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Oil’s collapse and COVID-19 might choke flow of remittances to Pakistan

July 07, 2020 (MLN): The responsiveness of remittances to the international oil prices is a concern for Pakistan’s economy as workers’ remittance flows from GCC countries allow Pakistan to maintain foreign reserves, service debt, and finance capital flight.

Knowing the fact that Gulf sovereigns are mainly dependent on Oil revenues, therefore, higher oil prices instigate more investment and consequently economic growth.

The secret behind this window is their labour force which is mainly composed of foreigners from all over the globe. Due to large migrants in GCC countries, they are the largest remitting countries in terms of percentage of GDP.  

Pakistan, being the receiving country, is much dependent on the significant amount of these monetary flows from GCC countries. Workers’ remittances are the key source of foreign exchange earnings, making up nearly 89% of the secondary income balance during June-May FY20.

It is pertinent to mention that several studies have found out that Pakistan’s workers’ remittances are mainly used for consumption purposes, therefore, they have a nominal impact on investment.

If we start tracing back the Pakistan monetary inflows, we see that in times of Global Financial Crisis (GFC) 2008, instigated by Subprime mortgage crisis, there is no such decline in remittance despite the ending of the remarkable boom period of oil, toppling oil price of $147 a barrel in July 2008 to a low of $33 per barrel in February 2009.

One of the reasons is the most migrant Pakistani workers are employed in GCC countries who thankfully were not affected by this crisis as expatriates of the US, Europe and Canada were affected most. However, the illustration shows that the remittances received by Pakistan witnessed no such decline with the effects of an oil price shock given the fact that most migrant workers are employed in GCC countries.

Back in 2014-15, Brent oil prices declined sharply owing to a growing supply glut from a peak of US$115.06 per barrel in June 2014 to a low of US$28.55 a barrel in January 2016.

Beneath the surface, we see the dynamics of GCC countries started shifting rapidly as nationalist sentiments grew in that region due to economic slowdown on the back of a plunge in oil which resulted in a significant decline in the number of Pakistan’s migrant workers, shown in the graph below.

But surprisingly, remittances grew steadily in that period too owing to strong fiscal austerity. Saudi Arabia and other GCC countries could withstand low prices; they took advantage of this free-fall in order to get long term benefits than giving up market share.

Today, GCC countries face a double whammy in the form of COVID-19 pandemic and crashing oil prices, which would affect the Foreign direct investment, remittances, export of labour and grants received by Pakistan.

The main worry during coronavirus pandemic will be the volatility of remittances from the Gulf Countries as they are feeling the pinch of lower oil prices, which have slowed down real economic activities due to fiscal deficit looms, illustrating in the above graph. Moreover, the accommodation of the retuning workers due to massive layoffs at this unprecedented time is another challenge for the federal government.

Keeping in view the latest development, Pakistan will likely see a drop in remittances from the USA as well, the second-largest remitting country, as an exponential increase in virus cases in US, led to a rise in layoff and unemployment rate during coronavirus outbreak.

While facing macroeconomic challenges, one must not forget about the impact of remittances on the exchange rate. In literature, it has been found that substantial inflows of remittances appreciate the exchange rate of the recipient country and hurt the export sector through the so-called Dutch disease; the domestic currency appreciation makes exports more expensive and imports cheaper, affecting the country’s trade balance.

However, this evidence is harder to find in the case of Pakistan. The domestic currency, PKR continues to weaken against the dollar since March’20 in the wake of the economic slowdown caused by pandemic despite the significant volume of remittances, displayed in the graph below.

If remittances from GCC countries and the USA take a hit in the coming months on an account of coronavirus, it will cause in the decline of foreign exchange reserves. Conversely, the PKR will further depreciate against the dollar.

Another factor which will affect remittances flows in the coming month is the temporary workforce reduction during Hajj and Umrah seasons as Saudi Arabia announced that only 1000 pilgrims will perform the annual Hajj this year due to coronavirus pandemic.

This religious annual ritual is a key source of income, generating nearly $12 billion, contributing 2% of Saudi’s GDP. A limited Hajj this year would cost a lot to Saudi’s economy and deliver a blow to the remittances flows to Pakistan, sent by expatriates who wait for this season to increase their earnings.

To stabilize output, some of the GCC sovereigns will likely preserve their fiscal and credit strength if a low oil price environment will likely to persist for long, according to the rating agency Moody’s. Further, some Gulf countries announced spending cuts in the form of overseas grants and aid payments.

Considering millions of Pakistanis employed in Gulf countries, there still exists inequality between the amount received and workers present when compared to the other South Asian countries. It is imperative to formulate a comprehensive policy to revitalize its existing workforce and make it more competitive in terms of working labour from other countries. The issue to lighten the burden of remittances requires great attention at the federal level. The procedural hurdles like high transfer cost even attached to a small amount of money must be removed to accelerate the influx of remittances through formal channels by bringing all relevant authorities on board.

Copyright Mettis Link News


Posted on: 2020-07-07T12:07:00+05:00


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