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The case of remittances from the US

Covering over 45 percent of the countryâ??s import bill, one cannot overlook the significance of remittances to the external account. While
Published May 26, 2016

Covering over 45 percent of the country's import bill, one cannot overlook the significance of remittances to the external account. While celebrating the remittances galore, one can also not help but notice the declining trend in share of inflows from overseas Pakistanis in the United States of America.

Though the amount has grown in absolute terms, remittances from US have transitioned from a share of over 30 percent in total inflows to 14 percent - in the last ten years (FY05-FY15). And interestingly, the trend in inflows from USA is a mirror image of what the country has witnessed in remittances from Saudi Arabia.

However, there is no vivid causal relationship between the two, and unlike the kingdom, remittances from USA have nothing to do with the existing oil price environment.

Apart from a natural deceleration post 2008 financial crisis, a reason for the recent decline has to do with return on investment, which means that Pakistanis working in the US must be holding back money for other purposes like savings or investments in the US.

The same has been highlighted by SBP in its FY15 annual report, where the central bank proposes the likelihood of narrowing interest rate differential - an outcome of normalising monetary policy in the US, and an easing policy in Pakistan. This means that the overseas Pakistanis are clenching onto a portion of savings at least in anticipation of increase in rates, while the rates in Pakistan continue to come down.

Recent withdrawal of remittance services in the US by National Bank of Pakistan just goes on to show the declining trend. NBP has suspended its PakRemit service since April 2016 quoting 'changing market dynamics' in its press release.

Apart from the tapering growth in remittances from USA, the regulatory landscape has also prompted NBP's decision. The rules for remittances have been changed; Up until 2013, there was little federal law to protect consumers who face problems in sending money outside the United States. As per the Consumer Financial Protection Bureau, the new federal law gives consumers who send remittances more information (before they pay) and protection against errors and frauds.

graph 1(1)2graph 2(1)1

The US House of Representatives and the Senate passed Money Remittances Improvement Act in 2014, which largely governed around the money service businesses (MSBs), their monitoring, efficient communication, anti-money laundering compliance and reduction in costs associated with money transfers. This change in regulatory landscape to a more transparent one could be another reason for the declining remittances from USA.

What does the future hold? With growth in overall remittances losing steam, heightened transparency in US law for remittances, and Fed signalling a rate hike in June, any bets for a reversal in remittance trend from the US?

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