EDITORIAL: After the good news of imports dropping almost 40pc month-on-month in July comes the bad news of remittances shrinking about 8pc year-on-year in the same month. This ought to raise very serious alarm bells in the finance ministry because the trade deficit is out of control despite record remittances and a very encouraging reduction (finally) in imports.
Despite the shock, though, remittances have now stayed above $2b for 26 consecutive months; and Finance Minister Miftah Ismail must already be back at the drawing board to understand the downward surprise last month and hammer out a strategy accordingly. It is extremely important to plug this hole instantly because imports cannot be depressed indefinitely and textile exporters are already warning of a $3bn pinch in their revenue for the ongoing fiscal.
The first explanation to surface is that July had far fewer working days on account of Eid and Hajj holidays for most Muslims. The bulk of our remittances come from the Gulf countries, especially Saudi Arabia and the United Arab Emirates (UAE), which are known for their extended religious holidays. So this could well explain the dip.
Yet just closing the argument on this line and waiting for the next month’s numbers to see if we were right would not cut it; not in the present Balance of Payments (BoP) environment, at least. Remittances have always been crucial but they first surprised to the upside in the thick of the first Covid lockdown, and forced all sorts of explanations out of commentators – the most common being that it was going to be a temporary phenomenon that would wind down as markets began opening.
That didn’t happen, of course, and over the last couple of years the government has more or less become accustomed to elevated remittances; without much of a solid explanation, really. Therefore, authorities must go the extra mile to make sure that July did not mark the beginning of a trend-reversal. Because if it did, then there will have to be a serious rethink of a number of items in the economic policy.
It’s because of the chronically low level of national reserves that we’ve had to bend over backwards and stay like that for IMF (International Monetary Fund) to agree to revive the Extended Fund Facility (EFF), and it’s for the same reason that even the army chief has had to go begging for bailout money from friendly countries, including the US. Losing the advantage of the strange-but-welcome bulge in remittances would definitely seriously undermine the quest for fiscal stability, so the finance ministry must begin making contingency plans right now.
The last thing we need is for an exogenous shock to undermine remittances and upset the balance of reserves that the IMF takes cue from, partly, before tightening the screws on its ‘prior conditions’ for additional tranches. Let’s not forget that this is not the only thing that the ministry has on its mind. It must not only maintain the momentum in remittances, but also increase exports, which isn’t exactly happening despite everybody’s best efforts, and keep imports contained in a way that the export-industry is not compromised, which is also posing more problems than anybody has time to solve.
There’s also a need to keep these issues insulated from political interference. For the opposition to use it as a punching bag right now might win it precious brownie points, but it will also induce further trauma into the economy. Ideally, all parties should join heads to solve such problems, since the entire country’s future is at stake. But that would require things like the charter of economy that keeps coming up, only to be shot down, and the bare minimum maturity required to see beyond one’s own nose. That’s something in even shorter supply than options to deal with such headwinds.
Copyright Business Recorder, 2022