Remittances to Pakistan have been on a decline (down 3.8%YoY in
4MFY17), where recovery following the sharp dip in July16 (-20%YoY) has been
slow to materialize.
Driven by weak global macro dynamics and depressed crude oil prices
the trend remains similar to other regional countries (Bangladesh/India down
9%/14%YoY in CY16TD) which are also considerably reliant on remittance flows.
Going forward, we expect seasonal recovery to keep remittances
marginally higher in FY17. With effects from current trends lingering we
project remittance growth to remain in low single digits over the medium term.
In this context, we highlight room for greater BoP volatility on
weaker trade dynamics. Nonetheless, support to external account is expected to
come in the form of higher foreign debt inflows (multilateral and bond
issuances) driving exchange rate stability and consequently keeping depreciation
pressures on the Pak Rupee limited.
Pakistan emerged more vulnerable in the region due to a weak global
macro outlook impacting remittance flow adversely, with major impact on South
Asian countries that share reliance on remittances (avg. Remittance/GDP ratio:
~10%) for foreign inflows.
Depressed crude prices affecting labor dynamics in GCC region has
been a key driver in this regard where the region receives ~63% (2015 est.) of
all GCC-sourced remittance. Consequently, Bangladesh and India have seen sharp
decline in remittances with flows contracting 9%YoY and 14%YoY in CY16 so far
respectively.
Though initially sturdy, Pakistan is also witnessing a slowdown in
remittances with 4MFY17 inflows declining by 3.8%YoY, where inflows from the
GCC region declined 4.6%YoY in the same period.
However, analysts take it as a bigger concern for Pakistan compared
to regional peers in the backdrop of worsening trade dynamics (trade deficit up
11%YoY in FY16) compared to Bangladesh/India that contracted trade deficits by
9%YoY/10%YoY in FY16. With oil prices unlikely to mark a sharp recovery in the
near-term and slow global demand recovery (UK/European economies), outlook for
remittances remains tepid, where the WB has projected a dip of 2.3% in 2016,
followed by moderate recovery in 2017/18 (2.2%/2.3% growth).
Similar to the region, outlook for remittance to Pakistan remains
subdued where analysts expect flows to stagnate around US$20 billion. Though
currently on a decline, they see room for seasonal recovery near the end of
FY17 - with flows increasing marginally for the year.
Going forward, effects of low oil prices are likely to linger over
the medium term, strong correlation of GCC remittance and oil price decline. On
the other hand, recent dip inflows from US on account of higher transfer costs
is expected to normalize.
In aggregate, remittance growth is projected to remain in single
digits over the medium term. However, key risks remain in the form of further
slowdown from UK/EU region on account of Brexit and concerns emanating from
recent US elections.
Going forward, expanding trade deficit (FY17F: 14%YoY) amid weak
remittance outlook remains a major risk to BoP stability, where analysts see current
account deficit rising to 1.7% of GDP as against 1.2% for FY16).
That said, concerns on exchange rate stability remain limited,
where analysts derive comfort from expected foreign debt inflows (multilateral
commitments and another bond issue planned) keeping foreign exchange reserves position
stable.
This remains a key positive for exchange rate strength, where
stronger foreign exchange reserves position will provide room to counter
current account weakness.
