Remittance bonanza

The upbeat momentum of home remittances continues. The less travel and state level pressure to curb on informal sources along with carrots for the formal channels is resulting in the 24 percent growth in remittances in Jul20-Jan21 (7MFY21). The average monthly remittances stood at $2.35 billion. The toll is at $2.27 billion in Jan21- up by 19 percent YoY.

The bonanza is evident as well in Bangladesh where the growth in Jul20-Jan21 is at 35 percent. The situation of less travel and conversion to formal sector is same in both countries. It appears that the informal chunk in Bangladesh was higher; therefore, there was higher growth in formal sector. The expats in Bangladesh are active in stock and real estate markets. In one telecom IPO there, around 35,000 new foreign accounts were opened out of total 200,000. One may think, how much liquidity Mobilink or other two big telcos can attract in Pakistan, if they decide for listing.

Many are inquiring about how long this higher remittance flow will continue in Pakistan. One can safely say that till travel is low, this higher flow will persist. It appears that in Feb21 (to-date) the inflows are better than Jan21. This is evident by the oversupply of foreign currency in the interbank market despite growing trade deficit. There is a general view amongst bankers and exporters that the currency may depreciate by a few percentage points due to growing oil prices and overall import bill. But the currency appreciated a little last week due to better remittances flow. However, yesterday, sudden jump in oil resulted in currency to depreciate a little.

The growth in remittances varies significantly across different jurisdiction. People are sending relatively higher amounts from US, UK and EU – the combined growth from these countries is at 48 percent in 7MFY21. The growth from Saudi Arabia (KSA) is at 22 percent – the flows are at $4,509 million. The story of UAE and other GCC countries (minus KSA and UAE) is rather dismal –up by 6 percent.

KSA is the biggest contributor to the home remittances in Pakistan. The travel to KSA is one of the highest due Hajj and Umrah. A general perception is that many people used to send cash through friends and family travelers back to their immediate family members. Then hundi/hawala people used to go abroad to get cash for local demand. Then Hundi/hawalaalso offset under invoicing and smuggling through remittances. All these are limited due to less travel.

Many workers in KSA are from low and low middle-income strata. Families here don’t have formal bank accounts and they prefer cash transactions. The other preferred way is to send through hundi/hawala. The recipients in Pakistan get cash. These people are probably using banking and other formal channels for the first time due to Covid.

However, the growth from UAE and other GCCs is low. The less travel is the case there too. Unlike, KSA not many low and low middle-income people travel for tourism in these countries. The other reason for low growth from UAE could be that hundi/hawala business is still somehow active. The third reason could be that workers arecoming back from UAE due to job loss.

Higher growth from the West is surprising for some. The general perception was that hundi/hawala was less in the West. But the numbers are showing a different picture. The restrictive cash movement from there – by travelers, is surely one reason for higher growth in remittances from the US, UK and EU. Travel restrictions in West are more than that in UAE – people are traveling to UAE; but not to the West as such.

All these are conjectures. Banks and SBP are not even clear on what is triggering this growth. Nonetheless, everyone is happy with growth. The question is what would happen when travel returns to normalcy. Some say that global travel would see a new normal after COVID – less than before. Those who have moved to formal channels may continue to remain. It’s a question of consumer behavior. Only time would tell.