Trend is likely to continue

Aug 25 - 31, 2003

The financial year 2003-04 made an impressive beginning in Pakistan. On one hand the capital market has shown a robust growth as the KSE-index cross the mark of 4400 points while the home remittances also sustained their historic performance during the previous financial year.

At the end of July, 2003 the first month of the new financial year, Pakistan received home remittances worth over $307 which matched with the amount of home remittances received in July, 2002 indicating that this segment of the financial sector will maintain its performance during the current year as well.

The home remittances, it may be recalled, had created a history by recording the highest figure of cash flow from overseas Pakistanis amounted to $4.23 billion at the end of 2002-03.

The previous financial year ended on June 30, 2003 had recorded an increase of 77.34 percent as compared to the previous ends remittances. The financial experts are of the view that the performance during the first month of the current financial year indicates that this sector is likely to repeat its performance this year and there are strong indicators that it may perform even better during the current year.

The total remittances received in the financial year 2002-03 include workers' remittances amounted to $4.10 billion as against $2.29 billion during July 2001 to June 2002 showing an increase of 78.63 per cent over the corresponding period of the previous financial year. In fact, it is the economics that is now playing a key role in boosting the flow of the home remittances.Financial experts while spelling out the factors behind the quantum jump in home remittances said that there was a chain of factors working in favor of cash flows from external resources.

Restoration of the confidence in the policies of the government was however on top of the list. It is the outcome of continuation of the liberal financial policies, stable exchange rate leaving no charm in the open market.People now prefer to remit through official banking channels in view of the process of documentation which has also started taking roots in the economy of Pakistan.

There were estimates by some quarters that Pakistanis have at least $32 billion in foreign banks. The banking sector in the United States as well as other European countries has started scrutiny of the deposits of the immigrants in the wake of events of 9/11. Under these circumstances, non-resident Pakistanis obviously consider their home land as the safer zone for their bank deposits.

Earlier, the source of home remittances had become almost dry soon after the decision of freezing the foreign currency accounts in May 1998 by the previous government. The foreign currency deposits were estimated at $11 billion at that time but that entire amount had already been consumed by different governments in the past. The decision of freezing the foreign currency account also added fuel to fire as it had badly shattered the confidence of the overseas Pakistanis. At that time most of the proceeds were received through unofficial channels like "Hundi" due to highly attractive exchange rate in the open market. There was a difference of almost Rs10 between the bank rates and the open market rates of the dollar. That difference was obviously a big charm for overseas Pakistanis for remitting their money through unofficial channels and no amount of patriotism could stop them to take advantage of the exchange rate differential.

The financial year 2002 was an extraordinary year for the Rupee. The global crackdown on Hundi network led to the collapse of the kerb market premium and consequently proved a turnaround in the exchange rate management strategy in Pakistan. All of which set the basis for accelerating liberalization of the foreign exchange market and particularly the removal of segmentation between interbank and kerb markets.

It is important to note that the massive improvement in the foreign exchange market post-September 2001 overshadowed the notable exchange rate stability already evident during financial year 2002. This stability was in sharp contrast to the 10.9 per cent depreciation of the Rupee during the same period previously.

The appreciation of rupee caught market participants by surprise, and their response added further strength to the Rupee. This also mitigated the impact created by freezing foreign currency account and people started bringing back their deposits held abroad.Home remittances have played an important role in the strengthening country's foreign exchange reserves which also reached a record high of over $11 billion. Improved financial health of the country also helped stabilizing the rupee against dollar.

The most significant implication provided by recent external shock to Hundi network is the opportunity to remove segmentation in the foreign exchange market. With the kerb premium floating around almost zero level.

In a scenario when rupee continues to appreciate, the interest of the individuals would naturally grow in the local currency as against the previous trend of dollarization which provides a strong reason for growing the size of home remittances in the days to come.