Rupee steady on remittances, external balances need boost

Overseas pakistanis are, once again, helping the nation steady the Rupee but external balances need a fast track boost.

Overseas Pakistanis — including those from Saudi Arabia and UAE — have remitted a record $9.033.41 billion in the first seven months of the current fiscal 2014 — July-January. The amount is plus 10.08 per cent compared to $8.206.34 billion received in the like period of fiscal year 2013. The remittances in the full 12-month period of fiscal year 2013 were $13.9 billion as against the official target of $14 billion. The growth in remittances in 2013 was significant from Bahrain, Britain, Australia and Sweden.

The current projections are that the ongoing fiscal 2014 will end on June 30 with the remittances reaching an all-time record of around $15 billion. Some analysts project the amount in the range of $16-17 billion.

At the same time, the rupee is slowly steadying and marginally appreciating. The Pakistani currency, which depreciated nearly 10 per cent during this year to Rs110 to a US dollar, is moving up.

The dollar was trading at Rs104.70/104.90 in the inter-bank market and Rs105.45/105.70 in the open market over this weekend.

“The rupee is currently trading higher against the dollar due to the positive sentiment in the forex market,” currency dealers say.

In case the higher projection for remittances are realised, Pakistan’s total gape between cost of its imports and export earnings will be virtually wiped out by the overseas remittances alone. The present projected annual imports are around $40 billion, and export earnings at $24 billion. Higher remittances will strengthen the balance of payments as capital account inflows are weak.

Good prospects for the rupee and the balances are claimed in the latest report of the State Bank of Pakistan, or SBP, the central bank, and multilateral institutions. This is despite the fact that the financial market dos not fully believe claims by Finance Minister Ishaq Dar that the forex reserves will shoot up to $10 billion by March and to $16 billion by December this year, as he said over the weekend.

The current forex reserves are $7.589 billion. Of these only $2.8 billion are held by SBP — the lowest in the last thirteen years. The rest of the money is owned by commercial banks. At this level the SBP reserves are enough to pay for imports for less than three weeks.

The SBP reserve in June 2001 had hit the historic low of $2 billion in June, 2001.The reserves have been on the downslide for months because of larger and costly imports including impored oil, and foreign debt repayment. Meanwhile, exports have not been moving up partly due to lower domestic output of exportable goods and reduced foreign demand, low FDI inflows.

The remittances are rising despite the disturbed foreign labour situation, and its effect on the already deployed Pakistanis, in Saudi Arabia and elsewhere. However, the overall effect of the larger inflow is good for the external and financial and the capital account. The 10 per cent increase this fiscal, when seen in the light of the fact that 2013 itself had witnessed a large volume of remittances which were diverted from “hundi” and “Hawala” to official banking channels.

Where did the normal and the larger amounts originate? According to the central bank, Middle East and the UAE led the field. United Kingdom and the EU region followed.

Remittances from Saudi Arabia alone contributed $2.59 billion. Overseas Pakistanis residing in the UAE sent $1.785 billion. The inflow from US was $1.441 billion, UK $1.309 billion, GCC — including Bahrain, Kuwait, Qatar and Oman — $1.048 billion and EU $251.13 million. Norway, Switzerland, Australia, Canada, Japan and other countries provided $600.85 million.

“Inflows under the current transfers continued to compensate for the deficits seen in trade, services and income accounts. Over the last few years, workers’ remittances have become one of the most important sources of forex receipts on the back of the rising number of Pakistanis, seeking employment abroad and effort made under SBP’s Pakistan Remittances Initiative, or PRI, to encourage use of official banking sources for sending money to Pakistan,” the central bank reports.

But, there is no denying the fact that use of unofficial channels of transfer of funds to Pakistan still account for a large part, varyingly estimated at $5 to $8 billion a year. However, no firm numbers are available on this account.

But, all is not well on the external balances front. Pakistan’s current account deficit, or CAD, widened to a big $11.11 billion during the first seven months of fiscal year 2013-14. This trade deficit is 4.55 per cent less than $11.638 billion for the same period of 2013. Exports during this seven month period were $14.7 billion up from $14.047 billion in the like period of 2013, showing a growth of just 4.64 per cent. Imports for the period were $25.81 billion, as against $25.68 billion in the like period of 2013 — an increase of merely 1.88 per cent. The overall trade deficit in the full 2013 was $2.06 billion, which was 36.32 per cent higher, compared to the previous year.

Exports were down 4.71 per cent to $23.64 billion in 2012 from $24.81 billion in 2011. Imports rose 11.13 per cent to $44.91 billion from $40.41 billion. Pakistani exports are very much knotted up in terms of commodities and destinations. Nearly three per cent of all exportable items, numbering 3,592, account for 75 per cent of its exports.

The major exportable items are textiles, rice, and petroleum-naptha. Out of 215 export destinations, 10 per cent countries buy 75 per cent of Pakistani exports in value-terms. US is the biggest export destination, followed by UAE, Afghanistan, and China. Foreign trade experts are of the view that Pakistan needs a great deal of export diversification to ensure regular sales abroad at all times and ensure regular income to help external balances.

What are the long-term prospects for the external balances? The larger and ensured export earnings, continued growth of home remittances, and, the hoped-for bilateral and multilateral inflows will protect and improve the external balances. Good for the economy. Good of the individuals working at home and abroad.

Views expressed here are his own and do not reflect newspapers policy.