If the monthly average inflow of $2.55 billion witnessed during July 2021-March 2022 remains intact, full year remittances at the end of June should touch the $30.6bn mark. Nothing indicates decisively that the pattern of inflows would change dramatically during April-June 2022.

During April-June of the last fiscal year, monthly remittances averaged $2.67bn — well above the level of $2.55bn required to take total remittances of this fiscal year to $30.6bn. This means even a low growth in remittances in April-June 2022 should easily boost 2021-22 remittances past $31bn. This must provide some comfort to the new government.

But what about the new fiscal year starting in July? Will the new government be able to boost remittances to a new height? Will it be able to retain them at the same level? Or, is there a danger of remittances falling?

That depends on the political stability and consistency of economic policies in Pakistan, the efficiency of its economic diplomacy and whether general elections will be held in the middle of next year — or earlier. That also depends on the global political-economic scenario, particularly of the Russia-Ukraine war and employment situation in the host countries of the Pakistani diaspora — as well as historically high inflation across the world.

Even the inflow of the $1bn tranche expected from the IMF cannot provide enough cushion to the forex reserves because of the continued widening of the current account deficit

Lack of political stability at home used to lower inflows of remittances in the past. But this time there is a difference. From the beginning of this fiscal year on July 1, 2022, conversions related to the current forex Roshan Digital Accounts (RDA) are included in the total amount of remittances. At least those conversions should ideally remain unaffected by political instability as they are governed more by the movement of interest rates. And 7th April’s 250 basis points increase in the State Bank of Pakistan’s (SBP) policy rate has pushed interest rates too high providing a fresh incentive to overseas Pakistanis to feed RDAs with more of their forex earnings.

That said, the growth rate of remittances is bound to decelerate from its peak levels seen in FY21 — if not in the remaining three months of this fiscal year, surely next year.

In FY21, remittances grew 27.5 per cent over the previous year — from $23.13bn to $29.5bn as easing of the Covid-19 related travel restrictions and lockdowns started in the host countries of Pakistani diaspora including Saudi Arabia, UAE, US and UK. But with the start of FY22, the growth rate began to slide mostly due to the base effect but also due to the low export of the Pakistani workforce in 2020 and 2021.

In 2020, only 225,213 Pakistanis left for overseas jobs against 625,876 in 2019, according to the Bureau of Emigration and Overseas Employment. In 2021, the number slightly improved to 288,280 but was still less than half of what it was in 2019.

In 2021, only 288,280 Pakistanis left for overseas jobs against 625,876 in 2019, according to the Bureau of Emigration and Overseas Employment

At what pace remittances may grow in 2022 and beyond also depends on the pace of workforce exports from Pakistan. And, that is a tricky matter given the flip-flops in our diplomatic relations with Saudi Arabia, UAE, US and UK — four main destinations from where the bulk of remittances come home.

During July-March FY22, Pakistan received about $23bn remittances, of which 25.2pc originated from Saudi Arabia, 18.6pc from UAE, 13.8pc from the UK and 9.6pc from the US, analysis of SBP data reveals.

Moving forward, it’s important to maintain year-on-year growth in remittances (20.8pc) from the US and (9.7pc) from the UK. It is also important to accelerate remittances’ growth (of 1.2pc) from Saudi Arabia and to ensure that negative growth (of 5.3pc) from the UAE turns positive. This means Pakistan needs to improve and strengthen its economic diplomacy with these four countries that together generate a little more than two-thirds of our total remittances.

Pakistan’s central bank’s forex reserves are precariously low — less than $11bn (as of April 16) which is barely enough to foot merchandise imports bill of even two months. If the ongoing negotiations with the International Monetary Fund succeed, the country will receive a billion-dollar tranche out of a total loan of $6bn. Even the inflow of this $1bn cannot provide enough cushion to the forex reserves because of the continued widening of the current account deficit.

This would eventually keep the exchange rates under pressure. The rupee is already on a losing streak. Further depreciation in the rupee’s value cannot be ruled out. Last week, the IMF projected that in FY22 Pakistan’s current account deficit would soar to 5.3pc of its GDP against 0.6pc of GDP in FY21.

The only way forward for mitigating pressure on exchange rates is to ensure enough growth in exports and remittances — two main sources of non-debt creating sources of forex inflows. The IMF is pressing the new government to phase out subsidies on energy, fertilisers and other items. Phasing out such subsidies may slowdown industrial growth and can also depress exports.

Under these circumstances, remittances gain additional importance. The new PML N-led coalition government and the State Bank of Pakistan cannot afford to let the growth of remittances slip further. In nine months of FY22, remittances’ yearly growth fell to 7.1pc from 26pc in the same period of FY21.

Apart from RDAs and incentives offered to banks to mobilise remittances, an effective crackdown on illegal channelling of remittances through Hundi/Havala had also contributed to double-digit growth in remittances in the last fiscal year. The government and the SBP must ensure that Hundi/Havala operators do not reengage in illegal handling of remittances by taking advantage of the ongoing political turmoil in the country.

Published in Dawn, The Business and Finance Weekly, April 25th, 2022

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