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Friday March 29, 2024

Large current account deficit, weak remittances threaten rupee

By our correspondents
September 28, 2016

KARACHI: A sharp widening in the current account deficit during the first quarter of the current fiscal year of 2016/17 and a slowdown in exports signaled pressure is mounting on the rupee, as the country also braced a drop in workers’ remittances from the Arabian Gulf region, analysts said on Tuesday.

The government has so far remained successful in managing the balance of payments and domestic currency despite a sharp fall in exports and an upsurge in imports.

Analysts said quarterly tranche from the International Monetary Fund and strong remittances inflows provided the much-needed support, apart from inflows from other global lenders and some foreign direct investments.

“However, the support is now weakening, as the IMF flows would be absent from September onwards, while the current account deficit is continuously widening (+92 percent in the first two months of the current fiscal year),” said analyst Zeeshan Afzal at Insight Securities.

“Problems on the remittances inflows, especially from the Middle East, could add to the troubles and may exert pressures on the local currency.”

Analysts said the government would continue managing currency, but the margin of error is shrinking.

Pakistani rupee has shown considerable strength and shed only 2.7 percent since June 2015 as compared to 4.3 percent by Indian rupee and 8.5 percent by Sri Lankan rupee, but they said, “The depreciation is long overdue.”

“The government is likely to continue managing the movement through domestic / foreign dollar inflows… but the margin of error for the government has significantly reduced where fall in remittances or a period of low financial inflows could take things out of its control,” Afzal said.

Remittances from workers in Saudi Arabia play a crucial role in some of the smaller and poorer economies of the Middle East and Asia. But now that economic model is under threat from the slump in oil prices, which has pushed the government budget deep into the red and the economy close to recession.

To recall, Saudi Arabia is mulling to cut domestic spending, reduce dependency on oil revenues and create jobs for national workers under its National Transformation Plan 2030. “In this scenario, Pakistan may witness a shortfall of around $0.5-1 billion in remittances from Saudi Arabia,” Afzal said.

Pakistan received $12.8b (64 percent of the total) remittances from the Middle East in the last fiscal year. He added that financial inflows are expected to remain healthy, but any disruption over the remittances or timing differences could jolt currency markets and “we cannot rule out 5 percent depreciation in the rupee value during the current fiscal year, which could impact domestic inflation and monetary policy; though positive for exports.”

Afzal said the Middle East political and economic situations have begun to bite Pakistan home remittances where the inflows have “improved by meager 4.5 percent to $13.3b in eight months of 2016 as compared to 17.2 percent and 15.1 percent in the same period of 2015 and 2014, respectively.

“We attribute the stagnancy to multiple factors, including quiet growth and low inflation in the developed world; tough labour market dynamics in GCC (Gulf Corporation Council) countries after the drastic fall in crude oil prices, and higher compliance cost for banks and money transfer operators due to tight regulations governing cross-border money transfers in the US,” he added.

Analysts said there are fair chances that Saudi Arabia and other GCC countries may impose tax on salaries and remittances in addition to discouraging foreign workers’ employment in certain sectors.