EDITORIAL: Home or workers’ remittances are declining. In the first quarter of this year, there was a fall of 6 percent to $7.7 billion. The month-on-month (MoM) decline in September was 12 percent to $2.4 billion. Remittances are likely to taper off in the remaining period of FY23 as well.
However, it is difficult to establish a definite trend based on a sharp fall in September. Home remittances soared significantly in FY21, surpassing expectations. The world economy slowed down due to Covid, but higher sums were sent to emerging economies by their workers abroad. So there was a metaphorical ‘helicopter drop’ of money, which led to the rise in remittances in FY21 by 27 percent and 6 percent over that high base in FY22.
Unfortunately, however, the growth in remittances appears to be saturating now. That is perhaps true for other economies as well. And there are multiple reasons for it. First, the world is about to hit a recession, and earnings (and, in turn, sending) ability of workers in the West and the Middle East are therefore on the decline. Another matrix is the higher interest rates in the US to tame the hottest inflation in four decades, which too is slowing down the money from expatriates. This money flows in largely for real estate and other investments. The 5 to 6 percent decline in remittances in the first quarter of FY23 reflects this phenomenon. The unexplained element, however, is the 12 percent MoM fall in September. One reason may be the sharp depreciation that PKR suffered in September - it declined quite steeply in the first three weeks of last month. As a result of which, the gap between the open and interbank markets widened significantly.
For remitters, it made greater sense to hold their remittances for a few days to get a better countervalue. There was also an incentive for them to send through the hundi/hawala system that traditionally offers higher amounts in countervalue. There are three types of exchange markets in Pakistan: interbank market, licenced exchange market, and informal open market. The PKR conversion to USD and vice versa is usually the highest in informal market where the gap remained quite wide during most part of September. That may have shifted remittance flows from the formal and licenced routes to the open market, causing a fall in the documented remittances.
Other factors to combat administrative measures by the government, too, may have played a role in this regard. For instance, the restriction on opening of letters of credit (L/Cs) and their negotiation/retirement in Pakistan prompted some importers to make part of the payment abroad to keep the import contract value below the limit prescribed by the central bank and for this purpose they literally poached on the incoming remittances for payments outside the country. With the State Bank of Pakistan (SBP) promising clearance of the import backlog, this aspect will most likely not remain in play or begin to peter out shortly. The rupee began appreciating in the last week of September and maintained its upward momentum during the first ten days of October, normalising the gap between the interbank and open market, so to speak. Furthermore, there have been higher inflows during the first ten days of October to pre-empt the anticipated loss due to PKR appreciation.
However, there is a slowdown in remittances in the current week. For example, one large bank’s daily inflow, which used to be to the tune of $11-12 million, was reduced to $8-9 million this week. Exporters selling in forward have an identical story to tell. And SBP is confirming that overall inflows (exports and remittances) slowed down this week, as is evident from the stabilization or an end to the winning streak of the appreciating PKR. There may be another reason for the secular slowdown in remittances.
As highlighted in an editorial carried by this newspaper on 16th September titled “Spurring forex inflows need of the hour,” the subsidy that the government pays through banks to exchange companies in the sender countries under the Pakistan remittances initiative (PRI) has not been paid for months. That subsidy is for not charging fees from senders by exchange companies to make remittances through formal channels attractive.
Furthermore, banks do not have an incentive to market the products in the sender markets as they get a share of the subsidy. This also encourages people to move towards informal segment. SBP and the government are, therefore, required to examine these anomalies and inconsistencies and sharpen their focus on remittances whose inward flows are unfortunately stagnating, if not declining at a fast pace, at a time when every incoming dollar is dearer than before.
Copyright Business Recorder, 2022
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