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EDITORIAL: Home remittances inched up from the previous month to $2.7 billion in August 2022. However, in the first two months of the current fiscal year, there has been a marginal decline compared to the same period of last year.

Growth in remittances, for various reasons, has a limited potential this year, whereas, the need for foreign exchange inflows was never as crucial as today. The currency is almost in a free fall and all the energies are being expended on reducing the imports through a combination of policy and administrative measures that may have adverse consequences for the economy at large.

The need is to focus on how to extract more juice in terms of inflows. Exports, Home Remittances, Roshan Digital Accounts (RDA) and Foreign Direct Investment (FDI) are four important channels that need to be relied upon.

Exports cannot provide the required quantum of growth in the short term. In order to attract FDI, macroeconomic steadiness and political stability are imperative — both of which are unfortunately missing at the moment.

Therefore, the immediate focus should be on enhancing the flows from home remittances and RDA. Over the last decade and beyond, remittances have remained the lifeline of the economy.

After the start of Pakistan Remittances Initiative (PRI) in 2009, official inflows increased from $7.8 billion in FY09 to $31.2 billion in FY22 while the exports largely remained stagnant before growing in the last two years. The primary reason for higher remittances growth is the increase in the number of workers going aboard. Unfortunately, however, that number is falling of late.

The other initiative is of PRI through which the government pays 20 Riyal (earlier it was 25 Riyal) for ticker size of above $100. The idea is that the exchange companies shall not charge any fee to the sender while the 20 Riyal is distributed between the receiving bank in Pakistan and sending exchange company with lion’s share (17-18 Riyal) going to the exchange company and that is to compensate them for not charging any fee.

The PRI is well recognised globally and has helped a great deal to shift hundi, hawala and other informal transactions to formal banking channels. The proof is in the pudding. The significant upward movement in remittances since the PRI started speaks for its success.

However, lately, there have been issues in the payment mechanism. Usually, payments are made to banks and through banks to exchange companies in 2-3 months.

The system was working fine. But since December 2021, the ministry of finance has made no payment (routed through SBP) to banks. Ironically, a circular debt has started to accumulate in PRI as well! The outstanding amount from one big bank is currently at Rs 1.4 billion.

The total outstanding amount is estimated at Rs 15-18 billion. The exchange companies are not being paid their dues for the past 10 months. Now they are agitated. They are of the view that if the matter is not resolved, they will start charging fee to the sender. And that may incentivise the sender to return to informal channels. Already, the growing PKR-USD gap in the open market to the interbank market is disincentivising official flows.

The government needs to resolve the matter at the earliest. The State Bank of Pakistan (SBP) is helpless while ministry of finance seems to be in a complete disarray. Banks are frustrated, and exchange companies are no less unhappy. All these factors could lead to a slowdown in remittances at a time when every dollar counts.

Already, the steep PKR depreciation is reducing the ticker size of remittances, as the need to send money in foreign currency is lower for the same amount in Pak Rupee. According to data of a big bank, in the last couple of years, average ticker size has reduced from $600 to $520. Thus far, the number is even lower in September 2022.

The sharp depreciation in the Pak Rupee has resulted in the ticker size to reduce to $423 in the first 13 days of the current month — an alarming development, indeed. This implies that the remittances’ inflow could be lower this month. In such circumstances, if the exchange companies start charging fee from the senders, the inflows from formal channels will squeeze further.

That was about the fate of remittances. The other channel the SBP needs to focus on is RDA. It’s a brilliant initiative that the SBP took under the leadership of the then governor, Dr Reza Baqir. Gross inflows have crossed $5 billion in the 25th month since it started. Of this, outflow is close to $1 billion, netting the country $4 billion.

This needs to be exploited and developed further. Around a two-thirds of RDA inflows are in Naya Pakistan Certificate (NPC). The share of NPC in the total RDA amount has slightly decreased from its peak.

One reason could be higher returns on fixed income instruments in the sender country. The interest rates in the developed countries are on the rise while the rate of return on the RDA has remained unchanged since its inception.

SBP needs to revisit the rates of return and revise it if necessary. However, the vibes coming from SBP suggest that the rates on the dollar (and other foreign currency) are lucrative enough and are not required to be changed. The central bank is in the process of revising the rates upwards for Pak Rupee bonds.

If SBP thinks that the dollar rate of return is fine, then it should take other measures to enhance the flows. A year ago, SBP was pushing hard product marketing even though banks had been lazy in the beginning. But they too realised that it is profitable for them to market the product. Lately, the push (both from banks and SBP) is slowing down and the pace of the inflows is not growing fast enough.

Nine million expats constitute the lifeline in times of extreme external account stress. In current circumstances, it is beyond comprehension why the fiscal and monetary authorities in the country have reduced the push on making remittance flow more accessible. As of August 2022, the number of RDA accounts stood at 456,732.

There is still a lot of room insofar as its growth is concerned. Then the inflows from existing account holders should increase. SBP should come up with innovative ideas for people to roll over maturing NPCs. The bottom line is that there are risks on the growth of both remittances and RDA flows.

SBP and ministry of finance should join hands and work on enhancing the inward dollar flow. Moreover, the incentives for FDI must increase, as for a developing economy, such as Pakistan, running a marginal trade deficit is fine, as long as this is offset by other non-debt flows.

Copyright Business Recorder, 2022

Comments

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Dabeer Razvi Sep 16, 2022 11:42am
Banks need to increase the rate of return for Local Foreign Currency Accounts. It will encourage people to keep their Foreign Currency in Banks rather than holding cash.
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Aamir Shakeel Sep 17, 2022 12:44pm
If only the Finance Minister would listen to the concerned stake holders to work on strategies to improve the FC inflows but Oh no...'Mein na Manu'.
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Hussain Sep 18, 2022 05:40am
Poor bank customer service - delayed release of funds and non responsive branch staff are a contributor to lower remittance - why remit money to help Pakistan? just remit enough to fulfill needs - How Bad Looking at you.
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