Moody’s expects Pakistan to offset remittance drop on oil fall

KARACHI: Moody’s Investors Service sees Pakistan to make up for an expected drop in remittances with reduction in oil import bills as a global demand slump gives price shock to oil-producing economies.

Ratings agency Moody’s estimated a 20 percent drop in remittances this year for a number of economies, including Pakistan.

“Relief on import bills from lower oil prices offsets a drop in remittances of around 20 percent,” it said on Tuesday in a report.

So far, Pakistan’s inflows remained safe from oil turbulence in Gulf Cooperation Council (GCC) member countries – the main source of the country’s remittances that rose six percent to $23.1 billion in the last fiscal year of 2019/20.

However, the country’s oil bill was reduced around 28 percent to $10.4 billion in FY2020, according to Pakistan Bureau of Statistics.

Oil-producing GCC economies suffered an economic setback due to global economic downturn precipitated by the coronavirus outbreak that led to a slump in demand for oil. This caused the price of Brent crude to collapse to a low of around $18 in April 2020, from $64 at the start of the year, before partially recovering to $40 in June. Moody’s expected Brent crude to average $35 per barrel and the West Texas Intermediate spot to average $30 per barrel this year.

“This will trigger falls in incomes and investment throughout hydrocarbon-focused economies, weighing on demand for migrant labour. As such, many countries that source a large share of their remittances from the GCC and Russia, where oil production plays a dominant role in the economy, will be indirectly hit by the fall in prices,” said Moody’s. “Weakness in the GCC will especially hurt South Asian economies such as Bangladesh, Pakistan and Sri Lanka.”

Moody’s estimates a 20 percent fall in remittances would result in an average three-percentage-point of GDP decrease in the current account balance for remittance-reliant countries. Lower oil prices are expected to result in an average two-percentage-point of GDP increase in the current account balance.

Moody’s said remittances are likely to remain below pre-coronavirus levels as global labour markets recover only gradually. “Furthermore, if the coronavirus pandemic contributes to a significant and lasting tightening in migration, the resulting opportunity loss will constrain the growth potential of the most remittance-reliant sovereigns.”

Moody’s expects Pakistan’s external resilience to deteriorate.

“By reducing household incomes and consumption, and current account receipts, a sharp drop in remittances weakens credit profiles through its impact on economic strength and external vulnerability,” it said. “The decline in incomes and economic strength is likely to be more gradual; the hit to current account receipts and weakening of external position can be abrupt.”