a deeper-than-expected downturn in major high-income countries.

The outlook for remittance inflow to Pakistan in 2024 is not optimistic, primarily due to ongoing developments in the major remittance-sourced countries. For instance, the United Kingdom will be imposing minimum earning ceilings on immigrants starting this spring.

Additionally, the current political environment and labour market conditions in the United States will continue to impede the flow of remittances to Pakistan. Moreover, the increasing cost of living in Saudi Arabia and the United Arab Emirates poses a potential obstacle to sending additional foreign exchange back home.

Given the outlook of remittance inflow, it is crucial to proactively implement measures to prevent a potential balance of payment crisis. In this realm, ensuring exchange rate stability, coupled with efforts to curtail the flow of remittances through the informal sector, can safeguard against financial mismanagement.

In addition to this, it is crucial to emphasise the importance of fostering alternative sources of foreign exchange inflow. Simultaneously, it becomes imperative to carefully assess and rationalise the outflow of foreign exchange reserves.