EDITORIAL: Remittance inflows, a desired form of inflows like exports, declined to 9,900.5 million dollars July-October 2022 against 10,827.2 million dollars in the comparable period of 2021 – a sizeable difference of 996.7 million dollars or an 8.5 percent decline that should be extremely concerning for the administration as these inflows play a critical role in balance of payment support and thereby do temper the need to contract expensive external loans to meet the country’s annual foreign exchange requirements.
Total remittance inflows rose steadily each fiscal year (June-July) since 2018 with 19.9 billion dollars in 2018, to 21.8 billion dollars in 2019 to 23.13 billion dollars in 2020 to 29.5 billion dollars in 2021 and 31.27 billion dollars in 2022. Was this steady annual rise due to the proactive measures taken by the successive governments and the State Bank of Pakistan (SBP) to facilitate/incentivise overseas Pakistanis to remit through the legal channels instead of through the illegal hawala/hundi system? Or whether other internal/external facts were in play?
On 13 July 2021, the SBP issued a press release claiming that “overall, record high inflows of workers’ remittances during FY21 have been driven by proactive policy measures by the government and SBP to incentivise the use of formal channels, curtailed cross-border travel in the face of Covid-19 infections, altruistic transfers to Pakistan amid the pandemic, and orderly foreign exchange market conditions.”
The reference to curtailed cross border travel in the face of Covid-19 was to the dampening of the then prevailing illegal hundi/hawala channel and the reference to orderly market conditions is clearly to allowing exchange rate flexibility by accepting the International Monetary Fund (IMF) condition of a market-based exchange rate.
Today these two elements are no longer in play: Covid-19 travel restrictions have been lifted globally and disorderly market conditions prevail as was noted by the Pakistan authorities in the seventh/eighth review documents (mid-August this year) in para 25: “the authorities noted concern about disorderly conditions in the foreign exchange market, should (foreign exchange) restrictions be removed….(and) requested more time to eliminate all remaining restrictions when BoP (Balance of Payment) conditions permit.”
And while the trade deficit has improved because of these restrictions yet without remittance inflows the country’s capacity to meet the large foreign exchange requirements for the current year will be severely compromised. In addition, there is a concern that disorderly market conditions may resurface especially if interventions are supported, including those of 2015 to 2017.
Projections of external borrowing by Miftah Ismail, former finance minister, and the International Monetary Fund (IMF) in its seventh/eighth reviews based on meeting the 4.9 percent budget deficit and the debt servicing/payment of principal as and when due, have been projected at a little over 40 billion dollars – an amount that no doubt requires updating as the Sharif administration has taken decisions in October that are at odds with its pledges made to the Fund (including subsidised electricity to exporters, the farm package and a discount rate 10 percentage points lower than the Consumer Price Index). These contraventions of the agreement with the Fund may at best lead to a further delay in the ninth review, a prerequisite for the release of the next tranche that in turn will release the rollover and additional funds pledged by the friendly countries, or at worst to a suspension of the IMF programme with default a distinct possibility.
In sum, any attempt to strengthen the rupee through administrative measures will imply that the hundi/hawala rate on offer is lucrative or gainful, which in turn will reduce remittance inflows through the legal channels. One can only hope that better sense will prevail and rupee flexibility be allowed as emphasised by the Fund in its last review report.
Copyright Business Recorder, 2022