REMITTANCES: A BRIGHT SPOT IN THE FRAGILE ECONOMY
Jan 30 - Feb 5, 2012
The remittances from overseas Pakistani workers have emerged out as a bright spot in Pakistan's fragile economy, which faces a tough time as most of the resources have dried up in the wake of deteriorating relations with the United States which holds influence on most of the donor agencies.
The amount of remittances sent home by Pakistani workers abroad has so far crossed the one billion dollar mark per month during first half (July-December) of the current financial year 2011-12 ending June.
The government hopes to surpass the target of $12 billion in remittances during the current fiscal year. The analysts attribute the high inflow of remittances to the crackdown on the illegal money transfers such as Hundi and Hawala, quick processing and other facilitation measures introduced by banks and exchange firms and the narrow gap between exchange rates in the open and inter-bank markets.
Pakistan has so far received an average of $1.054 billion per month as workers remittances from abroad during the first six months of the current financial year.
"If this healthy trend continues during the remaining half of the current financial year then the target of US$12 billion would certainly be surpassed," APP reported Rana Asad Amin, the spokesman ministry of finance as saying. "In the current economic scenario, workers' remittances provide the much required support to our economy as a whole".
A record inflow of remittances helped support the country's foreign exchange reserves that hit a record $18.31 billion on July 30. The high inflow of remittances is attributed to some important policy measures taken by the government.
For instance, Pakistan Remittances Initiative' (PRI) has jointly been taken by ministry of finance, state bank of Pakistan, and ministry of overseas Pakistanis that provided an efficient, transparent, and reliable transaction system.
Remittances from overseas Pakistani workers rose 19.6 per cent to $6.33 billion in the first half of the current fiscal year, compared with $5.29 billion in the same period a year earlier.
The remittances from many countries registered growth in the first half of 2011-12, according to the central bank. Overseas Pakistanis in Saudi Arabia, UAE, USA, UK, Gulf Cooperation Council (GCC) countries (Bahrain, Kuwait, Qatar and Oman) and EU states sent $1.66 billion, $1.41 billion, $1.15 billion, $726.35 million, $721.19 million and $189.14 million respectively.
The country's gap between imports and exports widened to $11.5 billion in the first half (July-December) of the fiscal year, against $8.287 billion recorded in the same period a year ago.
The country's foreign exchange reserves stood at $16.90 billion in week ending Jan. 13, compared with its record of $18.31 billion in July last year. The current account deficit has widened to $2.154 billion in the first six months of the current fiscal year, compared with a surplus of $8 million in the same period last year.
The country's foreign exchange reserves are bound to come under pressure and the current account deficit is likely to widen, as Islamabad with no additional sources of revenue starts repaying an $8 billion international monetary fund (IMF) loan this year.
The overseas remittances emerged as biggest source of dollars at a time when the country is in dire need of dollar inflow. Rise in remittances offers some protection to the economy from external funding shortage.
Another improving indicator is the inflation, which was for the first time in single digit in December since November 2009. The core inflation however remained in double digits.
The consumer price index (CPI) inflation fell a 13-month low to 9.75 per cent in December from 10.2 per cent in November 2011, as the energy crisis damped economic growth, according to the federal bureau of statistics (FBS). The core inflation, excluding food and energy, slightly dropped to 10.1 per cent in December from 10.4 per cent in November.
Single-digit inflation provides the central bank a cushion to slash its benchmark interest rate, which is still in double digits, in its next monetary policy to spur economic growth.
The country's fragile economy had been kept afloat with $11.3 billion IMF loan program since 2008. The government opted to discontinue IMF loan and ended the recent loan program on September 30 with the last two tranches of about $3.7 billion undisbursed.
Pakistan-US relations deteriorated following the November 26 Nato attack on Pakistani posts near Afghanistan border that killed two dozens Pakistani soldiers. Islamabad in retaliation cut Nato supplies routes to Afghanistan and evacuated Shamsi airbase from the US forces. The US recently froze some $700 million assistance to Pakistan after President Barrack Obama signed a defense bill.
Finance Minister Abdul Hafeez Sheikh has already warned that the country could face international isolation on the economic front if drastic steps are taken during the reviewing of bilateral terms with the United States. Sheikh told a parliamentary committee that Washington might use its influence over international financial institutions to hurt the country's economic interests.
The experts suggest that changes in any policy, which is protecting Pakistan's supreme national interest, should weigh the benefits of economic cost and benefits in any envisaged change in the country's geo-political stance.
"Unfortunately, we had a bad experience with the US relations due to which our economy witnessed downtrend during the last decade," APP reported Zahid Maqbool, former president of the Islamabad chamber of commerce and industry (ICCI) as saying. "It is the right time to take decisions according to the country's benefits."
With swelling trade and fiscal deficits, the country is heading toward a twin deficit crisis. The concerns are growing about a possible balance of payments crisis. The country is likely to face in coming months. The country's fiscal deficit swelled to 2.6 per cent of gross domestic product (GDP) in the first half (July-December) of the current fiscal year 2011-12 ending June, against a deficit of 2.9 per cent of GDP in the same period the previous year. The trade deficit widened to $11.5 billion in the first half, against $8.287 billion recorded in the same period a year ago.
Widening current account deficit forced the country in 2008 to turn to the IMF for a $11.3 billion loan under stand by arrangement (SBA) to avoid default on international payment. The experts fear that the country would be facing serious balance of payment situation in months to come because of its projected $4 billion foreign inflows for the ongoing fiscal year 2011-12 are at risk. The risks would have negative impact on country's foreign exchange reserves, which might shrink from current $16 billion to below $10 billion by June 2012.