Remittances - the new normal?

The remittances growth in low and middle income countries during the pandemic has taken many by surprise. The upbeat growth is in sharp contrast to the World Bank forecast made in April 2020 of 20 percent decline in a year's time. During Jul-Nov period, the flows are up by 27 percent in Pakistan, and 41 percent in Bangladesh. The trend in Latin American economies is similar. The question is: what is behind this counterintuitive trend and how long will it continue? And more importantly, what would be the new normal post-Covid.

The WB was expecting remittances to fall as there would be job losses in the remitter countries due to lockdowns. Developed economies have indeed witnessed a slowdown. Still, the inflows are showing unprecedented growth. But the key factor is conversion of informal channels to formal due to closure of hundi/hawala (informal means) operations in many places due to lockdown.

Low travel is diverting money sent as hard cash to formal digital channels. People are sending more money back as economic conditions are worse in home countries. And people are moving back with savings. Nonetheless, overall pie (formal and informal) probably is falling as predicted by the WB.

The transactions on plain paper promise (hundi/hawala are part of it) is an age old system and it was working efficiently much before the cross-border formal banking channels were established. The systems were used to be perfectly legal. Since 9/11, they have been declared illegal in some jurisdictions (such as Pakistan), and not a preferred option (at state levels) in others. There is a culture of sending money back through these channels and it continued despite development of banking relationships and technological advancement.

Many don't have trust on banking channels, and have remained financially excluded in home countries. They traditionally preferred cash transactions through someone they know personally. Earlier, banking channels used to take number of days before the money was received in destination country; while, informal channels at times have turned over time of 1-2 hours. Now, with digital means and payment gateways, banks' transaction time and costs have reduced significantly. Yet, many did not know this.

The cultural shift from informal to formal channels was happening; but at a slow pace. Social distancing and lockdowns have catalyzed digital and formal transactions. Just like it has been long argued that too many business meetings and travel is unnecessary, and technology can be deployed to save cost and time. After global pandemic, this has become a reality. Once pandemic is over, there will be some shift back to physical meetings and travel; but online dealing would continue in some cases.

Similarly, the move of informal remittances to formal will continue to be in formal sector once the pandemic is over. Those who have experienced formal channels for the first time may come to appreciate its user friendliness and would continue using it. In informal channel, there is no legal recourse in case the middleman doesn't pay money to end recipient. People may give weight to the traceability and legal cover of the formal channels in future.

At the same time, it is imperative for authorities to push for formal means. Pakistan Remittance Initiative (PRI) established in 2009 is working on bridging in the time lag and cost gaps between formal and informal channels. Covid-19 has given a lucky break. Using informal channels became illegal after the amendments in the AML Act in 2015. The direction in the whole world is to discourage informal means of transferring money. The government should crack down on them while they are weak. And it's happening.

The other element is to encourage senders to use formal channels by running awareness campaigns. State Bank of Pakistan (SBP) is conducting webinars across the globe for expats to promote its recent initiative of Roshan Digital Accounts (RDA). During such interactions, SBP is also telling them about the benefits and ease of using formal channels for home remittances. These all will help to stick senders into the legal and formal channels.

Let's see what would be the new normal post-pandemic. The breakup of the remittances shows that the growth is higher from developed economies such as the US and the UK - growth in 5MFY20 is over 50 percent. That is too high a number. Informal channels in these economies are low. The increase is probably attributed to people sending more money to friends and families in financial stress at home. In those economies, there are handsome cash handouts, and there is spillover of these here. Moreover, there are activities in the real estate in Pakistan due to construction package and that might have attracted expats' money. The growth in Saudi Arabia (biggest sender to Pakistan) is 28 percent. In this case, the conversion from informal channels could be the biggest contributor; whereas the growth from the UAE and other Gulf Cooperation Council (GCC) countries is in single digits.

The question is what would happen once the pandemic is over. In order to evaluate this, one needs to look at the trends of workers moving abroad. That growth is ought to decline as in Gulf the younger generation is coming into the work force and the vision of these economies is to provide local people with jobs first. The oil prices are on decline on a long-term basis due various reasons, including world's focus on cleaner energy. The infrastructure growth in these economies shall fall and they may focus more on services sector. The jobs for Pakistanis are less in services economy. Then, the growing relationship of Israel with GCC countries is not helping Pakistan. Thus, the long-term trend is of decline in growth of workers going abroad. And the pandemic might catalyze this phenomenon.

In Pakistan, exports have stagnated in the last decade while imports are consistently moving up. Remittances have filled the gap. But this decade, that savior might not grow in tandem with imports. Thus, the policymakers must look for alternate avenues. There is a limit to goods' export growth. The focus must be on attracting savings from expats - mainly in developed countries - high skilled people from the Gulf are fast moving to these economies. The other avenue is of services exports.

The focus of SBP and government at large should be on these two elements. RDA is one area where SBP is pressing hard. Around $150 million came through RDA in its early days - majority is in Naya Pakistan Certificate. Some of the RDA (not for investment in government bond, real estate or stock market) will be treated as remittances - and fall in current account. The rest is in capital account and would be treated similar to SCRA. This number has to grow and consistent flows are required to bridge the gap.

The better recurring option to lower current account deficit is services exports. The number is minuscule in Pakistan. The potential is huge. Last week in a webinar conducted by KASB Securities, a few rising stars in the ICT industry have shown some exuberance. The services exports are low due to skill set gaps and the country's poor image. IT experts mentioned in the webinar that in pre-Covid days buyers wanted to see facilities physically before giving business. Now that bottleneck has been removed, since travelling and tourism is reduced. Another expert is of the view that if the skill set is short in Pakistan, people can be hired from other countries to work remotely for companies in Pakistan.

In the past, image of Pakistan was falsely portrayed worse than the ground realities by Indian propaganda machines in the West. The Indian dirty tactics to malign Pakistan are now out in the open. This is a setback for India and opportunity for Pakistan to cover the lost ground.

Another reason for low investment in services and startups was frictions in money coming out of Pakistan. There are efforts under process to make the transactions smooth. The government has to push further on growing services exports; as without it, the imports-based consumption growth for world's fifth most-populace country might not be possible.

Copyright Business Recorder, 2020