What's actually behind record remittances?

ARTICLE: This writer has have been receiving plenty of queries whether the cause of record high remittances to Pakistan are due to Hajj/Umrah restrictions. The answer is an emphatic 'No'.

This year a total of 179,210 Pakistanis got registered for Hajj. 107,526 were under government scheme while 71,684 under private scheme. The Saudi government barred arrival of pilgrims from abroad due to the pandemic. According to official data, Umrah pilgrims from Pakistan in 2019 were more than 2.1 million. Based on these figures the cost of Hajj and Umrah pilgrimage easily exceeds USD 4 billion.

Hajj/Umrah collection & bank transaction

When Hajj pilgrimage gets approved, only a few of the designated banks treasury staff that are directly involved are fully aware of the deals and have access to the complete transaction that goes through various steps at different times. Initially, after collecting Hajj money, banks place the funds in the Ministry of Religious Affairs (MORA) current account. After ballot, these funds are placed in a MORA savings account, for one to two month. Banks then purchase Saudi Riyals from the market.

The KERB market plays a key role in providing cover for private Hajj operators, credit card and airline payments. Same applies for Umrah. Reporting of all transactions is made to SBP as rupee cheques are involved. Therefore, this writer will stick to his reasoning of July 18 Business Recorder article, 'Workers remittances to remain high', as travel activity overseas will remain low/slow, normal flights will take more than a year to resume, and expatriate Pakistanis will spend less and save more. The concession given by the SBP that allowed banks to make competitive PKR rates is timely and helpful.

There are obvious indications that in the near term to medium term remittances will surge, unless conditions return to normal. July numbers clearly suggest that remittances are not in line with the World Bank projection, as Pakistan received the highest ever remittances of Rs 2.768 billion, Bangladesh received record remittances of USD 2.6 billion and in the Philippines remittances surged too. While, remittances received by other countries should show signs of improvement.

Economic challenges/liquidity management

In broader terms, Pakistan's economic outlook still demands a stimulus. A small gain does not mean that the global economic condition is back to normal and will help to recover. Minor revival is the indirect impact of a massive global rescue package, which is soon going to exhaust or expire and therefore there is a need for additional fiscal support.

The good news is that the Covid-19 pandemic is receding in Pakistan which may help recovery in the consumer market to some extent. Overall, the economy needs consistent growth. Businesses are reopening, but are struggling as conditions are yet not stable.

Like advanced economies, our economy too needs additional and larger monetary and fiscal support. The government has so far made a good effort to control current account deficit. It is very encouraging to see renegotiation with IPPs. It is too early to celebrate. The increase in petrol/diesel sale or increase in sale of cars/motorcycles that may have occurred after a gap of a few months of lockdown period. The truth is that future prospects of the economy are totally dependent on the Coronavirus outlook which should be the guide for future economic trends.

On the monetary front, SBP made the right move, though in small amounts by providing stimulus and combining it with the aggressive policy rate cut. SBP has to make sure that sufficient liquidity is available in the banking system and it is diverted from investments in government securities by banks to productive areas and sufficient credit is available for the private sector.

Unfortunately, surge in inflation is not caused by the phenomenal increase in domestic production activity or consumer demand. It is purely because of disadvantageous fiscal measures and to some extent administrative mismanagement that had a disincentive effect on the economy.

While, on the other front the ministry of finance (MoF) has to carefully manage the moves in government paper. If we look at the last two, T/bills and PIBs auction results, signs are encouraging as MoF seems to have better control on the fixed income market auction bidding. If we look at the yield curve of the last 3 months for direction, banks acted in haste by aggressively pushing down government paper yields. It seems that initially MoF allowed the market to make readjustment though curve volatility and is now re-profiling T-bills/bonds/sukuk. This is why after steepness, it may have probably allowed cut-off yields to go up and now may have opted to put a cap on Treasury yields to control the curve as it cannot more afford to offer unnecessary premium.

Inflation too is likely to gradually taper down in the coming months, as fiscal measures should assist in having a better grip of the market that should comfortably bring it down below 9% by the end of the current fiscal year. This writer will not rule out the need for further cut, if the economy dips or does not respond. Chance of a hike in the medium term is almost zero, unless the economy is compelled to take a clue from the weak Rupee, which is undervalued based on economic facts.

(The writer is former Country Treasurer of Chase Manhattan Bank)

Copyright Business Recorder, 2020