Role of remittances in country’s current account

In current year, inflow of remittances has surpassed level of exports

KARACHI:

Inward remittances have become relatively more important for Pakistan’s external account.

For a foreign currency-starved country like Pakistan, inward remittances are a source of precious inflow of foreign currency which supports its import requirements. This importance of inward remittances requires an analysis.

The role of remittances has evolved over the last 20 years. In 2003, inward remittances were less than half of Pakistan’s exports, however, this year remittances are expected to surpass the level of exports. This trend is enough evidence for understanding the pivotal role that remittances play in the current account of Pakistan.

Now, let’s analyse the source countries of these remittances.

The inward remittances were negligible around the 1970s, however, as Pakistan started sending workers to the Middle East in the same decade, the inflow of remittances increased. A major source of these remittances in the 1980s was Saudi Arabia.

The dominance of workers’ remittances from Saudi Arabia remained paramount till the beginning of the new millennium.

In the early 2000s, the role changed and the US became the major source of inward remittances for Pakistan. After a few years, the role reversed again and increased remittances started pouring in from Saudi Arabia and the United Arab Emirates (UAE).

Since then, the dominance of these two countries has remained unparalleled in the external account of Pakistan. However, for the last two years, remittances from the US and UK have been on a steep declining trend.

In 2020, the same trend continued wherein remittances from Saudi Arabia and the UAE remained dominant and remittances from the US and UK declined recently. During the current year, the remittances have surpassed the level of exports, however, there is a twist in this tale. Expatriate Pakistanis are coming back from the Middle East and they are bringing back the remittances, therefore, these numbers do not appear to be sustainable. This instability in the inflow of remittances is not only a Pakistan-specific phenomenon but developing countries in general are facing the same challenge.

Globally, the remittance flows contracted sharply during the early lockdown period but have shown signs of recovery. Nonetheless, the risk of a decline in payments and transfers from migrant workers back to their home countries is very significant, particularly for countries such as Bangladesh, Egypt, Guatemala, Pakistan, the Philippines, and those in sub-Saharan Africa (the IMF Economic Outlook - October 2020).

Forces at play

There are a lot of forces at play in this remittances saga. The political evolution in the mindset of Arab rulers and gradual phasing out of oil as a trading commodity are important determinants of the current situation.

We will require the help of economists and philosophers in this regard. Karl Marx credited economic impetus as the most important determinant of the course of history, whereas the lust for power has been credited as a more influential impetus by British philosopher Bertrand Russel.

Both of these forces – economic impetus and lust for power – are at play in this great game.

If we dig deep with the help of Einstein’s axe of quantum theory, we come to appreciate that as matter and energy are inter-convertible, the above-mentioned two forces economic impetus (matter) and lust for power (energy) are also two faces of the same coin.

Hence, phasing out of oil and the changing political game in the Middle East is as intertwined as matter and energy in Einstein’s equation.

Freelance work

What can we do in this situation? We need to diversify and put our eggs in different baskets. The easiest could be leveraging the ultimate power of mobile phones and the internet.

Our young and tech-savvy population can do a lot of freelance work and get us precious dollars. These dollars could fill in the prospective gap due to any fall in workers’ remittances in future. There is a huge potential for IT exports. Currently, IT exports are around $1.2 billion and are expected to grow up to $5 billion by 2023, according to the IT minister. This would be a great source of respite.

Furthermore, the sector has the potential to increase exports up to $10 billion by 2025 as per vision of the prime minister.

Even if the above-mentioned numbers seem optimistic, the importance of IT exports and freelance work cannot be over-emphasised.

Policymakers must enable IT exporters and freelancers to get the incentives that the exporters receive including subsidised loans so that they can leverage their companies and capture market share.

The writer is a senior banker and teaches economics

 

 

Published in The Express Tribune, December 28^th, 2020.

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