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The country's remittances hit an all-time high of USD 29,370.9 million. When I wrote (July 18, 2020 article in Business Recorder) Covid-19 may hurt exports, but lockdown will provide huge extraordinary support through home remittances and quite a few other supporting factors, I received a barrage of queries with many experts/analysts and economists showing strong opposition to my argument.

This is an eye opener for exporters, who, since Independence, have been demanding subsidies, asking for depreciation of rupee, requesting for concessionary finance rates/refinance facilities and waivers in different shapes and forms. Despite meeting all their demands, exports in the last decade have hovered between $ 22 billion and $ 25.5 billion, which is not possible with importing raw material that may roughly cost 30% in the shape of precious foreign exchange.

The credit fully goes to the Governor State Bank of Pakistan, Dr Reza Baqir, and his team for the record amount of home remittances that is $ 6.238 billion higher versus $ 23.132 billion in FY20, a figure that is more than Pakistan's 39-month EFF arrangement approved by the International Monetary Fund (IMF).

Earlier, the much debated $ 4.1 billion hot money too was also the brainchild of Pakistan's central bank team that provided some valuable support at difficult times, which unfortunately flew out due to the pandemic. Emerging markets suffered massive outflows of capital, which is estimated to be nearly $ 105 billion until July 2020.

The difference between hot money and the other four - 39-month IMF EFF funding, 5- or 10-year Eurobond borrowings, one-year deposit borrowed from Gulf countries or Chinese funding - is that borrowed funds are placed overseas.

Obtaining IMF funding is very tedious with too many strings attached in the shape of tough conditions. Such borrowings are only good for window dressing required by the rating and other agencies to create goodwill.

All four credit lines have the same purpose, it is an instrument to show a healthy balance sheet in the shape of forex reserves. Only 10% of the IMF money can be utilized for balance of payment (BoP) purposes. Funds cannot be exchanged against Rupee to meet domestic funding shortfall, which is caused by low revenue collection and disappointing exports. Meeting the export target does not serve the purpose as it does not even meet the amount required for interest payment or dividends.

As the IMF and couple of other borrowings are only allowed to be placed with Bank of International Settlement (BIS) and central banks and cannot be exchanged for Rupee to meet domestic shortfall, which is why since almost last 10 years, SBP is forced to do open market operations (OMOs) and has so far injected Rs 1.65 trillion.

However, hot money was invested for a shorter duration of 3 or 6-month period and the only risk it carries is that if at the time of maturity the funds are not rolled over it will have to be repaid.

Unlike other borrowings it is extremely beneficial as the exchange risk is of investors and more importantly the best part is that in exchange it provides much-needed rupee liquidity to the market. This means the government has to offer T-bills/PIBs/Sukuk and the return to investors is in the shape of interest rate. It also obviates the need to borrow externally and bear the exchange risk due to depreciation that increases the external debt when converted in rupee.

Coming back to remittances, which is the real hope for stability, Pakistan would need to make structural changes. The State Bank of Pakistan should be encouraged by Prime Minister Imran Khan. He should personally visit and meet SBP staff to thank and encourage them for their extraordinary effort.

Presently, Pakistan has very good grip on remittances and this opportunity should not be missed. No risk is affordable at this time. Potentially, with some more effort, Pakistan can raise this amount by another $ 5-10 billion annually. To attain a higher growth target, I would request the government to offer two 120-square yard house every month as a prize to the labour class for remitting funds to Pakistan through banks.

SBP through coordination/notification can direct Pakistani banks to make sure about the genuineness of persons/transactions and if there is no Pakistani bank, the sender can get registered through Pakistani Embassy / Consulate. The total annual cost of 24 houses will be mere a Rs 106 million per annum.

Monetary policy

The expectation is that Pakistan's economy will grow at a much faster pace. The government projection for FY22 is much higher than what we have seen in the last fiscal year. While the economic recovery is gathering pace, rising oil prices, import of automobiles and cell phones is not very supportive. Last year's rise in food bill was necessary to meet the domestic shortages and is understandable.

Increase in the metal and textile group is unavoidable due to purchase of steel to build houses and textile products to support the industry and to meet exporters' demand for raw material.

All reckless spending should stop. To stimulate the economy, the economy cannot afford to arrange foreign exchange to buy cars, cell phones and other unnecessary products, which is already a burden that could worsen the current account position that remained in surplus for many months.

The need of the hour is to maintain the status quo to lower the policy rate. SBP is already projecting lower inflation. This is why it is required to maintain softness; if it does not, the risk is that the economic growth will descend from its current height.

(The writer is former Country Treasurer of Chase Manhattan Bank)

He tweets @asadcmka

Copyright Business Recorder, 2021

Asad Rizvi

(The writer is former Country Treasurer of Chase Manhattan Bank. The views expressed in this article are not necessarily those of the newspaper)

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