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FOLLOWING a relentless air of despondency that pervaded the national psyche for a number of months, there’s finally some good news from the economic perspective: a slight hike in the remittances sent home by Pakistani migrants during February. For a nation grappling with a colossal economic crisis marked by backbreaking inflation, shrinking reserves, and industrial closures, this reassuring development is no less than a breath of fresh air.
Remittances, a lifeline for a nation fighting to avoid the risk of default as foreign financing dries up as a result of the delay in the IMF agreement, have increased by 5%, according to the State Bank’s February data, after reaching a 32-month low in January. However, payments fell by almost 11% to $17.99 billion in the first eight months of this fiscal year.
Market participants attribute the dilemma to the sizeable black market for foreign exchange, the results of an unannounced exchange rate limit, and import restrictions enacted by the government and central bank to slow down dollar outflows.
Due to the enormous disparity in dollar exchange rates between the official and black markets, it is believed that the limit increased the profitability of sending money through illegitimate channels for migrant workers. Remittances through legal routes are increasing as a result of the exchange rate controls that were removed last month as a result of IMF pressure.
Without a question, the exchange rate cap is the primary cause of the drop in remittances. However, record inflation in most developed nations, including the US, UK, and EU nations, drove Pakistanis living there to spend more because of the steep hike in the cost of living and left them with less money to send home. SBP data reveals that, barring the US, imports from almost all major countries have plummeted during the current fiscal.
Over 15% less money has entered the country from Saudi Arabia and the UAE, as well as less than 6% and 8.6% less from the UK and the EU. The issue is whether the government can sustain and increase the “seasonal” growth in remittances in the future. To achieve this, our policymakers will need to stop fiddling with the market-based exchange rate system and crack down on importers who under-invoice their overseas purchases in order to reduce taxes.
These traders are significant buyers of dollars from the black market, including the proprietors of big retail chains. Many poor migrant workers will continue to use illegal channels to transfer money to their relatives for a higher rate if under-declaration of import values is not reined in.