Remittances and RDA: Major sources of foreign exchange for Pakistan

Overseas Pakistanis have sent the highest-ever US$8 billion remittances during the first quarter of the current fiscal year, registering an increase of 12.5% over the same period last year.

The State Bank of Pakistan (SBP) reported that with inflows of US$2.7 billion in September, workers’ remittances continued their strong momentum and have remained above US$2 billion since June 2020.

“This is the 7th consecutive month when inflows recorded around US$2.7 billion on average,” said the SBP. In terms of growth, remittances increased 17% in September as compared to the same period last year, while comparing with August inflows it was half a percent higher.

The surging imports in 1QFY22 widened the trade deficit putting immense pressure on the rupee-dollar exchange rate, which ultimately reflected in higher current account deficit. The situation for the economic managers is not comfortable except the higher remittance supported the economy beyond imagination.

The country had received record remittances of US$29.4 billion in FY21, which helped Pakistan in containing its current account deficit.

“The proactive policy measures by the government and SBP to incentivize the use of formal channels, curtailed cross border travel in the face of Covid19, altruistic transfers to Pakistan amid the pandemic and orderly foreign exchange market conditions have positively contributed towards the sustained improvement in remittance inflows since last year,” the central bank said in statement.

However, the deterioration of exchange rate has created serious problems for the external trade activities. Recently, the SBP has taken several measures to curtail outflow of the foreign exchange and reduce the import bill, but the exchange rate is still against the rupee which has lost about 11.5% during the last five months.

The highest remittances were received from Saudi Arabia but these were 2.6% less as compared to the same period last year. During July-September 2021-22 the remittances from Saudi Arabia rose to US$2.025 billion, from US$2.080 billion last year.

The contribution of Saudi Arabia in the total remittances during the first quarter of FY22 was almost 25%. In September, Pakistan received US$691 million from the kingdom as against US$694 million in the same month last year.

The remittance from the United Arab Emirates was second highest as it witnessed a growth of 8.7%, amounting to US$1.545 billion during the first quarter of FY22.

The inflows from UK and USA registered a growth of 13.2% and 32% amounting to US$1.115 billion and US$836 million respectively. The growth in the first quarter of FY21 was 71.5% for UK and 63% for USA.

For the first time, the inflows from EU countries surpassed the total inflows from other GCC countries. The inflows from EU countries rose to US$889 million as compared to US$880.7 million from the GCC countries. The remittances from EU countries increased 47.8% as compared to the same period of last fiscal year.

Roshan Digital Account

Inflows through Roshan Digital Accounts (RDAs) reached US$2.7 billion in October since its launch in September 2020, reflecting the growing confidence of overseas Pakistanis despite Covid-19 related slowdown across the globe.

Of the total over 68% or US$1.834 billion was invested in high-return Naya Pakistan Certificates (NPCs) during this period.

The SBP data showed that the total investments since September 2020 rose to US$2.677 billion, registering an average inflow of US$191 million per month.

Overseas Pakistanis invest larger chunk in high-return NPCs

In US$ terms, the three, six and 12-month NPCs offer a profit rate of 5.5%, 6% and 6.5% respectively. For three- and five-year certificate the return is 6.75% and 7% respectively.

The return rates in rupee terms are much higher ranging from 9.5% to 115 for different tenors.

The central bank and the government find the inflow satisfactory, but the bankers said the response is not up to the expectations.

Under the RDA, the investment for equity market was just US$27 million or one percent of the total indicating the trust in equity market is very low.

Since the inception of the RDA, the government took a number of decisions to make the scheme attractive besides making amendments to reduce the tax compliance cost for overseas Pakistanis. The government has made the taxation regime simple, convenient and hassle-free for Non-Resident Pakistanis (NRPs) to open and operate these accounts.

The amendments have extended the coverage of full and final taxation regime to dividends and capital gains on shares and mutual funds investments and capital gains on real estate investments made through RDAs.

As a result, NRPs will not need to file tax returns against their income derived from investment made through RDAs and will not be subject to tax on cash withdrawals and bank transfers.

The RDA is a flagship initiative of State Bank aimed at connecting overseas Pakistanis with Pakistan’s banking and payment system.

In February this year Prime Minister Imran Khan suggested housing loans for overseas Pakistanis and asked the participating banks for providing more products to meet the demands of the Pakistani diaspora, such as automobile and housing loans.

Bankers say so far there is no report about the housing loans from overseas Pakistanis under RDA scheme.

Both the government and State Bank believes that inflows of RDA helped to generate economic activity and improve the country’s balance of payments by raising foreign exchange reserves, making the product a win-win for both the diaspora and the country.

In response to demand from overseas Pakistanis in Europe and the UK, the government has introduced NPCs in euro and pound in addition to the existing US dollar and rupee-denominated certificates.

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