Can remittances rescue Pakistan’s volatile foreign reserves?
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The month of March has seen Pakistan’s foreign currency reserves falling to their lowest level during the ongoing fiscal year. The reserves witnessed a decline of $844 million during the week ending on March 18. Overall reserves which stood at $22.3 billion came down to $21 billion during the same week. The central bank’s own reserves fell on account of external debt and liability repayments. Eurobonds also matured and resulted in higher external repayments.
This has happened at a time when the government and IMF are engaged in the seventh review under the Extended Fund Facility; the IMF has concerns over the populist measures recently announced by the PTI government which enhanced subsidies and pulled down oil and electricity prices; heightened political instability in Islamabad is keeping foreign investors on hold; and PKR is fast losing its value against major global currencies.
The current account deficit recorded at $545 million in February was high at $2.5 billion in January and saw a sharp year-on-year expansion standing at $34 million in February 2021. Compared with the first 8 months of the previous fiscal year, this is a significant increase.
The widening of the current account is largely accrued to higher levels of import payments. Expanding production capacities on the back of higher levels of credit off-take; a global rise in fuel prices; volatility in oil, gas and commodities markets due to the Russian attack on Ukraine have all added to the increased import bill. Consequently, imports have seen an over 60 percent increase year-on-year during the first half of the ongoing fiscal year. The trade deficit doubled, and the Pakistani rupee lost almost 14 percent of its value since January.
The foreign currency inflows have unfortunately not increased at a rate which could compensate for the outflows and debt servicing. During the first half of the fiscal year, despite a weak currency, exports could only see a 25 percent increase and even this improvement is not seen beyond traditional exporting sectors.
There should be no doubt that exports, remittances, and other inflows such as Roshan Digital Accounts will never be sufficient to cover the various forms of Pakistan’s foreign liabilities.
Dr. Vaqar Ahmed
With these current account numbers, Pakistan is barely able to cover two months of import payments. A weak rupee and dwindling reserves have now also weakened future debt repayment capabilities. Raising long term debt to cover for maturing debts is also not easy in a weak macroeconomic milieu. Delays in the seventh review of the IMF could also result in other multilaterals slowing down their assistance, particularly the loan component.
While external shocks have contributed to these concerns, the government’s own policies also require introspection. There has been a clear deviation from the path initially decided with the IMF which did bring macroeconomic stability to some extent. The post-pandemic strengthened foreign exchange position could have been preserved if liberalization of imports had followed a priority order.
Several forms of amnesties, liberal credit regime, inward looking construction and auto policy measures have all contributed to higher levels of imports (not necessarily resulting in export increase).
Going forward, there should be no doubts that exports, remittances, and other inflows such as Roshan Digital Accounts will never be sufficient to cover the various forms of foreign liabilities. Even if immediate debt repayments are rolled over or import payments come to a screeching halt, there are other essential payment obligations which have to be met including repatriation of profits by foreign investors (which are witnessing abnormal delays), payments for external services being procured by public and private sectors, fees in foreign currencies to be paid for education and health purposes, payments on account of foreign transport and communication purposes.
The diaspora remains a source of solace for Pakistan’s economic managers. The month of March saw workers’ remittances from abroad increasing by 8 percent to $20 billion during the first eight months of the ongoing fiscal year. Workers in Saudi Arabia and the United Arab Emirates alone have contributed almost $9 billion during this period. However, the trend of increased remittances during the pandemic could taper as lenient travel restrictions and seasonal factors are embraced during this relatively ‘normal’ year. Pakistan’s diaspora abroad would like to see structural economic reforms take root before their interests go beyond just remittances and they initiate tangible investments in Pakistan.
According to most independent assessments, Pakistanis abroad remain reluctant to lock themselves into longer term investments in Pakistan’s agriculture or manufacturing sectors. This is attributed to weak rule of law and painstakingly slow formal dispute resolution mechanisms. This is where financial technologies could play a role. Embracing modern financial and insurance solutions could help in mitigating risks which the diaspora may have regarding the quality of their investments in Pakistan.
- Dr. Vaqar Ahmed is an economist and former civil servant. He tweets @vaqarahmed
