Tuesday February 27, 2024

Remittances jump 26 percent y/y in Jan, boosted by formal channels

SBP said that remittances in January were slightly higher than the $2.382 billion received in December

February 13, 2024
A currency exchange agent counts US Dollars at his company in Iraqs southern city of Basra, on December 8, 2023. — AFP
A currency exchange agent counts US Dollars at his company in Iraq's southern city of Basra, on December 8, 2023. — AFP

KARACHI: Pakistan's remittances from overseas workers rose 26.2 percent year-on-year to $2.4 billion in January, the central bank data showed on Monday, as more migrants used formal channels to send money home.

The State Bank of Pakistan (SBP) said that remittances in January were slightly higher than the $2.382 billion received in December, and mainly came from Saudi Arabia, the United Arab Emirates, the United Kingdom and the United States.

However, remittances in the first seven months of the 2023-2024 fiscal year, which began in July, fell 3 percent to $15.832 billion from the same period a year earlier.

Remittance inflows during January were mainly sourced from Saudi Arabia ($587.3 million), the United Arab Emirates ($407.6 million), the United Kingdom ($362.1 million) and the United States of America ($283.4 million), the State Bank of Pakistan said in a statement.

The rise in January remittances was a result of more Pakistani migrant workers sending money home through legal channels to support their families. Formal remittance flows appear to have been facilitated by the SBP's initiatives for banks and remitters. Remitters who use banking channels or exchange companies to transfer money home are rewarded under the Sohni Dharti Remittance Programme.

Furthermore, remittances were sustained by signs of Pakistan's economic recovery, a reduction in external account pressures and a stable local currency.

“Remittances increased during January amid higher flows from official channels as compared to the same period last year,” said Tahir Abbas, the head of research at Arif Habib Limited.

“Also, it's important to note that during the remaining fiscal year, remittances are expected to increase as two Eids [Eidul Fitr and Eidul Azha] will fall in the next 5 months,” Abbas added.

Even though Saudi Arabia, the country from which Pakistan receives the majority of its remittances, employs a large number of Pakistani workers, and the economic conditions of Pakistan's remittance destination countries—the US, Europe, and particularly the Gulf economies—have improved, remittances were nevertheless on the decline in seven months of FY24.

One SBP study claimed that worker migration to Pakistan increased significantly in FY22 and FY23. This could be linked to the opening of the host economies and the post-pandemic resumption of international travel. The Bureau of Emigration and Overseas Employment and the Overseas Employment Corporation had approximately 0.8 million registered Pakistani workers in FY23. Of them, Saudi Arabia accounted for 55.6 percent, the United Arab Emirates for 19.3 percent, Oman for 8.6 percent, and Qatar for 7.8 percent. Notwithstanding this rise, Pakistan received $27 billion in remittances in FY23 as opposed to $31.3 billion a year earlier.

According to the World Bank's report, which was released in December, Pakistan's low expectations for a return to positive economic growth once the programme supported by the International Monetary Fund (IMF) takes effect are likely to weigh on public confidence and cause remittances to decline by 10 percent and fall below $22 billion in 2024.

The rupee depreciated by 20 percent in 2023. Remittance inflows were diverted from official channels due to the government's attempts to restrict capital outflows through import and capital controls, which exacerbated foreign exchange shortages, according to the report.

Due to currency depreciation—particularly the stark discrepancies between parallel and official exchange rates as well as exchange rate management policies—migrants in Bangladesh, Pakistan, and Sri Lanka used unofficial routes to move money and take advantage of black-market premia, it added.

The Pakistani rupee hit a record low of 307 against the dollar on September 7 in the interbank market. However, since the currency stabilised in October as a result of the government tightening its crackdown on illicit flows, Pakistan's remittances have been improving. Currently, the rupee is hovering at 279 per dollar.

The SBP is hopeful that remittances will surpass $27 billion in this fiscal year, which is encouraging for the nation's balance of payments. According to IMF projections, remittances will reach $29 billion.

However, the question of whether remittances can continue to grow arises because of the political unrest and uncertainty that followed the unexpected results of last week's national elections as well as the economic difficulties that the future government will have to deal with.

After the election, the new government will face several immediate challenges, one of which is the crucial negotiation of a larger IMF programme to stabilise the balance of payments and strengthen the foreign exchange reserves, said Arif Habib Limited in a note.

The next major achievement after the formation of the new government will be the formulation of the FY25 budget, it said.

It will be interesting to see how the government strikes a balance between the two given that the new IMF programme is likely to be in place by the time the budget is announced. The government needs to implement important economic reforms, like modifying power tariffs, containing fiscal expenditures, expanding the tax base, and depreciating the PKR against the USD, while also giving relief to the masses, it added.