Covid-19 is going to stall global economic growth. “Global growth will turn sharply negative in 2020,” International Monetary Fund (IMF) chief Kristalina Georgieva warned recently. “In fact we anticipate the worst economic fallout since the Great Depression,” she cautioned. Prospects for the global economy are too bleak. Trade, investment and remittances are apparently doomed.
The World Trade Organisation (WTO) says trade can shrink by 13-32 per cent. About $100 billion worth of foreign investment has already fled the emerging markets. Flows of remittances into the developing countries are also expected to decelerate as joblessness grows in most host countries. In the United States alone, 17 million jobs have been lost since mid-March. “Waves of job losses among overseas workers and international border closures are sapping the $690bn annual flow of global remittances,” warned a Bloomberg report last week.
These are very tough times — tougher indeed for countries like Pakistan that were struggling with foreign exchange inflows even before the Covid-19 outbreak.
The slowdown in remittances began in Pakistan months before China reported the first case of the novel coronavirus in December last year. Back in August 2019, the monthly inflow of remittances had slumped to $1.7bn from $2bn in August 2018.
A declining trend in the inflows from key host countries is beyond doubt
Since then, growth in remittances has moderated chiefly owing to economic issues of, and job market problems in, Saudi Arabia and the United Arab Emirates from where we receive 23pc and 20.7pc of total remittances, respectively. In the first eight months of this fiscal year, remittances grew just 5.4pc against 10.4pc a year ago.
Pakistan gets 96pc of total remittances from a dozen or so traditional host countries: Saudi Arabia (23pc), United Arab Emirates (20.7pc), United States (16.9pc) and United Kingdom (15.2pc). Bahrain, Kuwait, Oman, Qatar (9.6pc combined), Malaysia (6.9pc) — and Australia, Canada, Germany, Italy and Spain (3.6pc combined).
A colossal loss in oil revenues is eclipsing growth prospects of Saudi Arabia, United Arab Emirates and other four GCC nations. The Covid-19–triggered stimuli and support packages offered by their governments are going to upset their fiscal projections. And this happens as lockdowns and social distancing aimed at fighting the pandemic are accelerating the economic meltdown in the GCC region and elsewhere. The economic downturn in the United States and the United Kingdom is also in sight as both economies are worst hit by Covid-19. The decline in global trade threatens their export earnings as well.
Lots of unskilled or semi-skilled Pakistani workers in Saudi Arabia and the United Arab Emirates are losing jobs. Average earnings of all others, including professionals and managers, are also bound to fall in the near future. Thousands of overseas Pakistanis in these two countries had returned home even before the breakout of Covid-19. Many more are just waiting for the easing of lockdown restrictions to follow suit.
The condition of Pakistani workers in other four GCC countries — i.e. Bahrain, Kuwait, Oman and Qatar — is no different. Another problem with them is they rely primarily on corporate jobs. Very few of them have partnered with locals to run businesses or have any additional source of income. Pakistanis living in these countries would likely reduce monthly remittances back home earlier than those in Saudi Arabia or the United Arab Emirates.
Pakistanis employed in the United States and United Kingdom, too, have started feeling the pinch of the Covid-19–driven wave of joblessness. Naturally, their average monthly remittances might also fall.
So a declining trend in the flow of future remittances from key host countries seems almost certain. Unfortunately, under the current situation that decline cannot be compensated from elsewhere. Covid-19 has devastated Spain and Italy. We can hardly expect anything close to the pre-pandemic level of remittances from there.
The same seems to be the case, though not just as bad, with Germany, Canada, Australia and even Malaysia. In fact, remittances from Malaysia are vulnerable to a steeper decline as lots of Pakistanis there were supplementing their incomes from small businesses set up with the help of Malaysians. Such businesses, mostly established in the informal sector, could hardly be revived anytime soon.
One thing is sure then: just like other economic indicators, remittances will remain a headache not only during this fiscal year, but also afterwards. Even in the best case, the IMF is expecting a “partial recovery” of the global economy next year.
Bureau of Emigration and Overseas Employment Director General Kashif Ahmed Noor estimates that remittances in 2019-20 can fall by $1bn to $1.5bn.
The loss in remittances means a lot for Pakistan as it can worsen external-sector problems. The government is trying to boost exports, but that is not so easy amid a global slowdown. Whether an earlier uptick in FDI will continue under the changed circumstances is uncertain. And foreign investment in high-yielding treasury bills continues flying out after monetary easing. Over $2.35bn funds parked in treasury bills have been divested so far this fiscal year.
The future pace of remittances depends a lot on whether the PTI government succeeds in convincing the GCC leaders to consider ensuring some level of job safety for Pakistani workers, particularly in unskilled and semi-skilled categories.
Much also depends on how soon the spread of Covid-19 is contained, lockdowns are eased and talented Pakistani youngsters are mass-trained in occupations and skills that will be most needed in the post-pandemic world. But that’s a medium-term thing.
In the short run, two things can help stave off a freefall of remittances. One, tighter controls on hundi/havala and, two, more incentives for remitters. In the recent past, remittances’ inflows through illegal channels have thinned but not disappeared. Some incentives can lure remitters to use banking channels.
For example, an exemption from service charges currently applicable on transactions of $500 or more can be extended to lower volumes. In eight months of this fiscal year, average monthly remittances stood slightly below $1.9bn. Stricter curbs on hundi/havala and incentives for remitters can be helpful in maintaining this level.
Published in Dawn, The Business and Finance Weekly, April 13th, 2020