EDITORIAL: The State Bank of Pakistan website revealed a 39 percent rise in remittance inflows for the first quarter of the current year (July to September) against the same period of last year – a rise that was sustained during each of the three months.
In July 2024, remittances increased by 965 million dollars compared to July 2023 (from 2029 million dollars to 2994 million dollars), in August by 848.3 million dollars (from 2094.5 million dollars to 2942.8 million dollars) and in September 2024 by 641 million dollars.
Two observations are in order. First, the rise each month in 2024 compared to the same month of a year before is contracting, which compels one to look at the possible reason(s) for this contraction. It maybe recalled that the devastating policy of the PDM-I government to control the external value of the rupee at a time when the country’s foreign exchange reserves were appallingly low, that in turn, constrained market intervention to prop up the rupee, led to multiple currency rates (with the differential rising to 30 to 35 rupees per dollar).
This severely flawed policy was in violation of the government and the International Monetary Fund agreement under the Extended Fund Facility programme approved in July 2019, and was effective 1 October 2022 till the staff-level agreement was reached on 30 June 2023 on the nine-month Stand-By Arrangement.
It was finally abandoned effective 1 July 2023 but remittance inflows through official channels suffered by about 4 billion dollars during this period as the remitters began to use the illegal hawala/hundi system, which had all but ceased due to lockdowns associated with the pandemic.
Thus as official remittance inflows reach their 2022 peak the rise compared to last year will contract. It is significant that the press release announcing the staff-level agreement on the ongoing EFF dated 12 July 2024 stipulated the need to adopt “a market determined exchange rate to absorb external pressure,” and to implement a “foreign exchange framework free of restrictions on payments and transfers for current international transactions and multiple currency practices.”
However, there has been an improvement in the first quarter inflows in 2024 compared to 2022 though by not as much in 2023: 400 million dollars in July, 127.1 million dollars in August and 601.5 million dollars in September.
And the obvious reason is the very high domestic inflation rate due to administrative measures that have raised electricity and gas rates sky high but also the heavier than ever reliance on indirect taxes to generate revenue, whose incidence on the poor is greater than on the rich, envisaged in the 2024-25 budget as well, that has severe implications on disposable income thereby raising the cash needs of the remitter’s families back home.
And second, the economy’s demand for desired foreign exchange earnings (exports and remittances) that would reduce reliance on external borrowings is rising.
Given that our exports continue to comprise largely of low value added consumer items and total export earnings cannot be projected with certainty as they are subject to global output as well as policies of individual countries (for example total earnings from rice exports rose when India suspended its rice exports - a policy which has been reversed since).
Although there are incentives in place for banks and exchange companies to maximise home remittances through official channels, the State Bank has recently instituted a two-step policy to further incentivise remittance inflows.
The increase in remittances can also be attributed to the increase in the number of Pakistanis emigrating for better prospects because of our struggling economy that has resulted in closures and layoffs. The hardship is further exacerbated by high inflation resulting in significant erosion of disposable incomes. This has resulted in emigration by the executive and entrepreneurial class as well.
The number of highly skilled professionals leaving the country increased from nearly half a million to three quarters of a million between 2022 and 2023.
Furthermore, the stringent anti-smuggling measures instituted and the steps to regulate the Afghan Transit Trade, that was big source of smuggling, has reduced by over 85 percent. These two measures have decreased the demand for dollars through the hundi/hawala market.
To conclude, a rise in remittance inflows must be appreciated; however, there is an urgent need to begin implementing structural reforms with the capacity to turn around our poorly performing sectors specifically energy and tax sectors that would considerably reduce the existing burden on the general public.
Copyright Business Recorder, 2024