Once a saving grace, remittances have been under pressure since quite a while now; the foreign inflows from expats abroad have trotted down by 2.5 percent year-on-year, while inflow remitted in February 2017 were down by 6.9 percent year-on-year. Remittances from all major economies (including US, UK, UAE, Saudi Arabia, and other GCC countries) were not only down in February 2017 but also in 8MFY17.
So what now? The reasons like the oil price crash, and hence lower revenues for the oil producing nations, and weaker western economic growth have all been well written about. Stable economies usually dont rely on remittances extensively. Can Pakistan also do so?
While critics have opined about the idiocy of relying solely on remittances to support the foreign reserves, remittances have actually been the only stabilising factor for the economy in the last decade or so. And now the dipping remittances are presenting the not-so-pleasant external account situation, especially when exports are receding.
The countrys dependence on remittances is also well established in a recent working paper by State Bank of Pakistan. The paper finds that a negative shock to remittances has a negative effect on consumption, investment, labour demand, demand for imported goods, aggregate output, current account balance as well as the exchange rate.
Two key risk factors that can create problems for the economy post the recent decline in remittances due to global slowdown and the vulnerability of gulf countries highlighted by the paper are the absorption of the potentially laid off workers abroad in the domestic work force, and fall in remittances that may further worsen the cushion available to finance the trade deficit, thereby increasing reliance on debt.
This however does not propagate further increase in reliance on remittances; the recent slowdown in remittances being the first episode of the vulnerability of these foreign inflows to external shocks.
Hence, there is a much greater need for structural reforms to not reduce its reliance on remittances by focusing on aspects like fixing trade deficits. However, we also need to improve the prospects for remittances; and one facet of that is improving the labour force and its export. There is no doubt a large labour force available; but there is a dire need for the training and development of this manpower export. Its time that we upgrade to high-skilled labour force if we are to compete with our Indian counterparts in some of the key remittance sending countries.
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