THE slight increase in remittances sent home by Pakistani migrants during February is a healthy development for a country battling a full-blown economic crisis characterised by decades-high inflation, dwindling reserves and industrial closures. The market is expecting a further spike in remittances around Ramazan and Eid. The State Bank’s February data shows that remittances — a lifeline for a country struggling to stave off the risk of default as foreign financing dries up thanks to the delay in the IMF deal — have surged by 5pc after hitting a 32-month low in January. Nonetheless, remittances in the first eight months of this fiscal year dropped by nearly 11pc to $17.99bn year-over-year. Market players blame the situation on the large black market for foreign currency, the outcome of an unannounced cap on the exchange rate and import restrictions imposed by the government and the central bank to decelerate dollar outflows. The cap is believed to have made it more profitable for migrant workers to send money through illegal channels, due to the massive difference between the official and black market dollar rates. The removal of controls on the exchange rate last month under IMF pressure is helping boost remittances through legal channels.

The exchange rate cap is undoubtedly the main reason for the decrease in remittances. But record inflation in most developed countries, including the US, UK and EU countries, meant that Pakistanis living there were forced to spend more, owing to the steep rise in the cost of living and had less cash to send back home. SBP data shows that inflows from almost all important destinations, barring the US, have dropped during the present fiscal. Inflows from Saudi Arabia and the UAE have plunged by over 15pc, and nearly 6pc and 8.6pc from the UK and EU. The question is whether the government can preserve this ‘seasonal’ growth in remittances and boost it going forward. For that, our policymakers will have to quit their habit of tinkering with the market-driven exchange rate mechanism and also clamp down on importers under-invoicing their foreign purchases to save taxes. Such traders, including owners of large retail chains, are major buyers of dollars from the black market. Unless under-declaration of import values is curbed, a number of poor migrant workers will continue to use illegal channels to send money to their families for a higher rate.

Published in Dawn, March 13th, 2023