KARACHI: As Pakistan received $18 billion in remittances during the first seven months of FY22, experts and economists believe the country is likely to manage its widening current account deficit, if the trend persists.
However, they said Pakistan needs to curtail its swelling import bill, boost its exports and attract foreign direct investment (FDI) to check the risks of any future shortfall of foreign exchange.
“If there is stable remittance inflows, the expected improvement in the trade balance will be reflected in the declining current account deficits, maintaining these deficits manageable and financeable,” said Mohammed Shaheen, CEO of Seven Capitals.
The State Bank of Pakistan (SBP) said that during the first seven months of 2021/22, the remittances have risen to a record $18 billion, registering a 9.1 per cent increase, compared with the same period of the last year.
Yogesh Khairajani, Global Market Strategist at Century Financial, said that at $2.14 billion in January 2022, the workers’ remittances remained above $2 billion for the 20th consecutive month.
The remittance inflows during January 2022 were mainly sourced from Saudi Arabia ($540 million), the UAE ($374 million), the UK ($320 million) and the US ($208 million).
“While remittances increased, the current account deficit increased in 2021. Pakistan posted a current account deficit of $1.93 billion in December, more than three times the shortfall the year before. The current account gap in the six months to December resulted from a significant trade shock, amid the ongoing economic recovery, Khairajani said.
Pakistan remains one of the slowest economies to reopen after the pandemic.
“The continuing severe supply chain disruption worsens the situation for the country, despite higher remittances being recorded,” he said.
The remittances declined 5 per cent, compared with January 2021, partly reflecting an easing of travel restrictions. Compared to the previous month, they fell 14.9 per cent due to seasonality, the SBP said.
A A H Soomro, an independent analyst, said that to some extent, workers’ remittances help curtail the widening current account deficit; however, a rising trend in imports will continue to weigh on the country’s foreign exchange reserves.
“The remittances have started to decline from this month. The current account deficit needs to be curtailed by reducing imports and growing exports only. More importantly, we have to create an environment that attracts non-guaranteed FDI,” Soomro said.
Echoing the sentiments, Khurram Schehzad, Founder and CEO of Alpha Beta Core, said that the forex reserves can only be raised on a sustainable basis through FDI and exports.
“Our potential is beyond $35 billion in annual remittances, we need to incentivise senders and middlemen to remit through official channels, and we should reduce transaction costs too,” Schehzad added.
Khairajani said that with the global economic growth expected to recover strongly this year due to the normalisation of the economy, there is a significant scope to boost exports.
“Moreover, with China moving more towards the higher value-added items, Pakistan can easily capture a share of the global market in textiles and food products,” he said.
Acknowledging the government’s efforts, Khairajani said that Pakistan is on track to achieve a record $32 billion in remittance inflows in the current fiscal year 2021/22 with over nine million workers already remitting $15.8 billion during the first-half of 2021.
“Proactive policy measures by the government and the SBP to incentivise formal channels have helped the economy gain these inflows. The launch of the Roshan Digital Accounts has provided the non-resident Pakistanis a solid incentive to maintain the account and make utility payments and transfer to local Pakistani rupee accounts. The interest rate offered for a conventional PKR Roshan Digital Account with six-month maturity is 10 per cent/annum,” he said.
Khairajani said that despite double-digit growth in overseas workers’ remittances and exports, the rupee remained under pressure due to the widening current account deficit and high imports.
They remained under pressure since the start of the current fiscal year. The rupee lost Rs18.24, or 11.58 per cent, against the dollar from Rs157.54 on June 30, 2021 to the present level of Rs175.78. The rising commodity prices are also taking a toll on the currency.
Soomro said that there is a super commodity cycle and imports are at a historic high in times when oil is at seven-year high and other commodities are highest, as well.
“The rupee is fairly balanced given the inflation and import pressure and possible impact of the US monetary tightening,” he said.
Khairajani said that the government has done a great job in boosting fiscal revenues by raising taxes, utility bills and implementing financial sector reforms.
“Nevertheless, rising US interest rates will make life more challenging for the rupee this year. Also, the next year’s national elections might slow the reform momentum and force the government to give more tax sops, impacting the rupee negatively,” he added.
