Karachi, December 16, 2022 (PPI-OT): Dissecting the weakening remittances trend
Remittances declined to a 27-month low in Nov-2022 and are on track of a rare trend in Pakistan’s history. The ongoing trend has so far reported a sequential decline for the past three months – a sequential decline of three months or more have only been reported 18 times since 1972 (only 6 being after 2000).
Key reasons we believe for the recent decline are (1) increase in use of informal remittance channels given widening gap between interbank and kerb market exchange rate (reportedly at ~11%) and (2) global monetary tightening making international investment avenues more attractive, reducing allocation of funds sent to the home country.
While remittances are expected to report a negative trend this year, a swing can emit from the expanding NRPs (+7% during 11MCY22). Our base case projections are at US$29bn, down 6% YoY.
Remittances sequentially drop for the third month
Remittances declined to 27-month low in Nov-2022 and is on the trajectory of a rare trend in Pakistan’s history of last 50 years. The trend has been reporting a sequential decline since the past three months, a streak recorded only once since 2010, during Dec-2016 to Feb-2017. The worst sequential record for Pakistan’s remittances growth has been a drop for five consecutive months, recorded only twice since 1972 (in 1984 and 2009/10), while sequential decline of three months or more have only been reported 18 times since 1972 (12 being before 2000).
The ongoing trend has begun to be a cause of concern in the midst of scarce external flows and central bank’s foreign exchange reserves enough to only cover imports of the next 5 weeks or so. From a monthly average of ~US$2.5bn, remittances have of late declined to a monthly average of US$2.2bn (-12%), while 5MFY23 accumulated numbers were recently reported at US$12bn (-10% YoY). This means the country would now need to curtail its trade deficit to US$2.2bn/month (4MFY23 average: US$2.7bn/month) in order to minimize the impact of Current account deficit drain on SBP’s FX reserves.
As remittances from Saudi shrink by 13% YoY
The decline has been led by lower remittances from Saudi Arabia, which is the largest contributor to Pakistan’s remittances. Not only the region has reported a 13% YoY decline during 5MFY23, over time, its share in total remittances has reduced from 29% till FY20 to now 25%. Share of the pie has broadly been taken by Non-Resident Pakistanis (NRPs) based in USA, other GCC countries and EU countries. During the period under review, where all regions report a negative growth, remittances from USA has increased by 4% YoY.
Key reason we believe for the decline has been increase in use of informal channels to remit money in Pakistan on account of widening gap between interbank and kerb market exchange rate. While interbank PKR/US$ rate ranges between 224 – 225, the kerb market rate has been reportedly trading close to 250 (+11%). In addition, monetary tightening around the globe also makes other international investment avenues more attractive for NRPs, reducing allocation of sending funds to home country.
Upside not ruled out as NRPs increase
Remittances are expected to report a negative trend this year over global economic slowdown and higher global inflation. As compared to the head item expected to witness a similar number for FY23 as witnessed in FY22 (US$31bn), our current base case now incorporates a ~6% YoY decline, clocking in at US$29bn for FY23E as we assume the ongoing run rate will continue. Nonetheless, as Non-Resident Pakistanis (NRPs) continue to increase, with 7% expansion during CY22, a rebound cannot be ruled out. The monthly run rate of remittance per NRP (Non-Resident Pakistanis) has declined to US$202/month as compared to the peak of US$223 in CY21. Assuming remittances/NRP bounces back to US$223 in the remaining months of FY23, total remittances for the year may accumulate to US$31bn.