KARACHI: Remittances from Pakistanis working abroad dropped to a 31-month low at $2.0 billion in December, central bank data showed on Friday, pointing to a shift towards unofficial channels for fund transfers.
Pakistan saw a 19 percent year-on-year decrease in remittance flows in December. Remittances declined by three percent month-on-month.
The country received $14.1 billion in remittances during the first six months (July-December) of the current fiscal year, 11.1 percent down from a year earlier.
Due to the use of hawala and hundi, which provide better rates than the official rate, remittances are declining. Artificially controlling the exchange rate has caused a huge difference between the dollar interbank rate and the open market rate, which is affecting official flows because more people are using unauthorised means to transfer money, according to analysts.
Owing to this, large money flows have been moved outside of banking channels.
In order to stop the drop in official remittances, the Pakistan Business Council recently recommended narrowing the gap between the informal and official foreign exchange rates.
The amount of money Pakistani citizens living in Saudi Arabia send home fell 14 percent to $3.470 billion in July-December FY2023, according to figures from the State Bank of Pakistan.
Remittances from United Arab Emirates declined 14 percent to $2.602 billion. These inflows sourced from the United Kingdom stood at $1.977 billion, compared with $2.147 billion last year. Remittances from the European countries fell 12 percent to $1.544 billion in July-December FY2023.
However, the Pakistani diaspora living in the US transferred $1.526 billion in the first half of this fiscal year, which was 2 percent higher when compared with $1.494 billion in the corresponding period last year.
Remittances play a crucial role in Pakistan's economy, providing a much-needed inflow of dollars to boost foreign exchange reserves and finance the current account deficit.
Pakistan is grappling with a balance of payments crisis brought on by high foreign debt repayments and a lack of external financing which have hammered its foreign reserves and created chronic dollar shortages.
Many imports have been halted by the government in order to conserve dollars, and some firms have stopped operating because they are unable to import machinery or parts.
The central bank’s foreign exchange reserves dropped by $1.2 billion to $4.3 billion as of January 6, leaving the crisis-hit Pakistan with barely three weeks’ worth of import cover.
To ensure that Pakistan receives the funding it so sorely needs from the IMF, the Pakistani government is preparing to make difficult economic decisions.
Remittances are declining, which is not good for the current account deficit.
Despite declining reserves, the government remained committed to reducing the deficit through administrative measures, which were further supported by SBP's tight monetary policy that saw the benchmark interest rate increase to 16 percent.
These actions assisted in stopping imports, which led to a lower deficit that was $3.1 billion in July through November of FY2023, which was 57 percent lower than during the same period in FY2022.
Analysts anticipate that in FY2023, the current account deficit would remain at 2 percent of GDP. Although administrative measures and reduced commodity prices have helped to reduce the deficit, the effect is expected to be short-lived due to decreased exports and remittances.
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