Remittance revival!

It’s super exciting to see 38 percent month-on-month growth in remittance flows in October 2018; it’s the highest month-on-month growth since December 2003. But that excitement must wane because this mind boggling sequential growth in remittance last month is only because of the low base as inflows in September 2018 had tanked due to the ‘Eid affect’, discussed in detail earlier in this space. That said, the 38 percent month-on-month rebound after the Eid affect is not ignorable; nor is the 4-month year-on-year growth (See Figure 1 & 2).

According to central bank data, remittance in the four months ended October 2018 grew 15 percent, which one of the highest 4-month growth in recent memory, and ‘may’ bode well for the full year number. The emphasis is on ‘may’.

The central bank, in its recently released annual State of Economy report, said it expects the full year number to land at around $20-$21 billion, which is also the target set the Planning Commission ($21.2 billion). The last time 4M growth was this high, i.e. in FY15, actual full year remittance beat both the government’s and the central bank’s target and projection. Not that any causation is being implied here, but just to point out that 4M numbers can be read as a sign of a promising year.

Contrary to popular perception, higher oil prices may not be contributing to this growth. This doubt is based on the fact that remittance from countries whose national incomes don’t heavily rely on oil – the US, the UK, Malaysia and EU countries – contributed about 68 percent of the total year-on-year increase in 4MFY19 (See Figure 3).

Saudi Arabia, worrisomely, contributed only 7 percent ($68mn) of the total increase ($975mn) in remittance in this period, whereas flows from ‘Other GCC’ countries actually dropped by $23 million year-on-year in 4MFY19. The exception from this region was the UAE that contributed about 20 percent of total increase.

There are multiple theories and anecdotes making rounds behind the increase in remittance, where alternate mechanisms such as m-wallet and Asan remittance account are reputed to be helping towards this end.

The increase in remittance from the like of the US/UK can be aptly attributed to the growth in advance economies, where readers would recall that unemployment in the US recently slipped to its lowest level in many decades. Some, however, also attribute the increase in remittance flows from the US to patriotic feelings that PM Imran Khan has been trying to invoke; hard evidence to the ‘Khan affect’ is as visible as thin air.

Another set of anecdotal evidence suggests that returning workers from the Gulf region have increased because it is increasingly becoming difficult to live in the Gulf and Saudi Arabia. (See also BR Research ‘Saudi remittance blow’ published March 13, 2018). For example, vox populi suggests that a host of ride-sharing drivers are in fact returning workers from the lands of sheikhs.

There are also talks that people are increasingly using formal channels of sending remittance. This is partly a result of the incentives offered and marketing efforts made by Pakistan Remittance Initiative (PRI), and partly because of threats of crackdown on ‘hundi/hawala’ as well as attack on corruption money parked outside that have may have started to come back in, especially from the UAE. Again, these are just talks and as such there is little evidence to prove or disprove the crackdown theory; albeit growth in inflows from Malaysia (58% YoY in 4MFY19) can indeed be attributed to visible efforts for agency set ups and marketing by the PRI.

Another theory so goes that remitters being non-experts in economy absurdly believe that rupee will strengthen soon against the dollar due to the ‘Khan affect’. Even some open market dealers are reported to have made such statements in private gatherings. If their word is taken to be serious, it could be so that some average Joes have decided to send dollars now (and encash more rupees) to avoid regretting later.

Lastly, some are also inclined to believe that the inflationary impact of higher oil prices and increase in the price of utilities here at home have already resulted in increased remittance amounts, and that this trend will continue in the remaining part of the year. It is difficult to say that that impact has already happened, if anything it may not have happened as yet, since rupee depreciation may have met the need for more money due to inflationary pressure.

Will inflationary pressures offset the impact of rupee depreciation in the months ahead? BR Research aims to fill that research gap soon, although such long form research should be ideally put forward by the central bank itself, academia and think tanks. Remittances, after all, are Pakistan’s saviour; too bad, it’s ill-studied.