EDITORIAL: Remittance inward flows declined to 22.74 billion dollars July-April 2023 against 26.14 billion dollars in the comparable period of the year before – a decline of 3.4 billion dollars or 13 percent. Given the average monthly inflows for the first 10 months of the two fiscal years - 2.274 billion dollars in 2023 as opposed to 2.614 billion dollars in 2022 - this differential can be projected to rise further to nearly 4 billion dollars by the end of the current fiscal year with total inflows projected at 27.28 billion dollars against the 31.278 billion dollars last year.
Remittance inflows through official banking channels constitute a desired form of inflows, surpassing export revenue in recent years, and therefore the shortfall in the current year needs to be promptly investigated and mitigating measures put in place.
Till 27 January 2023 when the interbank rupee-dollar parity was clearly under control but without the necessary foreign exchange reserves that would have allowed market intervention as and when deemed appropriate the emerging grey market made remittances through official channels less profitable compared to inflows through the illegal hundi/hawala system – a system that suffered major losses due to global lockdowns to better deal with the Covid-19 pandemic from 2020 to 2021.
The grey market simply revived the hundi/hawala system as a more attractive medium of transfer. Post-27 January the rupee is market-based or within a range determined by the State Bank of Pakistan premised on a number of key macroeconomic indicators, including the trade deficit, foreign exchange reserves, balance of payments position, a decision that prompted the International Monetary Fund to re-engage on the ninth review, however, to recapture a lost market is not an easy prospect as many a market player has learned to his cost.
Additionally, exchange rate restrictions for legal imports into the economy continue to be in place (imports of raw materials, semi-finished products as well as consumer items) with eligible items with an invoice higher than what is being currently processed promptly accounting for a massive rise in under-invoicing to the extent that the amount cited is within the limit of prompt approval while the remainder is being remitted out of the country through hundi/hawala system.
Thus the rise in under-invoicing will negatively impact on tax collections by the Federal Board of Revenue, on import tariffs as well as sales tax. It is little wonder that the IMF in its seventh/eighth review documents cautioned the government to give more prominence to exchange rate flexibility as a means to address balance of payment pressures rather than through administrative and exchange measures.
There is, therefore, a need for the country’s economic team leaders to understand that all key macroeconomic indicators respond to policy measures and therefore careful consideration must be given before implementing a policy as inane as controlling the rupee-dollar parity. Sadly, with the constant recycling of finance ministers focused on proving their past policies were correct and that of their predecessors flawed, there have been no lessons learned that accounts for the current sustained economic impasse.
Copyright Business Recorder, 2023