KARACHI: Remittances to Pakistan through legal channels declined by 14 percent or over $4 billion during the outgoing fiscal year amid political and exchange rate instability, official data and experts said on Monday, as Saudi Arabia and the United Arab Emirates remained top contributors of money sent home by Pakistani workers.
Pakistan received $27 billion during the outgoing fiscal year, FY23, compared to $31.27 billion the year before. In June 2023, $2.2 billion in remittances were recorded, according to data released by the State Bank of Pakistan (SBP) on Monday.
The cash-strapped South Asian nation struggled with low foreign exchange reserves almost throughout the fiscal year due to its inability for months to reach a staff level agreement with the IMF to unlock at least $1.1 billion under the lender's ninth review of a $6.5-billion Extended Fund Facility agreed in 2019. A day before the program expired, Pakistan secured a badly-needed $3 billion short-term financial package from the IMF last month, giving its economy a much-awaited respite as it teeters on the brink of default.
“Due to instability of exchange rates in the grey, open, and interbank markets, the flow of remittances through official channels has declined,” Tahir Abbas, Head of Research at Arif Habib Limited, told Arab News.
“The country remained in the grip of uncertainty related to the IMF program that has also played a critical role in the decline of remittances through official channels. Political uncertainty was another contributing factor.”
Pakistan receives more than half of its total remittances from labor markets in Saudi Arabia, the United Arab Emirates (UAE) and other Gulf countries where more than 80 percent of Pakistan’s overseas labor force is employed.
However, remittance from Saudi Arabia, UAE and other gulf countries also declined by 16.9% to $6.4 billion, 20.5 percent to $4.6 billion and 12 percent to $3.1 billion, respectively, during the outgoing fiscal year, FY23, according to SBP data.
“The key reason for the decline from Gulf countries was the activation of the grey market in Pakistan after the exchange rate crisis,” Farhan Mahmood, Head of Research at Sherman Securities, told Arab News.
An ongoing political crisis coupled with uncertainty related to the $6.5 billion IMF program had created three exchange markets for currency transactions, characterized by significant disparities between buying and selling rates in all three markets.
In the official interbank and open markets, the exchange rate gap had widened by over Rs22 in May this year. In the grey or illegal market, the disparity in exchange rates was even greater compared to the open and interbank markets, according to the Exchange Companies Association of Pakistan (ECAP).
“To benefit from the high exchange rate, people remitted through hundi and hawala channels where rates were comparatively good,” Mahmood said, referring to informal money transfer networks that allow customers to rapidly move large sums across borders outside the scrutiny of regulators and largely without an easily traceable paper trail. Funds received through these methods are not counted towards a country’s official remittances.
“It does not mean that the inflows have reduced, it only reflects that the business has shifted to the grey market.”
Mahmood said remittance inflows from countries apart from Gulf nations had not declined.
After the approval of the new $3 billion program by the IMF, the exchange gap between the open and interbank markets had narrowed while “the grey market at present is non-existent,” Mahmood said.
“Going forward, remittance inflows through official channels will increase after the IMF program and political stability in FY24,” Abbas added.
