Dependence on remittances

Published July 18, 2016

OVER a period of nearly three years, Pakistan’s external account had been in surplus. This has come about despite the dismal performance of the export sector, which is the country’s primary source of forex earnings.

Three major factors explain this trend: a dramatic fall in global oil prices (which led to large-scale savings on the oil import bill), rising worker remittances, and higher debt inflows. Much has already been written about the incurrence of external debt by the current government and the billions of dollars in savings from lower oil payments.

Yet, the importance of worker remittances for the country’s balance of payments position cannot be overstated.


Pakistan relies on remittances for over 36pc of its current account receipts — much higher than the ratio for China (1.6pc) and India (12.2pc)


Pakistan relies on remittances for over 36pc of its current account receipts — this is much higher than the ratio for regional countries like China (1.6pc) and India (12.2pc). This heavy dependence on remittances means that Pakistan is that much more exposed to unfolding economic and geopolitical developments in countries that are a major source of these inflows.

And the country is already feeling the pinch of some adverse global developments. During 11MFY2016, remittance growth slowed to just 5.6pc YoY (as inflows reached $17.8bn), from 17.9pc YoY ($16.9bn) recorded in 11MFY2015.

The growth in inflows has slowed dramatically from the six-country Gulf Cooperation Council (which has a dominant 64.5pc share in overall remittances), while flows have actually declined from the US (which, until FY2015, was the second-largest source of remittances for Pakistan). Remittances from the GCC rose just 5.9pc in 11MFY2016, against nearly 24pc in the same period last year. Meanwhile, remittances from the US dropped 8pc during the period, after rising 8.8pc last year.

Both internal and external factors seem to be responsible for this slowdown. The sizable drop in crude prices, from an average of $96 per barrel in 2014 to $50.5 in 2015, led to a drop of $390bn (17.5pc of GDP) in export revenues for Middle East last year, according to the IMF. This led the six GCC countries to post a combined fiscal deficit of 9.9pc in 2015, against a surplus of 3.3pc in 2014.

The GCC states have responded to the ensuing fiscal crisis by drawing down on their sizable forex reserves, issuing sovereign bonds, and slashing public spending. Thousands of workers have reportedly been laid off. In Saudi Arabia, the construction giant Binladen Group laid off at least 50,000 workers (mostly foreigners) in May, setting off rare street protests by migrants in Makkah. Many other firms in the region, particularly those dependent on state contracts, have also delayed paying their workers as the GCC governments fell back on their own payment schedules.

It is virtually impossible to know the exact number of Pakistani workers who have been laid off and subsequently sent home by the GCC countries, as there is no public data available about migrant repatriation. But given the unlikelihood of oil prices reverting to levels where the Gulf economies could resume their profligate spending, more and more Pakistani workers are likely to face layoffs, while labour demand from the region will also shrivel (with the exceptions being Dubai and Qatar). This will, in turn, further squeeze remittances coming from the region going forward.

On the other hand, regulatory issues are likely responsible for the decline in remittances from the US, according to the SBP. In its 3QFY2016 report, it says money transfer operators and commercial banks in the US are facing tightening anti-money laundering and counter financing of terrorism (AML/CFT) regulations, which has significantly increased their compliance costs.

This is likely to have affected Pakistani banks’ US operations as well, leading to an increase in cost of remitting money for expatriates. In March, it emerged that the National Bank of Pakistan discontinued its remittance service Pakremit; its spokesperson told a newspaper that this was a ‘business decision’ taken in view of the changing nature of the global remittance business due to the ‘current regulatory landscape in the United States’. Again, it is unlikely that this issue will also go away anytime soon.

Yet it is the internal factor, as identified by SBP in its latest report, that is more interesting. The central bank has referred to two changes made in the subsidy scheme for banks involved in the remittance business. The first measure, introduced in July 2015, doubled the minimum amount of transaction for which banks could claim reimbursement of telegraphic transfer (TT) charges from the SBP, from $100 to $200. It also reduced the amount of rebate from 25 Saudi Riyals (SAR) per transaction to 20SAR.

The second measure, which became applicable from this May, tightened existing regulations to ensure that banks couldn’t split a single remittance transaction into multiple ones in order to claim undue refunds. For instance, earlier on, banks could technically split a single remittance transfer of $500 into two transactions of $250, and claim refund on two transactions, even though the customer had authenticated only one transfer of $500. Now, the SBP has said banks would be reimbursed for only one transaction conducted between a sender and a receiver on the same day, regardless of the actual number of transactions conducted between them on that day.

While facilitating fund transfers between two customers is financial intermediation at its most basic level, the fact that banks have to be subsidised so they would participate in the remittance business (when they are already making decent margins from the differential between interbank and open market exchange rates), just shows the extent to which rent-seeking behaviour is embedded in the industry.

And the SBP should make sure that banks are weaned away from the subsidy culture, without compromising on their outreach activities to ensure that more migrants use formal channels to remit money back home.

Published in Dawn, Business & Finance weekly, July 18th, 2016

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