Pakistan’s external account is in trouble: Import figures seen inelastic despite historically low global oil prices – both fuel and edible – while exports are sliding fast. For example, in textiles, Pakistan’s largest industrial sector and traditionally accounting for approximately 12% of GDP, 67% of exports and 57% of national employment, total exports fell 13.50% during period-on-period July to October 2015 over 2014.

What is worse, the three main competitive product categories, Cotton Cloth, Bed Linen and Towels, all lost out heavily to competitors like Bangladesh, Sri Lanka, Vietnam and India, losing volume sales by 10%, 9% & 19% respectively – and this in spite of Pakistan enjoying a zero-duty entry tariff with our largest customer, the EU. The government defense to this rather disturbing phenomenon is simply that we are not an exception since there is global slowdown and other more robust economies are witnessing similar trends. However, what it forgets is that our CAD (current account deficit) represents a structural flaw, whereas this is not the case say with China, India or even Bangladesh. For both China and India imports have been coming faster than exports; India’s volumetric exports have not fallen; and Bangladesh in fact has posted healthy volumetric gains in 2015 and marginal gains in dollar terms in the last quarter. Perhaps the only saving grace for Pakistan has been the healthy rising trend in our foreign remittances being sent home by the non-resident Pakistanis (NRP) living and working abroad, but at heart still romantically connected with their homeland. It will be good to understand this factor in order to avoid a brewing complacency (owing to these inflows) in our economic management.

Points to ponder:

  • What we see is that remittances from the NRP have a strange pattern in that they have never slowed down: not even during the post 2008 financial crises’ recessionary period (UK & USA and the Euro-zone still constitute the bulk of our inflows from the West); nor during the wars in the Middle East or in the period of depressed oil prices (Gulf as we know is now our highest source for NRP remittance inflows). Others have not been so lucky, Philippines, Indonesia, Sri Lanka and Bangladesh have all seen a revenue or growth decline in recent years, and even India, which has a far superior quality-mix of foreign Diaspora, posted a decline last year.
  •  Over the years Gulf has emerged as the prime destination from where we receive our remittances, accounting for nearly $12 billion per annum or about 5% of our total GDP. While theoretically there should be potential to further improve on this figure, since India is at $63 billion, China $62 billion, Philippines $28 billion and Bangladesh $13 billion, it appears that we may in fact have reached our saturation point. India is about 5 times our size so 63/5=12.60 and we are already at 12, but as already mentioned, India’s foreign Diaspora in the Gulf on average earns far more than that of Pakistan, and also that in the days ahead there are visible signs on slowing down of the Gulf economies.
  • A vide number of critics attribute the robust trend in our home remittances and their growing concentration in Gulf to the money whitening endeavors where foreign remittances in Pakistan, even today, are neither taxed nor probed. So the questions that are frequently asked are that, a) what percentage of remittances are not legitimate or unsustainable, i.e. if the whitening scheme is withdrawn? b) Do these un-screened foreign inflows benefit or harm our economy? and c) Should we encourage them or gradually try and reduce our dependence on them? While there are no clear cut answers and there are good arguments on both sides, one feels that in our case - at least in the short-term - prudence and pragmatism needs to prevail, implying
  • Amidst eroding competitiveness and declining exports, the importance of home remittances in our external account equation has increased in recent years, so we should not unnecessarily rock the boat at least not for now!
    - Nearly 25% of the total foreign exchange reserves held by the commercial banks have a weight age of approximately 50% in shape of savings based on the annual remittance-cycle. And given that nearly $3 billion of the liquid foreign fund portfolio held in Pakistan is termed (by Moody’s and S&P) as risk-prone and fluid, the importance of regular and consistent inflow of remittances assumes an even higher significance when assessing the ‘solvency’ of the Pak economy - as we know solvency of an economy tends to be a key element for qualifying for any type of fund program from the likes of IMF, etc.
    - The conscious history of home remittances dates back to the 70s when the PPP government of Mr. Bhutto took up overseas labor employment as a state policy. Over the years as globalization and outsourcing of manufacturing activities took root, it gave a new meaning and impetus to the concept of the ability of markets or countries to deploy and also provide cheap, efficient and headache free labor and services to international and multi-cultured corporations.
    - If the growth trend of remittances continues while coinciding with a declining trend in exports of our manufactured products, the remittances in effect will soon become our main ‘export income’. Till such time that deeper and longer-term economic management issues can be addressed, remittances need to encouraged, albeit with emphasis cum incentives only on genuine transactions.
    - The criticism of brain drain is rather unfair because talent goes where the demand is. The only way to retain talented youngsters is by creating opportunities for them at home and not by denying them their due share in the global job markets. In fact, most countries with non-resident workers and professionals abroad are already finding innovative ways to harness the very networking and linkages of their foreign workers in order to establish win-win synergies for the home country.
    India as we know uses the strength of its NRI to: promote a soft image of India; undertake effective lobbying; establish professional connectivity between Indian organizations and their counterparts abroad; expand its global corporate footprint; and last but not least, transport technology and knowledge back home.
  • Some concerns vis-à-vis Pakistan:
    a) Pakistan’s policy on overseas Pakistanis remains much to be desired. The mistrust between the NRP and successive Pakistani governments over the years has grown, which affects the very nature of home remittances undertaken by them; being more consumption based rather than investment based. Sri Lanka, India, Philippines and China for example have made some landmark efforts to see to it that their foreign Diaspora plays a lead role in spurring employment generating investments at home.
    b) Any real efforts in improving the quality and mix of our outward bound workers seem to be missing. This exercise can significantly increase the earning capacity of individuals, in-turn also increasing the per capita remittance value.
    Lastly, misuse of or inter-mixing of whitening schemes with home remittances (giving rise to untaxed and unaccounted for income) leads to serious issues on artificial heating up of the economy through injected inflation. And we are now seeing this phenomenon un-fold in Pakistan where the rise in real incomes is for example disproportionate to the rise in say real-estate and luxury goods prices. If allowed to remain unchecked for longer periods - as today being the case in Pakistan - such trends lead to widening of the social divide, inequality, creation of an unproductive middle-class, consumption distortions, and a general sense of frustration in the masses leading to dissatisfaction with the state, ultimately resulting in erosion of nationalism. As mentioned above, this perhaps may already be happening in Pakistan. Therefore, it is imperative for us to ensure that foreign remittances are somehow channeled in a way that they are always accounted-for, monitored, and incentivized towards productive investments. India already has a scheme in place to attract its NRI income into government bonds and securities through whitening and tax incentives that accrue after such investments and not before. Such a check if undertaken successfully, will not only ensure that remittances from our non-resident citizens are indeed genuine, but also that they are sustainable in nature and directed towards productive investments that over long-term effectively mitigate the risk of unhealthy reliance on revenues, which in entirety do not belong to the state.