KARACHI: Declining workers’ remittances may affect consumption and investments, said a research report issued by the State Bank of Pakistan (SBP) on Tuesday.

“Our results indicate that a negative shock to remittances has a negative effect on consumption, investment, labour demand, demand for imported goods, aggregate output, current account balance as well as the exchange rate,” it said.

Understandably, this poses a significant question to economic managers as to how well-prepared the economy is to cope with in case the exogenous shock is significant, said the report.

“To avoid the risk associated with remittances as a source of financing trade gap, structural reforms are needed to help the economy out of the historical trade deficits,” it suggested.

The recent economic slowdown and the vulnerability of Gulf countries, a major destination for Pakistani workers abroad, in terms of depleting fiscal space may result in the layoff of foreign workers.

“This may cause at least twofold problems for Pakistan’s rather ailing economy. First, the absorption of the potentially laid-off workers abroad in the domestic work force could be a giant task to deal with given the already high unemployment rates in the country,” said the paper.

Second, a fall in remittances may worsen the cushion available to finance the trade deficit, thereby forcing economic managers to resort to international sources of debt, said the report. It said external debt tends to be expensive in bad economic times, adding that Pakistan has already accumulated a quarter of GDP as external debt.

The country is highly dependent on external resources to finance its trade deficit. Although a bulk of the deficit is met by workers’ remittances, the dependency renders Pakistan’s economy vulnerable to external shocks. Pakistan’s debt levels have already been high – 68 per cent of GDP, with external debt at 24.5pc of the size of the economy – to help the economy in case of any significant negative external shocks to workers’ remittances.

There is a need for structural reforms to help bridge the trade gap to decrease dependence on remittances.

Any sizable shock to workers’ remittances is associated with huge risks of getting into traps of economic problems on many fronts with significant consequences, said the report.

Main findings of the research indicate that an increase in foreign remittances helps boost domestic consumption and imported investment goods, reduces the trade gap and relaxes pressures on the exchange rate, thereby enhancing real growth. It has a positive impact on domestic inflation, which might have resulted from the increased level of disposable income and thereby consumption, said the report.

Published in Dawn, February 22nd, 2017