The government in Pakistan always expects overseas Pakistanis to rescue it whenever it is in financial trouble.
Faced with a big balance-of-payments problem now, the PTI government has decided to launch diaspora bonds to raise $3 billion. The federal cabinet has approved the plan and the bonds can be launched anytime next month — or even before the end of this month.
Explore: Growing reliance on remittances
The launch of the bonds itself is a good idea, but generating the expected $3bn is not guaranteed. Greece is an example. To ward off its debt crisis in 2011, it launched a diaspora bond in the United States, which failed to attract $3bn.
Relying too much on remittances without offering incentives and privileges to overseas Pakistanis can be a mistake
The government has so far failed to realise a simple fact: the gap between exports and remittances is closing. This calls for concrete actions to make the Pakistani diaspora realise that they are no less important than exporters.
Also read: What’s behind the jump in remittances?
Like the PPP and the PML-N, the PTI government is also doling out billions of rupees to exporters in different kinds of subsidies. But no big incentives are available to nine million-plus Pakistanis abroad who send billions of dollars back home every year.
Now first let’s have a look at remittances’ inflows in the first five months of this fiscal year. In July-November, we received $9bn against $8bn in the same period a year ago. The growth volume of a billion dollars translates into $200m additional remittances per month. Compare this with our total merchandise exports of $9.12bn in July-November against $9bn a year ago. What do you see? An increase of just $120m in five months or a paltry $24m per month! Don’t you think overseas Pakistanis deserve better treatment?
But the reality is that for generating more remittances we incentivise banks — and not the remitters. Incentivising banks is logical. It helps curb inflows of remittances through unofficial channels. But offering no incentives to those who send lots of foreign exchange back home does not make sense. Unlike Bangladesh, we have no scheme in place to promote exclusive investment from our expatriate citizens in special economic zones or special industrial schemes on easier terms.
Government officials claim that the prospects of investment in the planned diaspora bonds are huge and expect an overwhelming response from overseas Pakistanis. This may or may not turn out to be the reality as several factors will determine the fate of these bonds.
Some of them are: other options of investment available to overseas Pakistanis, the risk-benefit analysis of these bonds, fears about whether investment in these bonds will expose overseas Pakistanis to complications regarding the legitimacy of funds and the feeling that they are not treated on a par with exporters.
But if the government announces a let’s-honour-overseas-Pakistanis kind of incentive package before launching these bonds, it can boost chances of success.
Media reports suggest the government plans to launch Pakistan Diaspora Bonds in tenors of three and five years offering fixed interest rates of 5pc and 5.5pc, respectively. Initially, it plans to launch these dollar-denominated bonds in the United States and the United Kingdom.
These bonds are being launched as an alternative to the planned sale of Eurobonds of $3bn for which international market conditions are not conducive owing to our weak external sector and the associated high risks in the eyes of global investors.
Foreign exchange reserves held by our central bank have now come down to $7.26bn (as of Dec 7), barely enough to cover one and a half months of imports. Reserves stood at $10.23bn two days before Prime Minister Imran Khan took oath of his office.
Regardless of whether the government succeeds in attracting $3bn through diaspora bonds, it is expected to keep home remittances under policy focus throughout this year and even beyond due to a slower-than-expected growth in exports despite all export-boosting measures taken so far.
But relying too much on remittances without offering a wholesome package of incentives and privileges to overseas Pakistanis could be a mistake.
We get the bulk of remittances, about 82pc, from just five countries: Saudi Arabia, United Arab Emirates, United States, United Kingdom and Malaysia. A sharp decline in manpower exports to Saudi Arabia in 2018 plus the ongoing nationalisation of jobs there can affect volumes of our remittances negatively in the future. In five months of this fiscal, however, inflows have rather shown a modest 2.5pc growth.
From the United Arab Emirates, remittances have grown at a healthy 10.6pc. But that is because of the fact that the Gulf nation’s real estate sector has shown signs of overheating and Pakistanis living there are sending more money back home than they usually would.
The export of manpower to the United Arab Emirates has also declined sharply in the first 10 months of the current calendar year to 170,000 from over 275,000 in entire 2017. This can also impede additional inflows of remittances from there as expatriate Pakistanis are already facing tougher competition from Indian diaspora in the Gulf nation.
Remittances from the United States have increased by a huge 33pc in July-November, but that is largely due to high economic growth and a better employment situation there. Leading economists, including former Federal Reserve Chairman Alan Greenspan, are now warning about a slower growth in the US economy. If that happens, we can see some moderation in remittance inflows from there as well.
Inflows from the United Kingdom, though still growing, can decelerate as the British economy is slowing down.
Lately, Malaysia has emerged as a major source of remittances. Pakistanis living or working there have sent back home $616m in five months of 2018-19, up 53pc from $402m a year ago. This is entirely due to a higher export of manpower to that country. Let’s hope the trend persists. In the first 10 months of this calendar year, more than 8,500 Pakistani workers went to Malaysia, up from less than 7,200 in entire 2017, according to the Bureau of Emigration and Overseas Employment.
Published in Dawn, The Business and Finance Weekly, December 17th, 2018