Pakistan Reader# 519, 16 January 2023
Joel Jacob
On 13 January, State Bank of Pakistan’s data showed the country’s remittances have dropped to a 31-month low at USD two billion in December 2022 and are pointing to a shift towards unofficial channels for fund transfers. A 19 per cent year-on-year decrease in remittance was also seen in the December remittance flow, which is declining three per cent month on month. Pakistan has received USD 14.1 billion in remittances during the first six months of the current fiscal year which is 11.1 per cent lower than the previous year.
Why is it decreasing?
1. Better interest rate provided by Hawala and Hundis
Hawala and Hundis provide better rates than the official rates. Banks offer PKR 228 per dollar while exchange companies offer PKR 238, with the grey market offering higher than PKR 270. By controlling the exchange rate artificially, a huge difference between the dollar interbank rate and the open market rate is created. This situation makes people use more unauthorized means to transfer money. In order to stop illegal transfers, the SBP recommends narrowing the gap between informal and official exchange rates.
2. Government's unwillingness to implement the floating exchanges rate
The government’s unwillingness to implement the floating exchange rate as demanded by the IMF. This is also a factor in pushing up the dollar price and further fuel inflation. Debt servicing is the biggest problem but zero inflows have made it more difficult for the economy to make timely repayments.
3. Saudization of the labour market
The major share of Saudi Arabia’s labour market consists of Pakistanis and the recent labour growth due to the Saudization of labour market growth in opportunities for overseas workers to set up small businesses in Saudi Arabia also influences the volume of foreign exchange sent back home.
4. Delay in adopting a digital remittance service
the slower pace of adopting a digital remittance service as borders reopen and travel has no restrictions which will reduce the flow of remittances from other countries and direct investing.
5. Outflow of forex to Afghanistan
The two billion dollars which have gone to Afghanistan from Pakistan in the form of official and unofficial trade, abuse of transit trade, smuggling and through the borders, has weakened Pakistan’s foreign exchange reserves and caused a heavy decrease in the value of the currency.
What were the contributions from Pakistani citizens abroad?
Remittances from Saudi Arabia fell 14 per cent to USD 3.470 billion, From UAE declined 14 per cent to USD 2.602 billion, from the UK, declined to USD 1.977 billion and European countries decreased 12 per cent to USD 1.544 billion in the current fiscal year compared to the previous fiscal year. Pakistani citizens in the US transferred USD 1.526 billion in the first half of the fiscal year which was two per cent higher than the previous fiscal year. Also, the cumulative inflow of USD 7.7 billion during the July-September period in the fiscal year of 2023, the remittances decreased by 6.3 per cent as compared to the same period last year
What are the implications?
At the time of Covid 19 and recent floods, IMF waived the restrictions to support Pakistan and welcomed remittance from abroad, but still, the country could not make up for the fall in remittance.
When the remittances are declining, the current account deficit also gets affected. The government remains committed to reducing the deficit through administrative measures and import restrictions which were further supported by SBP's tight monetary policy. This was regarded as the benchmark interest rate increase to 16 per cent but has not shown signs of improving the market. The remittance fall will most likely continue to decline if all the factors continue to persist in the economy as the government continues with strict economic measures and the balance of payments crisis
Reference
Shahid Iqbal, “Remittances fall 19pc in December,” Dawn, 14 January 2023
“Remittances down 19% year-on-year, clock in at $2.04bn in December,” Business Recorder, 13 January 2023
Mohiyuddin Aazim, “Why are remittances falling?,” Dawn, 21 November 2022
.png)
.png)
.png)
.png)
.png)
.png)
.png)
.png)
.png)
.png)
.png)
.png)
.png)
.png)
.jpg)
Matiari-Lahoretransmissionlinei.jpg){kind=spacer}
