ANY which way one looks at it, the steep fall in remittances received in the month of July is worrying. The inflows this year dropped by 20pc compared to July last year. Some attribute this drop to a post-Eid dip, but no such dip was seen in previous years, and considering the numbers are comparing the July data from last year and this year, any such fall would be accounted for in both. In some measure, the drop can be the function of the currency volatility since Brexit. The pound has fallen by a historic 31pc in the month of July, and in the data the steepest drop in remittances is also from the UK, down by 38pc. But the declines are broad-based, happening in countries ranging from the US to Saudi Arabia, the UAE and other GCC nations. They are also part of a longer trend that predates Brexit volatilities.
It is too soon to say that the declines are here to stay, but it is not too soon to start contemplating the possibility of this. All three sources of foreign exchange inflows for Pakistan are showing similar trends, with FDI and exports also falling consistently. The State Bank and the IMF have, in their own way, warned about the vulnerabilities in Pakistan’s external sector. Earlier July data for FDI also showed a steep drop, possibly indicating an acceleration of the trend. With remittance data adding to the gloom, an urgent reminder has been issued that the “record high foreign exchange reserves” that are the pride of the finance minister may not be all that they are made out to be. It is a grave mistake to put all our stock on Chinese investment and inflows from the IMF, World Bank and other IFIs as the counterbalance to declines in other areas. The strength of the external sector is built primarily on exports, FDI and remittances. Once all three of these indicators show sustained declines — and going by recent data an accelerating decline — there are grounds for serious concern about the underlying health of the economy. The government’s growth story is now at stake. Managing an economy is about more than just the GDP growth rate and foreign exchange reserves. If the government has no ideas on how to arrest or reverse this trend, it is laying a very poor foundation upon which to build its legacy.
Published in Dawn, August 26th, 2016