Pakistan Economy: Remittances rise to record level in June
- Remittances in June rose an impressive 49% yoy to US$2.5bn – also the highest monthly inflow ever recorded.
- Contributing factors were many: Lifting of lockdowns globally, return of laid-off expats, and Eid-ul- Azha in July.
- We expect remittances to decline August onwards, but the fallout in the external account will be moderate.
Balance of Payment: Remittances rise to a record level in June
Remittances in June 2020 rose an astounding 49% yoy (up 31% mom) to US$2.5bn, which is also the highest monthly inflow ever recorded. This took FY20 total remittances to US$23.1bn, up 6.5% yoy. A number of positive factors during June led to the surprise increase, defying expectations of a sharp decline amid the coronavirus pandemic (World Bank assumes 20% yoy decline in global remittances in 2020).
Key factors leading to the sharp jump include:
- Lifting of lockdowns globally allowed Pakistanis abroad to send the money they would have sent earlier.
- Expats sending money to families in Pakistan to support them against the health and economic effects of the pandemic.
- Laid off workers returning to Pakistan with their savings. Note that air travel had resumed in May/June both in Pakistan and globally. Many of them would be blue-collar workers returning from the GCC.
- Eid-ul-Azha falls in July (money sent for the sacrifice of animal).
- Cancellation of Hajj pilgrimage for most people led to the return of money (set aside for it) from Saudi Arabia.
- The SBP also attributes the reducing of threshold to avoid fees for small remitters from US$200 to US$100.
The trend was broad-based, with inflows from most of the major sources rising 50% yoy or more during June. Remittances from Saudi Arabia (c.23% of total in FY20) are 85% higher yoy, while those from the US and UK are up 63% yoy and 49% yoy respectively.
The 6.5% yoy growth in remittances in FY20 is thus unexpected. Notably, flows from the two largest sources – Saudi Arabia and UAE – grew 9% yoy (because of June flows) and only 1% yoy – as they were hard hit by the pandemic (lower international crude oil prices and tourism in these countries). Flows from both were up 5% yoy during the July-March period (before the pandemic). Meanwhile, flows from the US rose an impressive 24% yoy during FY20.
Outlook
We think remittances to Pakistan will likely normalise in the coming months to less than US$2.0bn (July flows may remain healthy due to Eid). Flows from August onwards will depict the true extent of damage inflicted by the pandemic, where yoy declines could be 10% or more. Note that the pandemic is still raging in the US and the threat of second wave has kept economic activity below par in many other countries. Having said that, potentially less-than-expected decline in exports and further imports compression will likely offset the decline in remittances during FY21f, in our view.
The SBP’s Forex reserves recently rose to US$12bn again (a pre-pandemic level; better than 3mth import cover) thanks to significant debt inflows from multilateral agencies and Chinese banks. The sharp rise in remittances was also a key factor. These flows will likely stabilize the PKR in the coming months, which had depreciated 3% against the US$ in June 2020.
No surprise considering the amount of poverty PM Imran Khan's Government has imposed on the nation.
So cruel and evil.
