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Provides a vital cushion to foreign exchange and money market stability
The home remittances by overseas Pakistanis have become a considerable source of external flows, which have provided the much needed cushion to foreign exchange as well as money market as both money and foreign exchange markets exhibited relative tranquility in Pakistan.
While talking to PAGE, Sirajuddin Aziz, President and CEO Habib Metro said that Pakistani banks and other financial institutions engaged with fund transfers have done a great job in facilitating home remittances of Pakistani overseas workers and used the latest technology of transferring funds on-line without charging any transfer fee from the workers and without loss of time. The banks in Pakistan not only providing technology support for fund transfers but also offering rebate to the workers for utilizing their services.
Today, the total liquid foreign reserves held by the country stood at US$20,884.9 million which can be attributed to the growing role of inflows remitted by overseas Pakistanis. These remittances become more important in the face of huge amount of debt servicing, which is estimated at $6 billion per annum according latest figures released by the central bank of Pakistan as well as in view of the declining export earnings due to global slowdown.
Home remittances
It may be noted that the persistent growth in home remittances by overseas Pakistani workers who remitted US$ 12,714.57 million in the first eight months July to February of Financial Year 2016, showing a growth of 6.07 percent compared with US$ 11,986.44 million received during the same period in the preceding year. The current financial year is expected to post a landmark growth in remittance around $18-19 billion this year.
According to details during February 2016, the inflow of worker’s remittances amounted to US$ 1,516.39 million, which is 3.65 percent higher than January 2016 and 6.74 percent higher than February 2015. The country wise details for the month of January 2016 show that inflows from Saudi Arabia, UAE, USA, UK, GCC countries (including Bahrain, Kuwait, Qatar and Oman) and EU countries amounted to $471.94 million, $317.12 million, $212.19 million, $174.66 million, $191.75 million and $28.48 million respectively compared with the inflow of $453.41 million, $319.1 million, $189.63 million, $180.02 million, $168.22 million and $24.17 million respectively in February 2015.
Remittances received from Norway, Switzerland, Australia, Canada, Japan and other countries during February 2016 amounted to $120.25 million together as against $85.99 million received in February 2015.
However the financial relief was also provided by decline in oil prices, and calmer international capital markets improved sentiment in the foreign exchange market.
Interest rate at historic low
Currently the policy rate of the State Bank of Pakistan is at 42 years low thanks to low inflation rate as well as stable foreign exchange reserves. It is because of the stable financial health and low rate of inflation, the central bank has once again kept the policy rate at 6 percent for the next two month in its Monetary Policy review last week. The Monetary Policy Committee of the State Bank of Pakistan has decided to maintain the policy rate at 6.0 percent.
Monetary policy
The Monetary Policy review said that the current trends in inflation indicate pickup in aggregate demand, amid both improved security situation and real incomes. This is reflected in rising demand for consumer durables, acceleration in construction activities, and expansion in services sector. Further, uptick in credit to private sector, mainly owing to lower cost of borrowing, also supports this.
Continuing increase in fixed investments for the fifth quarter remains noteworthy. With positive consumer sentiments and incremental lending rates at considerably lower levels, the uptake in credit to private sector is expected to end FY 2016 on a higher level than that of FY 2015.
Improved business sentiments
At the same time, with improved business sentiments, lower input prices and better energy availability and supply conditions have improved as well. Largely contributed by automobile, cement, and fertilizer sectors, large-scale manufacturing grew by 4.1 percent in July-Jan FY16, compared to 2.5 percent growth in July-Jan FY15. The improving large-scale manufacturing and industrial growth trends are expected to continue despite sector specific issues in steel, paper and board, and sluggish textile sector.
Furthermore, excess stock of major food items and the February 2016 pass-on of lower oil prices to domestic consumers are expected to keep downward pressure on inflation. This is also corroborated by a decline in inflation expectations in the latest wave of IBA-SBP consumer confidence survey.
In line with these developments, both money and foreign exchange markets exhibited relative tranquility in recent months. The cushion provided by decline in oil prices, inflow of remittances, and calmer international capital markets improved sentiments in the foreign exchange market. As a result, in post January 2016 Monetary Policy period, Pakistan rupee has remained stable in the inter-bank market.
Money market
In the money market, volatility in the overnight repo rate was contained. The weighted average overnight repo rate stood at 3 basis points above the policy rate in post January 2016 monetary policy period compared to being 21 basis points above in the post November 2015 monetary policy period. Thus, KIBOR and market interest rates have declined depicting low inflation expectations for an extended period of time.
However, market’s liquidity requirements increased on account of continuing trend in retirement of government debt from SBP through enhanced borrowing from scheduled banks and higher private sector requirements.
Development expenditures
Despite an increase in development expenditures, budget deficit remained manageable in the first half of FY16. The improvement came from containment of current expenditures and sharp increase in tax revenues. Specifically, the uptick of 14.6 percent has been recorded in federal tax revenues during first half of FY16 as compared to the marginal growth of 3.9 percent in the first half of FY15.
Notwithstanding the pickup in quantum of oil imports along with high imports of machinery and transport equipment, trade balance stood at last year’s level in July-Feb FY16. Even with rise in imports of machinery for some time and improvements in domestic conditions, exports continued to decline. However, moderating growth in foreign remittances resulted in marginally narrowing down of the current account deficit.
The increases in net flow of foreign direct investment and net foreign assistance during July-Feb FY16 kept the capital and financial account at nearly the same level as of last year. These developments resulted in keeping the overall balance of payments in surplus during this period and added to the official foreign exchange reserves. These trends are expected to persist and thus the balance of payments outlook for the remaining months of FY16 remains positive.
However, low private capital inflows pose challenge for medium term external sector sustainability.
While the current macroeconomic stability, improved law and order, and China-Pakistan Economic Corridor (CPEC) related investments bode well for the future prospects for foreign direct investments, it is the decline in exports receipts that is worrisome. General weakness in global trade further accentuates this risk. Hence, the current improved domestic environment provides for the necessary conditions to inculcate better value addition and diversify products and markets for sustainable growth of exports.
