Karachi, July 11, 2023 (PPI-OT): FY23 remittances dip despite growth in NRPs
Despite continued growth in number of Non-resident Pakistanis (continuing at 10-year CAGR of 6%), remittances for FY23 closed 14% lower YoY at US$27bn (first YoY decline since FY17). As a result, Remittances per NRP dipped 18% YoY, clocking at around US$176/month, marking a 3-year low.
In addition to global macro challenges, widening gap in interbank and kerb FCY rates cannot be ruled out among key reasons for the drop. The lower remittances have however proved sufficient to cover the controlled trade deficit of the last few months.
Going forward, normalization of imports will require uptick in remittances where gap between interbank and kerb rates could be key. We maintain base case remittances estimates for FY24 at US$25bn (in line with current rate of US$2.2bn/month). Assuming NRPs grow at 6% for FY24, US$25bn translates into Remittance per NRP of US$153/month (-14% YoY).
In terms of sensitivity, remittance per NRP if maintained at current US$176/month, translates into remittances of US$28.8bn. Every 1% growth in remittance per NRP while maintaining 6% growth in NRPs would yield additional remittances of ~US$300mn p.a. - hence the pace of NRP growth and remittance per NRP would be critical to track.
FY23 remittances witness decline despite growth in NRPs
Remittances for FY23 closed at a 14% YoY lower reading at US$27bn. The tally declined despite Non-resident Pakistani (NRP) growth continuing at usual pace. NRPs have increased by 6% YoY, in-line with 10-year CAGR pace. This has resulted in a steeper decline in remittances on a per Non-resident Pakistani (NRP) pace at 18% YoY and making the per NRP remittances sent declining for the first time in five years.
Remittances per NRP in FY23 clocked in around US$176/month, lower than FY22 average of US$215. During FY23, as the average declined to a 3-year low, it went back to the streak maintained around US$179 pre-FY21 remittances spree. To recall, Pakistan’s remittances during FY21 and FY22 averaged at US$30bn, keeping monthly remittances per NRP above US$200 for the first time in history.
Over macro headwinds and gap in interbank and kerb rates
While the year started on a promising note with 1QFY23 monthly remittances averaging around US$2,500, the data weakened as global macro challenges elevated, compounding by higher interest rate investment avenues available overseas. As a result, monthly remittances for the remaining 9 months declined to ~US$2,150, where Jun-2023 data also clocked in at similar levels.
Moreover, widening gap between interbank and kerb PKR/US$ rate in the passing year could also not be ruled out as a reason of the drop in remittances despite higher NRPs. During FY23, the country witnessed a steep PKR/US$ devaluation of 28% YoY, marking among the worst years in the country’s history. This was in addition to much volatility in the price trend throughout the year, where the gap between kerb and interbank FCY rates widened more than ~5%. We do not rule out the same leading to NRPs opting for other than official channels to remit funds into the country to gain from favourable currency rates.
Pace remains sufficient to cover controlled trade deficit
Despite the decline, remittances levels in the recent months have however been sufficient to more than cover for trade deficits and other external current expenses, resulting in a Current Account Surplus since Apr-2023. To recall, with administrative controls on imports and all other efforts towards limiting US$ outflow by regulators and the government in place since many months, sticky remittances have led to the country reporting a cumulative US$1bn Current Account Surplus during Apr-2023 to May-2023.
While Jun-2023 remittances also clock in US$370mn higher than the month’s trade deficit reported by Pakistan Bureau of Statistics (PBS), we do not rule out the Current Account streak to continue till at least Jun-2023. To note, PBS trade deficit data usually maintains a higher gap of ~US$350mn to trade deficit data reported by State Bank of Pakistan (SBP) - the relevant datapoint for Current Account, over timing and other reporting differences.
With imports gradually opening up, however, the remittances trend remaining sticky would likely take the country back to the usual monthly Current Account deficit of ~US$750mn.
Transfers remain a key window of opportunity for FY24
With the gap between interbank and kerb rates contracted recently, remittances that may have diverted to other channels may revert to official channels, leading to rebound in remittances per NRP that could support to fill the external balance gap.
The average monthly remittances per NRP have witnessed an increase of 3% per annum in the last 10 years, while total NRPs have increased by 6% during the same time. Assuming similar increases in both heads for FY24, remittances for the year may clock in at US$28.8bn, up 7% YoY. Assuming NRPs grow at 6% for FY24, US$25bn translates into Remittance per NRP of US$153/month (-14% YoY).
However, taking a US$2,200 monthly remittances average, close to levels reported in the last 9 months, FY24 remittances can total to US$25bn, down 8% YoY, which is our base case. In terms of sensitivity, every 1% growth in remittance per NRP while maintaining 6% growth in NRPs would yield additional remittances of ~US$300mn p.a. - hence the pace of NRP growth and remittance per NRP would be critical to track.