EDITORIAL: Remittance inflows declined during the first two months of the current fiscal year against the comparable period of the year before by 21.6 percent – to 4.12 billion dollars from 5.25 billion dollars.
The reason why is fairly obvious: July-August 2022 was marked by the then finance minister Miftah Ismail and the Acting Governor State Bank of Pakistan (SBP) reaching a staff-level agreement with the International Monetary Fund on the seventh/eighth review under the Extended Fund Facility programme on continuing with a market-based exchange rate, a positive discount rate (higher than the rate of inflation) and a sustainable budget deficit (under 7 percent) - policy measure openly violated subsequent to the appointment of Ishaq Dar as the finance minister on 27 September 2022.
The country was then subjected to economically unsound policies that included a controlled rupee-dollar parity at a time when foreign exchange reserves were too low to enable SBP to intervene in the market to shore up the rupee, thereby giving rise to three rupee-dollar rates: the interbank rate that was much lower than the open market rate at which dollars were not available that, in turn, gave rise to the grey market that revived the illegal hundi/hawala system (negatively affected due to the Covid-19 global lockdown) with, at one point in time, an offer of 30 rupees higher than the official rate.
During the Dar months external borrowing, which had propped up the reserves during Dar’s previous stint as the finance minister (2013-17), dried up as the IMF refused a staff-level agreement on the ninth review until and unless the violations by Dar were reversed.
The nine-month 3 billion dollar Stand-By Arrangement with the IMF was reached on 29 June 2023 wherein the government confirmed the implementation of all the conditions that were violated under the EFF, including a market-based exchange rate.
Thus the remittance inflows of July and August 2023 reflect a market-based exchange rate and their continued decline indicates that the government would have to further incentivise inflows through official channels before the remitter reverts back to using the legal system. Invoking patriotism is likely to have limited success as the remitters’ priority is to enable their families back home to meet their monthly budgets.
Remittances and exports are a desired form of foreign exchange earnings for Pakistan and in fiscal year 2021-22 total remittance inflows reached a high of 31.278 billion dollars comparable to total exports of 31.792 billion dollars (largely due to a rise in the international prices of our traditional exports rather than any increase in volume).
Last fiscal year total remittance inflows declined to 27 billion dollars attributed to Ishaq Dar’s flawed policy decisions as did exports to 27.735 billion dollars. Raising exports is dependent on fiscal and monetary policies in place that in the past have included subsidies (fiscal and on utilities) as well as cheap credit, thereby narrowing the already narrow fiscal space.
Today monetary and fiscal policies are highly contractionary, given that these are conditions for the ongoing SBA and hence export revenue is unlikely to rise in the near future.
However, remittances through official channels can be incentivised at a cost to the treasury much less than required by the exporters and hence one would hope that the government and the SBP give appropriate attention to identifying measures that would fuel remittance inflows – measures that represent out of the box thinking.
Copyright Business Recorder, 2023