Pakistan: Remittances continue to be the biggest source of foreign exchange

Remittances have remained high in June 2022. Eid festivity impact was restricted to the month, the inflow of US$2.5 billion depict a higher rate of remittance. Even though remittances were down 9%MoM, analysts expect growth during the year to remain tepid backed by increase in Pakistani worker registration in GCC countries.

As per Board of Emigration and Overseas Employment (BEOE), around 458,000 Pakistanis have expatriated during 7MFY22TD as against 288,000 and 225,000 during FY21 and FY20, respectively. Most of the expatriations have occurred towards Middle East countries which continue to enjoy better macros in a high oil price environment. 

Notwithstanding a better current account deficit (CAD) in July 2022, the overall Balance of Payment (BoP) position was reported at a negative US$1.8 billion. This is largely owing to the absence of financial flows from any country during the month. 

During June 2022, Pakistan received US$2.3 billion deposit from China while in July 2022 external debt repayments of US$748 million eroded foreign exchange reserves.

Pakistan’s monthly CAD nearly halved during the month under review to US$1.2 billion (3.7% of GDP), despite hefty oil payments as the free-fall in Pak Rupee (fall of 17%) continued to act as a key shock absorber, supported by administrative measures that reduced trade deficit to US$3 billion (21%MoM decline). 

Notwithstanding the fizzling out of Eid festivity impact, rate of remittance flows remained steady at US$2.5 billion for July 2022. 

Trend reversal in PBS-SBP import differential was witnessed owing to oil payments where most shipments, at high crack spreads and as under PBS data, were made during July 2022. Adherence to the renewed IMF program is imperative besides administrative measures to conserve energy in order to keep CAD within the targeted level of US$10 billion (3.0% of GDP).

Pakistan is poised to receive US$4 billion under friendly assistance from GCC countries, which will effectively put its external account at an over-financed status.

SBP has already indicated a pause in tightening with a few downside risks from exogenous factors and deviation from the path of fiscal consolidation. While the end of overheating of economy is in sight (June 2023), Pakistan needs stay adequately congruent to the Fund’s stipulations and implement energy conservation drives to reduce oil import bill.

Trade deficit has come off from its fresh peak of US$3.9 billion to US$3.1 billion, largely owing to demand moderation as well as administrative measures on restricting non-essential items, more specifically the CKD imports.

The biggest decline was seen in machinery and transport group. Infrequent trend reversal in the PBS-SBP import difference was also witnessed during the month, which was primarily on account of higher crack spreads booked in prior month and cash transactions being settled in July 2022. This also kept Pakistan’s average cost of oil import higher than oil prices.