Wanted: Reasons for remittance slowdown

The central bank's latest data release shows that total workers remittances received in FY16 was $19.9 billion; about $900 million higher than the target set for FY16. The news flash, however, is that FY16 saw the second-most slowest year-on-year growth (6.4%) since FY05; the slowest being in FY13 when remittances grew by 5.6 percent.

What are the reasons behind remittance slowdown in FY16? According to the central bank, the main reasons are (a) sharp falls in global oil prices and ensuing lay-offs and visa glitches in Gulf labour market and (b) the tightening of regulatory landscape governing cross-border money transfers in the US that has increased compliance costs for banks and money transfer operators. It also highlights that economic growth in the developed world is nearly flat and is marked by low inflation.

While these conditions do indeed exist today, they did not exist in FY13. Oil prices were fairly high and stable in FY13. The increased pace in the strengthening of remittance regulations in the US too is a FY16 phenomenon. Slow growth in the west and low inflation too is not unique to FY16 - this environment existed in FY14 and F15 - and so these factors should not be cited as a cause for the drop in remittance growth in FY16.

What is common between FY13 and FY16? The answer to that is the subsidy by government of Pakistan. Recall that effective from July 2015, the government had reduced the effective subsidy from 25 Saudi Riyals per remittance transaction to SAR 20, and increased the minimum transaction amount to qualify for the rebate to USD 200 (or equivalent) from USD 100.

Similarly, in FY13 there were prolonged delays in reimbursement of telegraphic transfer (TT) charges by the government to institutions on inward home remittances. For the uninitiated, the government of Pakistan partially reimburses the TT cost that banks have to bear in transferring money to Pakistan. The move is aimed at encouraging overseas Pakistanis to remit through official channels. However, for the most part of FY13, the government was unable to reimburse banks under this head.

In the absence of substantial evidence, this column will resist the temptation to say that reduction or hiccup in government subsidy is the real cause behind remittance slowdown in both FY13 and FY16. However, the fact this is the only common factor between the two years does indeed demand some explanation by the central bank as well as the finance ministry. A study to that end is important in light of the recent restrictions placed on per customer/per day transactions that would limit the expansion of the overall remittance business.