Boosting Currency Inflows Needs Time – Editorials

EDITORIAL: Remittances to homes increased slightly from the previous month to reach $2.7 billion in August 2022. However, in the first two months of the current fiscal year, there was a slight decline compared to the same period last year.

The growth of remittances, for various reasons, has limited potential this year, while the need for foreign exchange inflows has never been more crucial than today. The currency is almost in free fall and all energies are spent on reducing imports through a combination of political and administrative measures which can have adverse consequences for the economy as a whole.

The need is to focus on how to extract more juice in terms of influx. Exports, Remittances to Home, Roshan Digital Accounts (RDA), and Foreign Direct Investments (FDI) are four important channels to rely on.

Exports cannot provide the required quantum of growth in the short term. In order to attract FDI, macroeconomic stability and political stability are imperative – both are unfortunately lacking at the moment.

Therefore, the immediate focus should be on improving flows from home remittances and ARD. Over the past decade and beyond, remittances have remained the lifeline of the economy.

After the launch of the Pakistan Remittances Initiative (PRI) in 2009, official inflows increased from $7.8 billion in FY09 to $31.2 billion in FY22, while exports remained largely stagnant before growing over the past two years. The main reason for the higher growth in remittances is the increase in the number of workers going abroad. Unfortunately, however, that number has been dropping lately.

The other initiative is from PRI through which the government pays 20 riyals (previously it was 25 riyals) for a ticker over $100. The idea is that the exchange companies charge no fees to the sender while the 20 riyals are split between the receiving bank in Pakistan and the issuing exchange company with the lion’s share (17-18 riyals) going to the exchange company and this is to compensate them for not charging a fee.

The PRI is well recognized globally and has been instrumental in moving hundi, hawala and other informal transactions into formal banking channels. The proof is in the pudding. The significant upward movement in remittances since the launch of the PRI testifies to its success.

However, lately there have been problems in the payment mechanism. Usually, payments are made to banks and through banks to exchange companies in 2-3 months.

The system worked well. But since December 2021, the Ministry of Finance has not made any payments (routed through the SBP) to the banks. Ironically, circular debt has also started to accumulate in PRI! A major bank’s outstanding balance is currently Rs 1.4 billion.

The total outstanding amount is estimated at Rs 15-18 billion. Exchange companies haven’t received their dues for 10 months. Now they are restless. They are of the opinion that if the problem is not fixed, they will start charging the sender a fee. And it may entice the sender to return to informal channels. Already, the widening gap between the PKR and the USD in the open market versus the interbank market is discouraging official flows.

The government must resolve the matter as soon as possible. The State Bank of Pakistan (SBP) is powerless while the Ministry of Finance appears in disarray. The banks are frustrated, and the exchange companies are no less unhappy. All of these factors could lead to slower remittances at a time when every dollar counts.

Already, the sharp depreciation of the PKR reduces the size of the remittances ticker, as the need to send money in foreign currency is less for the same amount in Pak Rupee. According to data from a major bank, over the past two years the average ticker size has increased from $600 to $520. So far, the number is even lower in September 2022.

The sharp depreciation of the Pak Rupee caused the ticker size to shrink to $423 in the first 13 days of the current month – an alarming development, indeed. This implies that the inflow of remittances could be weaker this month. Under such circumstances, if exchange companies start charging fees to senders, flows from formal channels will further tighten.

It was about the fate of remittances. The other channel the SBP should focus on is RDA. It was a brilliant move that the SBP took under the leadership of the then Governor, Dr. Reza Baqir. Gross admissions topped $5 billion in the 25th month since launch. Of this amount, outflows amount to nearly $1 billion, bringing the country $4 billion.

This needs to be exploited and developed further. About two-thirds of RDA entries are in Naya Pakistan Certificate (NPC). The share of NPCs in the total amount of RDAs has decreased slightly from its peak.

One of the reasons could be the higher yields of fixed income instruments in the issuing country. Interest rates in developed countries are on the rise while the rate of return on the RDA has remained unchanged since its inception.

SBP should review the rates of return and revise them if necessary. However, the vibrations coming from SBP suggest that the rates for the dollar (and other foreign currencies) are lucrative enough and should not be changed. The central bank is in the process of revising the Pak Rupee bond rates upwards.

If SBP thinks the dollar rate of return is good, then it should take other steps to improve flows. A year ago, SBP was pushing product marketing hard even though banks had been lazy at first. But they too have realized that it is profitable for them to market the product. Lately the push (both from banks and SBP) is slowing down and the pace of inflows is not increasing fast enough.

Nine million expatriates are the lifeline in times of extreme stress on external accounts. In the current circumstances, it is incomprehensible that the country’s fiscal and monetary authorities have reduced the effort to make the flow of remittances more accessible. As of August 2022, the number of RDA accounts stood at 456,732.

There is still plenty of room for growth. Then, inflows from existing account holders should increase. SBP should come up with innovative ideas for people to replace mature NPCs. The bottom line is that there are risks on the growth of remittances and RDA flows.

The SBP and the Ministry of Finance should partner and work to improve the flow of incoming dollars. Moreover, FDI incentives need to increase, because for a developing economy, like Pakistan, a marginal trade deficit is acceptable, as long as it is offset by other non-debt related flows.

Copyright Business Recorder, 2022

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