Remittances: September causes shivers

Local markets were blindsided by a sudden and significant drop in remittances to the country, in September, after State Bank of Pakistan revealed the previous months tally of money sent home by expatriates. The workers repatriation totalled to Rs.890 million in September; its lowest level in the past seven months, down by 32 percent compared to August. Inflows were abnormally high in August shooting to Rs.1.3 billion; the highest level ever recorded. The market attributed a higher level in August to Eid and Zakat factors. Sudden drop in workers inflows during September could be the result of an exceptionally high inflow in August, since the monthly average inflows during September and August stood at Rs.1.1 billion- close to the monthly average of Rs.1.06 billion received between March 2011 and July 2011. Other major event that may have thrown a spanner in the works is mounting fear that rupee will depreciate in the wake of rising tension between USA and Pakistan. Such fears had gripped the currency market in recent days until the central bank stepped in to restore order. During the frenzy, the gap between the open market and the inter-bank market for rupee versus the US dollar had spread significantly. This gap may have prompted many expatriates to remit money to their loved ones through hawala and other illegal channels instead of sending remittances through the banks. This assertion is supported by historical trends as remittances had drastically dipped in October 2008, on account of 14 percent depreciation of rupee against dollar between August and October 2008. The government is banking on a higher remittance flow to support the countrys balance of payment. As such, the abrupt fall in remittances in September has dented market sentiments. The high differential between interest rates in Pakistan and many advanced economies has also incentivised expatriates to increase remittances to Pakistan, for better returns on their savings. As the central bank has now started to shed its tight monetary stance, this incentive may lose lustre in coming months. That said, it is highly unreasonable to set this years outlook based on September data alone since continuous employment migration from Pakistan and the governments initiative to shift flow of remittances from informal to formal banking channel will continue to reward the country with higher worker inflows in the future.