Alarm bells for the economy

In the face of sluggish export growth, high trade deficit and meagre foreign direct investment (FDI) inflows, one factor that has sustained the economy and helped ease pressures on the external account over the years is remittances sent by overseas Pakistanis. However, with the economic slowdown in the Gulf States, a new challenge is emerging for the national economy.

Traditionally, the Gulf States, particularly Saudi Arabia and the United Arab Emirates (UAE), have been among the largest sources of remittance inflows into Pakistan. The Gulf countries have, by and large, been heavily dependent upon one commodity – oil – for keeping the wheels of the economy moving, job creation and exports.

The enormous oil wealth, together with distaste for manual work among the local population, made it possible as well as necessary for these economies to create substantial employment opportunities for foreign workers. The Gulf States have been a favourite destination for unskilled and low-skilled workers from South Asia, including Pakistan.

However, the slump in oil prices in recent years is beginning to cast its shadow on Gulf economies. Saudi Arabia, the largest Gulf economy, which posted modest economic growth of 3.6 and 3.5 percent in 2014 and 2015 respectively, is projected to grow by 1.2 and 2 percent in 2016 and 2017 respectively (IMF: World Economic Outlook July 2016).

This lacklustre growth is forcing Gulf States to lay off foreign labour. Many an enterprise is finding it difficult to pay wages to foreign workers. For countries like Pakistan, which have exported a considerable chunk of their workforce to the region, alarm bells are ringing. One just needs to look at recent figures to endorse the view.

In financial year 2015-16 (FY16), remittances reached the record level of $19.9 billion. However, compared with the $18.5 billion remittance inflow for the preceding year, the increase in remittances was 7.5 percent. On the other hand, between FY07 and FY15, remittances registered average annual growth of 16.5 percent including 17 percent growth in FY15. This means growth in remittances fell by 9.5 percentage points in FY16.

In July 2016, the first month of the new financial year (FY17), $1.32 billion remittances were received – compared with $2.07 billion in June 2016, thus posting a decrease of 57 percent. Likewise, in July 2015, $1.67 billion remittances were received. Thus, remittances in July 2016 registered year-on-year negative growth of 26 percent.

In August 2016, remittances went up to $1.76 billion posting 5.4 percent growth over the preceding month’s figures. On a year-on-year basis, remittances grew by 15 percent. However, in September 2016, remittances went down to $1.60 billion. On a year-on-year basis, remittances decreased by 9 percent (remittances in September 2016 were $1.77 billion). Cumulatively, in the first quarter of the current financial year (FY17- July-September), $4.69 billion remittances were received, marking a negative growth of 5.4 percent over $4.96 billion remittances during the first quarter of FY16.

Gulf countries have been the major source of remittance inflows into Pakistan. Out of the $18.5 billion remittances received by Pakistan in FY2015, $11.9 billion (64 percent of the total) were sent by Pakistanis living in GCC countries including $5.6 billion by those residing in Saudi Arabia, $4.2 billion in the UAE and $2.1 billion living in other Gulf States.

In July 2016, out of total $1.32 billion remittances, the source of $840 million was the Gulf region including $378.7 million from Saudi Arabia, $293.7 million from the UAE and $169.6 million from other GCC states. In comparison, out of $2.07 billion remittances in June 2016, $1.24 billion were from GCC countries: Saudi Arabia ($582.8 million), UAE ($434.9 million), and other GCC countries ($197.8 million). Thus out of the $750 million decrease in remittances in July 2016, $408 million is accounted for by the fall in remittances from the Gulf countries. In particular, remittances from Saudi Arabia went down by $204 million.

In July-September 2016, out of a total of $4.69 billion remittances, the source of $2.95 billion was the Gulf region including $1.32 billion from Saudi Arabia, $1.05 billion from the UAE and $574.34 million from other GCC states. In comparison, out of $4.96 billion remittances in July-September 2015, $3.10 billion were from GCC countries: Saudi Arabia ($1.44 billion), UAE ($1.11 billion), and other GCC countries ($592.9 million). Thus out of $270 million decrease in remittances in July-September 2016, $150 million is accounted for by the fall in remittances from the Gulf countries. In particular, remittances from Saudi Arabia went down by $390 million.

Pakistan is not the only South Asian country that has been hit by slow growth in GCC countries. Other economies in the region are also bearing the brunt, as GCC-South Asia has been one of the top remittances corridors in the world. India, globally the largest recipient of remittances, saw its remittance inflows in 2015 went down for the first time since 2009. Sri Lanka also experienced a fall in remittances; while in case of Bangladesh, growth in remittances in 2015 fell to 2.5 percent compared with 8 percent in 2014.

However, for Pakistan, the 8th largest recipient of remittances worldwide and 7th among developing counties, the fall in remittances is likely to hit the economy harder because of unsatisfactory performance on other key external account indicators, such as exports and FDI. Remittances have been the principal source of financing Pakistan’s trade deficit. In FY2015, Pakistan ran trade deficit of $17.2 billion, which was financed by $18.7 billion remittances. Likewise, in FY2016, $18.5 billion trade deficit was recorded, which was financed courtesy $19.9 billion remittances.

Likewise, in the first quarter of the current fiscal year, trade deficit of $5.15 billion was recorded ($5.04 billion exports and $10.19 billion imports), which was chiefly financed through $4.69 billion remittances. Not only that, the share of remittances in GDP (7 percent) in FY2016 approximates that of trade deficit in GDP (6.5 percent).

At a time when the government has decided to say goodbye to the IMF after the conclusion of the current programme on September 30, the fall in remittances will not bode well for the country’s economy and the balance of payment position.

The writer is a graduate from a Western European university.

Email: hussainhzaidi@gmail.com