Karachi, September 13, 2023 (PPI-OT): Increasing base of NRPs yet to reflect in remittances

Aug-2023 remittances barely maintained the recent monthly trend and clocked in at US$2.1bn (+3% MoM/-24% YoY), taking remittances for 2MFY24 down ~22% YoY to US$4.1bn.

On the other hand, Non-Resident Pakistanis (NRPs) have increased by a further 200,000+ in the ongoing fiscal year (~2%+) already, compared to average annual increase of 6% in the last 10 years, where sluggish remittances have resulted in a further 10% decline in remittances per NRP to US$159/month.

Widening gap between interbank and open market PKR/US$ rate, especially in the second-half of Aug-2023 could be a possible reason behind struggling remittances growth despite higher NRPs.

Every 1% growth in remittance per NRP, maintaining 6% growth in NRPs, yields additional remittance of ~US$300mn/annum. Hence pace of NRP growth and remittance per NRP would be critical to track - especially in light of gradually normalizing imports leading to expansion in trade deficit - making healthy remittance trend inevitable to control current account pressures.

2MFY24 remittances drop while base of NRPs increases...

Aug-2023 remittances barely maintained the recent monthly trend and clocked in at US$2.1bn (+3% MoM/-24% YoY), taking remittances for 2MFY24 down ~22% YoY to US$4.1bn. The tally continued to decline despite Non-resident Pakistani (NRP) growth continuing at a relatively faster pace. NRPs have further increased by 200,000+ in the ongoing fiscal year (~2%+) already, compared to average annual increase of 6% in the last 10 years. This has resulted in a further 10% decline in remittances per NRP to US$159/month. On an annual basis, the last time Pakistan witnessed such low remittances per NRP was in FY11.

Likely due to gap between interbank and open market rates

Widening gap between interbank and open market PKR/US$ rate, especially in the second-half of Aug-2023 could be a possible reason behind struggling remittances growth despite higher NRPs. During Aug-2023, the country witnessed a steep PKR/US$ depreciation of 10% in the open market, marking among the worst months in the country’s history. The depreciation in interbank rates however limited to 6%, widening gap between both rates to 6%. The gap has now been narrowed to both rates almost at similar levels.

Is the pace sufficient to cover expanding imports?

The recent sticky remittances levels are concerning in light of expectations of import levels normalizing in the near future. To recall, after a streak of four months with current account surplus, Pakistan’s current account balance turned negative in Jul-2023. Aug-2023 import bill under PBS has already reported a notable rebound, marking a 7-month high bill at US$4.5bn. While some uptick in exports controlled the trade deficit to US$2.1bn, the balance just comes equal to this month’s remittances. Having said that, in-line with historical trend, we do not rule out trade deficit reported under SBP to clock in at lower levels compared to PBS data. To note, PBS trade deficit data usually maintains a higher gap of ~US$350mn to trade deficit data reported by SBP – the relevant datapoint for Current Account, over timing and other reporting differences.

Remittances/NRP critical to track

With the gap between interbank and open market 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$28.5bn, up 6% YoY. However, taking a US$2.1bn monthly remittances average, close to levels reported in the last 11 months, FY24 remittances can total to US$25bn, down 7% YoY, close to our base case.

In terms of sensitivity, every 1% growth in remittance per NRP, maintaining 6% growth in NRPs, yields additional remittances of ~US$300mn/annum – hence the pace of NRP growth and remittance per NRP would be critical to track.