JS Global Capital: Remittances declined to 27-month low in November 2022 and is on the trajectory of a rare trend in Pakistan’s history of last 50 years. The trend has been reporting a sequential decline since the last three months, a streak recorded only once since 2010, during December 2016 to February 2017.

The worst sequential record for Pakistan’s remittances growth has been a drop for five consecutive months, recorded only twice since 1972 (in 1984 and 2009/10), while the sequential decline of three months or more have only been reported 18 times since 1972 (12 being before 2000).

The ongoing trend has begun to be a cause of concern in the middle of scarce external flows and the central bank’s foreign exchange reserves enough to only cover imports of the next five weeks or so. From a monthly average of $2.5 billion, the remittances have of late declined to a monthly average of $2.2 billion (-12 per cent), while the five months of FY23 accumulated numbers were recently reported at $12 billion (-10 per cent YoY).

This means the country would now need to curtail its trade deficit to $2.2 billion/month (four months of FY23 average: $2.7 billion/month) to minimise the impact of the current account deficit drain on the SBP’s forex reserves.

The decline has been led by lower remittances from Saudi Arabia, which is the largest contributor to Pakistan. Not only the region has reported a 13 per cent YoY decline during the five months of FY23, over time, its share in the total remittances has reduced from 29 per cent till FY20 to 25 per cent, now.

The share of the pie has broadly been taken by the non-resident Pakistanis (NRPs) based in the US, other Gulf Cooperation Council (GCC) and the EU countries. During the period under review, where all regions report a negative growth, the remittances from the US has increased 4 per cent YoY.

The key reason we believe for the decline has been an increase in the use of informal channels to remit money in Pakistan on account of widening gap between interbank and kerb market exchange rate. While the interbank rupee/dollar rate ranges between Rs224 to Rs225, the kerb market rate has been reportedly trading close to Rs250 (+11 per cent).

In addition, the monetary tightening around the globe also makes other international investment avenues more attractive for the NRPs, reducing the allocation of sending funds to home country.

The remittances are expected to report a negative trend this year over the global economic slowdown and higher inflation. Compared with the head item expected to witness a similar number for FY23 as witnessed in FY22 ($31 billion), our current base case now incorporates a 6 per cent YoY decline, clocking in at $29 billion for FY23E, as we assume the ongoing run rate will continue.

Nonetheless, as the NRPs continue to increase, with 7 per cent expansion during CY22, a rebound cannot be ruled out. The monthly run rate of remittances/NRP has declined to $202/month, compared with the peak of $223 in CY21.

Assuming the remittances/NRP bounces back to $223 in the remaining months of FY23, the total remittances for the year may accumulate to $31 billion.