EDITORIAL: It’s interesting that the ADB’s (Asian Development Bank’s) latest report, ‘Understanding the drivers of Remittances to Pakistan’, cites high interest rates as one of the reasons for the recent surge in remittances.
Remittances did just rise 44.4 percent year-on-year in June 2024, even though that was just when the state bank turned dovish, and ADB sees a correlation based on similar findings in other emerging and frontier markets. Yet while there’s no doubt that ADB would possess streams of data indicating such trends across markets, it seems it might have overlooked Pakistan’s large cash economy while fitting it into this generalisation.
Of course, that’s not to say that high interest rates do not attract carry trade and hot money inflows that expats would and do partake in – as has happened in the past – but that’s not likely when rates are high pretty much all over the world.
ADB’s other idea, that a high inflation environment also attracts more remittances, just like it does in all Third World countries, seems more on the mark here too. The past few years have seen historic inflation and unemployment, after all, and that’s just when locals would have demanded that little bit extra of their friends and relatives who send money home.
As for the Covid days – which the report also highlights for a jump in remittances – it was because Pakistan was perhaps a handful of countries across the world that did not completely shut down; in fact, the latter globally celebrated idea of smart lockdowns has its roots here. The then prime minister, Imran Khan, made it clear that he would not close the economy, which naturally attracted extra savings from everywhere.
Going forward, another reason for this trend to continue could be increasing desperation inside Pakistan. Common people, already reeling from years of historic inflation and unemployment, are now bracing for the inflated utility bills and cost-push inflation of the new IMF programme, which, mysteriously, was supposed to begin with the new fiscal year, but there’s still no official confirmation about it. In such a case, the bulge in remittances would be more than offset by the plunge in the local economy; which triggered more inflows in the first place.
Whatever the reasons and however welcome this rise, though, it must not make the government lose sight of the desperate need to upgrade, improve and increase exports to support the current account. Remittances have been critical to the exchequer since at least the 1990s, but the main driver of foreign exchange, the export sector, needs to do much better. This realisation has frustrated all administrations of the last few decades, yet not one was able to come up with a workable solution.
Now, with savage upfront conditions of the new IMF programne about to set in, the need for more fiscal space and more foreign exchange is greater than ever. More remittances are always welcome, but there’s no telling when such trends could reverse. And, contrary to ADB’s revelation, it’s not very likely that the interest rate would have any long-term effect on it in Pakistan in the foreseeable future.
Copyright Business Recorder, 2024
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