The recent introduction of foreign currency (FCY) business value accounts for businesses of overseas Pakistanis is apparently aimed at developing an extra source of forex supply. These accounts when fed with enough amounts of foreign exchange will provide extra forex liquidity into the interbank market and help Pakistan mitigate the perennial shortage of dollars.
Consequently, these accounts would also help provide support to the rupee, particularly at times when the central bank cannot intervene in the forex market to prop up the local unit even temporarily due to a low base of forex reserves.
The FCY business value account scheme has been developed to enable overseas Pakistanis to invest in foreign currency-denominated bonds as well as FCY bank deposits in Pakistan. Forex inflows in these accounts would naturally become part of the foreign currency deposits of the banks operating in Pakistan and would strengthen the supply of foreign exchange in the interbank market.
At present, neither the government nor the central bank is pessimistic about growth in remittances. But foreign currency business value accounts introduced in the first week of this month seem to have been designed keeping in view a possible deceleration in the pace of remittances inflows — whenever it happens. And, don’t we know this has started happening already?
Job localisation drives in Saudi Arabia and UAE, and a recession in the US, indicates that remittances may decline this year
In the last fiscal year ended in June, inflows of remittances into Pakistan had touched an all-time high of about $31.24 billion, up from $29.5bn a year earlier. But July’s remittances data indicates that the remittances during this fiscal year may either remain stagnant at last year’s level — or may even decline. In July 2022, overseas Pakistanis sent back home about $2.524bn, down 7.8 per cent from $2.736bn in July 2021, according to the State Bank of Pakistan.
The decline in remittances’ inflows from Saudi Arabia and the UAE — two key sources of these inflows — is quite disturbing. Pakistanis working in these two Gulf countries had repatriated to Pakistan around $650 million and $548m respectively in July 2021. But in July 2022 they sent back home only about $581m and $456m. If this trend persists in the coming months, Pakistan’s forex earnings through overseas Pakistanis will take a sure hit as inflows from these two brotherly countries account for a little more than 40pc of the total remittances.
Due to ongoing intense job localisation in Saudi Arabia, it is sheer optimism to expect that average monthly inflows of remittances from there would rise significantly in the coming months. Saudi companies are being continuously encouraged to hire local people and are paying penalties for not ensuring the right mix of local-expatriate ratio in jobs. One gleam of hope, however, is the growing number of new resident Pakistanis joining the 6m-strong Pakistani diaspora in Saudi Arabia.
Between January and July this year, 275,046 Pakistanis went to work there according to the Bureau of Emigration and Overseas Employment. This number far exceeds the number of Pakistanis who went to work in the Kingdom in the entire 2021 — 155,777 to be exact.
The fall in remittances from the UAE, too, may be compensated after some time as the export of Pakistani labour there has also risen this year. Between Jan-July 2022, a total of 79,305 Pakistanis went to work in the UAE. This number is greater than the combined export of Pakistani manpower there in 2020 and 2021.
But in the case of both Saudi Arabia and the UAE, the rising trend in the export of Pakistani labour is largely attributable to the low base effect of the past two years. In those years the Covid-19-related travel restrictions and unfeasible economic conditions in these two countries had caused a massive decline in the number of Pakistanis going there for work. Another thing to remember is that just like in the case of Saudi Arabia, the localisation of jobs in the UAE is also in full swing squeezing the room for Pakistani professionals to find jobs. Low-paid workers continue to do better, though.
So, in the short run, ie during this fiscal year remittances from Saudi Arabia and the UAE may either continue to fall — or remain stagnant. In the medium term, though, there are chances for growth in remittances from these two countries. The flow of remittances from the UK and the US — two other major sources of expatriate Pakistanis’ income — remains uncertain partly primarily due to increasingly competitive job market conditions there. Remittances from the US have already fallen in July this year and those from the UK have shown little growth.
Going forward, not much can be hoped regarding the increase in the combined volumes of remittances from the US and UK. The technical recession has already hit the US. Its GDP shrank 1.6pc year-on-year in Jan-March followed by a 0.9pc contraction in April-June 2022. The UK economy also contracted 0.1pc quarter-on-quarter in April-June. The Bank of England has warned that the economy may enter recession in Oct-Dec.
The US and the UK together make up over 25pc of our total remittances. Low or no economic growth there means a possible reduction in future remittances from Pakistanis living there. In July this year, remittances from the US were already down 8.3pc compared to July last year, SBP stats reveal.
Forex repatriation back home by Pakistanis living in the EU countries slipped by 2.2pc and remittances from Australia, Canada, Japan, Malaysia, Norway, Switzerland and South Africa also recorded a declining trend. Remittances from the UK did grow — but only 3.4pc.
Published in Dawn, The Business and Finance Weekly, August 22nd, 2022