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Exchange rate spread may route remittances via grey channels

By Erum Zaidi
February 03, 2018

KARACHI: A widening gap between exchange rates in interbank and open markets is feared to promote remittances through unofficial channels as kerb rate is relatively more attractive, analysts said.

The spread between the exchange rates widened to Rs1.55 on Friday as rupee closed at 110.55/dollar in the interbank market and 112.10 in the open market.

Sakib Sherani, an ex-economic adviser said the widening differential between official and unofficial exchange rates may induce a shift from formal to informal banking channels.

“If the authorities manage to keep the differential narrow then the impact on remittances could be minimised,” Sherani added.

A head of remittances department at a bank said a gap of more than one rupee between the two markets is alarming.

“This [rising spread between interbank and open markets] is likely to reduce the formal remittance flows to Pakistan. We may see a short-term dip in remittances if the rate differential between the two markets not checked,” the banker added on condition of anonymity. “The use of hundi and hawala could be increased.”

In Pakistan, banks, exchange companies and Pakistan Post are engaged in remittance business. On Wednesday, the State Bank of Pakistan convened a meeting of exchange companies to address an unstable exchange rate. The rupee had reached 112.70 to the US dollar in the open market on Monday.

The State Bank’s officials asked the heads of exchange houses to ensure that the rupee would not surpass the 112 level in the kerb trade in the coming days.

Zafar Paracha, general secretary at Exchange Companies Association of Pakistan said the rupee has been stable now but he agreed that any further volatility in the domestic currency would encourage Pakistani expatriates to shift from official to unofficial sources of sending money home.

Remittances marginally increased 2.52 percent year-on-year to $9.744 billion in the first half of the current fiscal year.

Rupee depreciated around five percent against dollar during July-January FY18 and market is expecting further depreciation.

On the effects of currency depreciation on foreign remittances, senior economist Bilal Khan at Standard Chartered said, “Depreciation so far does not appear sufficient to provide a big boost to inward remittances”.

“However, further PKR (rupee) weakness could change the calculus. I mean, inward remittances may pick up,” Khan added.

Sherani expected 2 to 3 percent increase in workers’ remittances in FY2018 from the previous year. The country received $19.3 billion of remittances in FY2017.

Sherani said the increase in remittances from UK/EU was mainly the effect of currency appreciation of the British Pound and Euro. Approximately 65 percent of remittances come from Gulf countries, mainly Saudi Arabia, which have been mired in recession/slowdown for the past few years. “As a result many ongoing projects in Saudi Arabia have either been cancelled or postponed, and workers made redundant,” Sherani added. “In many cases, the workers have not been paid. Hence, the flow of remittances has been affected.