The right kind of monetary policy by the government can further encourage home remittances



Sep 30 - Oct 06, 2002

Home remittances sent by overseas Pakistanis have shown phenomenal rise during the first 2 months of the current financial year. These are reported to be about $700 million almost 3 times as compared $181.63 million in the same period last year. This should help in boosting the country's economy specially in the external sector.

In August 2002 it was 392 million dollar as against $97 million in Aug. 2001, disclosed the Finance Minister Shaukat Aziz saying that this four-time increase reflects underlying confidence in the system that had also contributed to the strength of the rupee. Total remittances during 2001-2002 were $2.39 billion. There is a strong possibility that the level of remittances would be somewhere between $3.5-4 billion during current fiscal year, he added.

The systematic change on the quantum of remittances took place on the post 9/11 period, when international drive against hundi or hawala system forced Pakistani workers to switch over to formal banking channels instead of traditional open market transactions.

Hawala or trust is a traditional South Asian model where anyone can send someone through a kerb market dealer simply through a shake of hand, without any paper work. However, when American FBI started hounding such offshore moneychangers in Dubai, Saudi Arabia and the United States on suspicion of terror related flows, it created a knock on effect.

Even those Pakistanis who were placing their black money in the safe havens, away from the NAB or revenue authorities, sent back their holdings to avoid freezing of their deposits, or questioning by the respective regulatory authorities. As a result local market was awash with liquidity during last 12 months, with a significant decline in buyers.

Buyers were mainly smugglers and black money holders, also in some cases, genuine businessmen who left the country due to continued political wrangling and misguided accountability drives. There was no evidence that this latter business elite had reverted back to the country, but demand for financing smuggled goods had evaporated due to security scenario on Pak-Afghan border and greater threat perception.

As a result rupee is riding high against the US dollar, appreciating from Rs.64.2 to a dollar just ahead of attacks on the World Trade Centre in the official interbank market to Rs.59.18/ 59.20 to a dollar on Wednesday for buying and selling. And, even lower at Rs.59 to a dollar in the kerb trade.

The Central Bank that purchases over $7.7 billion through offshore moneychangers and interbank market during last three years had almost stopped purchases from the open market dealers, switching to official interbank market and foreign exchange companies.

But the continued flow of remittances and official and multilateral assistance had kept the reserve level high. On last Tuesday, the State Bank of Pakistan (SBP) reported $7.7 billion reserves, according to the Ministry of Finance.

The money does not include $317 million new defence services payments from the United States and almost $100 million privatization proceeds of the United Bank Limited (UBL). Finance Ministry claimed that within a week or two, reserves would cross $8 billion mark.

It is expected, if no adverse situation arises, the forex level would be much higher by end of the current fiscal year, providing much needed confidence booster to the foreign investors that remained away from Pakistan in recent years to balance of payments worries and threats of defaults. However, stable political and law and order situation would be a prerequisite for that to happen.

The increase in home remittances through official channels has been attributed to the fact that the gap between the official and unofficial exchange rates had remained almost negligible in July and August. At times the US dollar is said to have become dearer in the kerb market. The golden and silver cards schemes initiated by the government for those sending their money through official channels also helped in raising the level of home remittances.

All this has once again shown that by following the right kind of monetary policy and by offering some incentives. The government can further encourage home remittances through official channels. What is, therefore, implicit in the situation is that exchange rate stability will need to be ensured on a sustained basis. Foreign exchange reserves will soon be reaching eight billion dollars touching an unprecedented level. That should help in the revival of investor confidence.

Against the backdrop of economy growing by 3.5 per cent last year, fresh economic assistance being made available by the donor community on soft terms, greater market accessibility provided by the European Union and foreign investment also showing signs of improvement, the government has acquired greater capacity to address the still unresolved economic issues. With external sector having gained in strength, the government ought to be focusing more attention on issues like attracting fresh investment, creating new jobs and expanding social sector services. Poverty reduction efforts have to be redoubled. It will also be necessary to accelerate exports. As the foundation for economic revival has been laid, it is about time to start consolidating the gains. The benefit of every improvement in economic indicators should also be reaching the consumers who have long been awaiting the results of the reforms.