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Reversing the declining trend of remittances

Reversing declining trend of remittances

It goes without saying that remittances by overseas Pakistanis have been the biggest savior. Lately, a declining trend has been observed in the influx of remittances, which can be attributed to the growing use of informal channels.

It is regrettable that the Government of Pakistan (GoP) has not been able to offer incentives to the remitters. One of the reasons is that Pakistanis living in the Middle East, particularly Saudi Arabia and the United Arab Emirates (UEA), because of little knowledge are easily lured by Hawala/Hundi operators.

It is a common complaint that the banking system operating in rural areas is still inefficient as compared to the Hawala/Hundi operators. Account holders say at the time in the formal banking system transfer takes 3 to 7 seven days. As against this, Hawala/Hundi operators deliver the money in less than 24 hours.

The reason for rising remittances from the United States and Europe is the presence of anti-money laundering laws in these countries. On top of that now more and more educated/trained Pakistanis are being hired by the US and European companies.

Experts are of the view that the remittances by overseas Pakistani can be increased manifold if educated/ trained youth are able to get jobs in overseas companies. Remote working is a blessing, but the youth has to meet the requirements of overseas employers.

According to the data released by the State Bank of Pakistan (SBP), the country’s monthly remittances posted a decline of 5% MoM and 14% YoY to close in at US$2.1 billion. This took the total remittance inflow during 5M FY23 to US$12 billion, down 10% YoY.

Declines in the inward flow of remittances were seen across all the major host countries during November 2022 with the greatest declines coming from the two largest markets of KSA and UAE, each posting double-digit declines on MoM basis.

On a cumulative basis, apart from the United States, which posted an increase of 4%YoY during 5MFY22, all the major markets posted declines ranging from 8% to 14% in the wake of economic slowdowns in the host markets and rising inflation.

One of the prime observations is that Hundi, Hawala and the black market continue to dent the official inflow of remittances. Pakistan has to contend with a booming black market of currency exchange, which also offers far more lucrative rates, and the flow of inward remittances through official channels was inevitably going to fall. Unless the authorities are able to decrease the spreads between the official and black markets, the remittance inflow will likely continue to fall short of expectations.

The Current Account Deficit (CAD) for the month of November 2022 shrank. As per the data released, the country’s trade balance was reported at US$2.9 billion as imports posted a sequential increase of 11.3% MoM. Notwithstanding the difference in reported numbers of SBP and PBS, the Current Account Deficit for Nov’23 is likely to settle around US$ 1.0 billion mark, taking the cumulative CAD during the period to US$3.8 billion. With capital controls still in place and the repatriation of dividends and profits being strictly managed by the central bank, we may see some surprise in the overall CAD for the month. However, analysts still stick by their estimates of US$10.5 billion to US$11.0 billion in yearly CAD balance for FY23 (3% of GDP), which is in line with the central bank’s own estimates for FY23.

The Rupee is likely to face major headwinds in the coming months as the trade imbalances and debt repayments will continue to hammer reserves position. The country recently honored its repayment commitment by retiring international Sukuk with a maturity of US$1.08 billion, which took the reserves position below the US$7.0 billion mark, translating into less than 1.3x of monthly imports cover.

From the vantage of the equity market, analysts expect the market to remain jittery in the short term as economic uncertainty will continue to dent sentiments. They advocate investors to maintain exposure in scrips and sectors which offer a good currency hedge.

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