August 26, 2023 (MLN): When July's remittances of $2 billion were announced, many dismissed it as marginal non-event despite a 20% decline year on year. What's between the lines is two years ago, Pakistan fetched $2.7bn in the very same month.
Pakistan's economic woes – though blamed for that year's performance – were hardly a problem with the benefit of hindsight. Hence, panic should have spread and is unsurprisingly not jolted policymakers yet.
To put things in perspective, a $700m decline is nearly 1/3rd of the monthly exports of a country housing 240m. Since independence, we have hardly been able to move the needle in exports of goods or services stuck at a paltry 8% of GDP.
This is despite the fact in 24 months, the currency has plunged nearly 50% from PKR 165/USD to PKR 300/USD coupled with a tripling of interest rates from 7% to 22%. The good work of reducing the Trade deficit from $3bn on July 21 to $2bn on July 23. Good work is being undone by evaporating remittances.
Some things need introspection and corrective actions. SBP and Ministry have sprung into action along with investigative agencies to curb speculation and the unwarranted gap between the interbank and open market.
Under IMF, with no ability to squander dollars, it is an open market that would be pulling its weight on interbank rates – the gap of which needs to be 1.25% on average. Interbank will surrender if the open market doesn't. Despite several administrative restrictions and documentation requirement, dollar smuggling and the informal market is thriving.
People sending money back home are still being rated much higher than open, let alone interbank rates. Because in the last 2-4 years, keeping hard cash in USD has proven to be a better asset class than equities, real estate or returns on bank products. The middle and upper classes are scrambling to grab as many greenbacks to preserve their purchasing power. Similarly, families requiring PKR 1 lac per month two years ago, now want 1.5 lacs to sustain similar expenses. Arguably, hence the need to send $500 instead of $650 two years ago.
The situation is dire and needs radical intervention to arrest the decline. Why did the interbank even need to come down to $270s after IMF program – the last token decrease in fuel prices by PDM? – only to race towards triple century. Such two-way unsustainable volatility feeds into confidence crises forcing people to stop investing in Rupee denominated assets.
Rupee depreciation needs to be 1/2 or 1/3rd the fixed income returns offered by the government to nudge people away from dollarization. This would require efforts over 2-3 years.
If depreciation heads back to normal 6-8% per year and closes PKR 325 by June 24, then we have a shot at economic stability. Calls are rising by commentators of PKR at 500/USD in 12 months. Such a doomsday scenario can not be averted by interest rate hikes but by decisive actions to improve trade and fiscal balances.
Otherwise, many people would leave the country again and no, we can wait for brain drain to come back as "brain asset". The time to act is today.
Posted on: 2023-08-26T22:58:00+05:00