KARACHI: Remittances plunged 22 percent in the first two months of the fiscal year as expatriate workers opted for informal channels to send money home amid a widening gap between official and unofficial exchange rates.
The country received $4.12 billion in remittances, a key source of foreign exchange, from July to August, down from $5.29 billion in the same period last year, according to data from the central bank. In August alone, remittances fell 24 percent year-on-year to $2.09 billion, but rose 3.1 percent month-on-month.
Analysts said the decline was mainly due to the large difference between the interbank and grey market rates, which reached as high as 10 percent last month, encouraging many expatriate Pakistanis to use unregulated methods such as hawala and hundi to transfer funds.
Another factor was a drop in inflows from Roshan digital accounts, a scheme launched to attract foreign currency deposits from expats.
Between July and August FY2024, remittances from Saudi Arabia decreased by 23 percent to $977 million. Inflows from the United Arab Emirates fell by 37 percent to $624 million. The amount of remittances from the United Kingdom dropped 18 percent to $638 million. In July-August FY2024, Pakistanis residing in the United States remitted home $504 million, down from $545 million the previous year.
“The main reason for the fall in remittances compared to last year is the large disparity between interbank, open market and grey market rates,” said Tahir Abbas, head of research at Arif Habib Limited. “While remittances transferred through interbank declined, the amount sent through unauthorized routes surged.”
Abbas said that a staff-level agreement on policies to conclude the combined 7th and 8th reviews of the Extended Fund Facility between the IMF and the Pakistani authorities had resulted in an appreciation of the rupee and a narrowing of the interbank and black market rates. That resulted in the country receiving $2.7 billion in remittances in August 2022, a significant amount.
He explained that after the IMF's board approved the disbursement of over $1.1 billion to the cash-strapped economy in August of last year, the rupee strengthened and appreciated from 239 to 219 against the dollar in the interbank market. As a result, there was a high flow of remittances during that time as Pakistani employees abroad sent home more money through formal means.
Abbas expects an improvement in remittances in September as the rupee strengthens following the government's recent crackdown on illegal dollar traders, hoarders, and black marketers.
The rupee gained 2 percent against the dollar over the past four trading days, closing at 301.16 in the interbank market on Monday. The gap between the interbank and open market has narrowed from peaks of over 8 percent due to regulatory measures and enforcement from law authorities.
Fahad Rauf, head of research at Ismail Iqbal Securities, said remittances should pick up now that the interbank and grey market gap has been reduced. For Pakistan, which has been grappling with high inflation, dwindling foreign exchange reserves, a weak currency and a deteriorating balance of payments position, the slump in remittances is not a good sign.
The country’s reserves held by the State Bank of Pakistan dropped by $70 million to $7.8 billion in the week ending September 1. The country also saw a current account deficit of $809 million in July against a surplus of $504 million in June.