Relying on remittances

Remittances have been one of the key stabilising factors in the Pakistani economy over the last decade and a half. The money sent back from overseas Pakistani workers has been critical to the improving foreign exchange reserves touted by financial managers. Less well known is the role remittances play in spurring investment and everyday consumption.     Last week, the State Bank of Pakistan (SBP)       issued a report that warns of the economic impact of declining remittances. Declining remittances threaten consumption, investment, demand for imported goods, demand for labour, the current account balance and the exchange rate. Overall remittances from the July-January period went down by 1.8 percent compared to last year. The most significant fall was from Saudi Arabia – down by $30 million for the month of January alone. Pakistani labour has been facing serious problems in Saudi Arabia, which has also deported 40,000 labourers. The SBP has identified Gulf countries as a major source for the vulnerable position of remittances to Pakistan.         The government is nowhere to be seen – and the effect is visible in terms of the remittances sent to the country.

While there is some positive news that overall remittances increased by 1.45 percent for January year-on-year, the overall trend is here to stay. The SBP has emphasised the importance of improving the trade deficit. There is recognition that there is little that a government can do for workers outside the country who are exposed to global economic shocks, such as the impact on the construction industry in the Gulf of the decline in global oil prices. But this is no excuse for doing nothing. And a country such as Pakistan, which has an overreliance on the money sent back by its citizens living abroad, owes even more to them. The SBP itself has highlighted that the decrease raises questions about Pakistan’s inability to cope with exogenous shocks, especially in the context of the high trade deficit. If more Pakistani workers abroad were laid off, they would be forced to return to the country and add to the economic burden. With unemployment already high, where will these potentially laid-off workers be absorbed? Moreover, a greater fall in remittances would reduce Pakistan’s ability to cope with the trade deficit – forcing the country to return to the international begging bowl. No fundamentally stable economy relies on remittances to the degree that Pakistan does. Pakistan’s foreign exchange reserves are set to face more pressure. The optimists at the helm of government need to prepare for harder times ahead.