Remittance slowdown

11 Oct, 2023

Remittances inflows stood at $2.2 billion in September which is up by 5 percent from the previous month and down by 9 percent from the same period last year. The number in 1QFY24 stood at $6.3 billion, which is 18 percent lower than the same period last year.

The September number is lower than general expectations, as the market was expecting remittances to be at $2.3-2.4 billion, due to the shift of flows from illegal open market to formal banking channels as rates in the open market and interbank have converged, and there was a crackdown on Hundi/Hawala. Nonetheless, September numbers are at their five-month high, and perhaps the flow will improve further in October.

Channel checks from four large banks (amongst the top seven) show an 8-13 percent month-on-month increase in September flows. The question is, why is the overall increase at 5 percent. This perhaps implies that the flows coming from exchange companies and/or small banks are declining.

The formal remittances come from banks and Type-A exchange companies. The flows from banks are likely to be higher than 5 percent while the growth remained muted (or negative) from exchange companies. The crackdown on exchange companies has perhaps reduced the official business of these as well. SBP should be more generous in sharing data by publishing remittances flows from banks and exchange companies separately for better analysis.

Having said that, there are interesting trends in the breakup of remittances. The flows are better from Middle East – on a month-on-month basis, there is a growth of 30 percent and 10 percent from UAE and Saudi Arabia. That is encouraging. Mostly Hundi/Hawala business is from UAE and higher growth in formal channel implies that there is a reduction in hundi/hawala business.

The decline is mainly from UK (6% down) and EU (7% down) while the flows from US remain stagnant. The lower number coming from the developed world is perhaps due to growing interest rates (especially long-term yields) in these countries indicating that it may be better to keep savings there.

In Pakistan, remittances also have a share of investment coming in real-estate and other investments in Pakistan. Since real estate market is dead and overall investment climate is low in Pakistan, those sending money for investment purposes are shying away. And then the attraction to keep money in the host country is higher.

The argument of keeping money in host country can also be collaborated from the data of Bangladesh where there is a sharp decline is witnessed as well – the number is down to $1.34 billion (16% MoM decline) which is 41 months low.

It is hard to digest the overall low growth of 5 percent (MoM) in Pakistan when big banks are showing on average 10 percent increase. There are some unexplained factors which SBP should shed light on. We need to see the trend in October and November to assert better reasons. Stay tuned.

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