Sunday, December 29, 2019

Pakistan's Year 2019 in Review: Economic and Security Challenges

Pakistan started the year 2019 in the midst of a very serious economic crisis with very high twin deficits and extremely low foreign exchange reserves. While Pakistan's internal security challenges subsided, the external security concerns grew with India's attack on Balakot in 2019. Tough actions by PTI government have started to pay off at the end of year 2019.  Toward the end of the year, Pakistan's twin deficits declined substantially and credit rating agency Moody's upgraded Pakistan's outlook from negative to stable. Mass migration continued both within and outside Pakistan. About 600,000 Pakistanis went to work overseas in 2019. And at least 4 times more Pakistanis moved from rural to urban areas.  Pakistan had high profile visits of the royal families from the UK and the Netherlands as well as the visit of the Sri Lankan cricket team, the first foreign team to play test series in Pakistan in a decade. Conde Nast Travel picked Pakistan as the top tourism destination for 2020. Regional security situation worsened with Indian and Kashmiri Muslims facing the threat of genocide at the hands of newly re-elected Indian government of Hindu fanatic Prime Minister Narendra Modi.

Economic Crisis:

The year 2019 began with Pakistan battling massive twin deficits, deteriorating foreign currency reserves, low exports, diminishing tax revenues, a weak currency, unsustainable external debt payments, and soaring sovereign debt. This crisis has forced the country to seek IMF (International Monetary Fund) bailout, the 13th such request in Pakistan's 72 year history.

Tough actions by PTI government have started to pay off at the end of year 2019.  In October 2019, Pakistan saw a monthly trade surplus of $99 million, its first in decades. Pakistan's exports in November 2019  jumped 9.6% to $2.02 billion while imports dropped 17.53% to $3.815 billion over corresponding month of last year, the Ministry of Commerce data showed.

Pakistan Trade Data 2019

In December 2019, IMF's Pakistan representative Maria Teresa Daban Sanchez said as follows: “Pakistan has put behind its difficult years of security. Now, it is time for the business community and society in general to enjoy this new time and to really unleash the potential of Pakistan.”

Moody's credit rating agency upgraded Pakistan's outlook from negative to stable as the year 2019 came to a close.

Security Challenge:

While newly elected PTI government was still dealing with the economy, the Indian Air Force entered Pakistani airspace and dropped bombs in Balakot on the orders of India's far-right Prime Minister Narendra Modi. The Indian action drew strong Pakistani response with Pakistan Air Force crossing the Line of Control in Kashmir and shooting down two Indian fighter jets.  Pakistan also captured an Indian fighter pilot shot down down in Azad Kashmir. It was Pakistani Prime Minister Imran Khan's deft handling of the regional crisis that prevented further escalation into a full-blown India-Pakistan war that could have gone nuclear. The year 2019 ended with Pakistani economy stabilizing and Indian and Kashmiri Muslims facing the threat of genocide at the hands of newly re-elected Indian government of Hindu fanatic Prime Minister Narendra Modi.

The Indian action drew strong Pakistani response with Pakistan Air Force crossing the Line of Control in Kashmir and shooting down two Indian fighter jets.  Pakistan also captured an Indian fighter pilot shot down down in Azad Kashmir. It was Pakistani Prime Minister Imran Khan's deft handling of the regional crisis that prevented further escalation into a full-blown India-Pakistan war that could have gone nuclear. The year 2019 ended with Pakistani economy stabilizing and Indian and Kashmiri Muslims facing the threat of genocide at the hands of newly re-elected Indian government of Hindu fanatic Prime Minister Narendra Modi.

Source: South Asia Terrorism Portal

Pakistan saw lowest terror related fatalities in a decade with 228 deaths in the first half of 2019. This is a huge improvement from 2009 when Pakistan had nearly 12,000 deaths in terrorism related incidents.

Source: Conde Nast Traveller 

Improved security helped Pakistan earn number one spot among top tourism destinations picked by Conde Nast Travel magazine.  Pakistan hosted Prince William and his wife Kate Middleton as well as Queen Maxima of the Netherlands among other top foreign dignitaries. In December, Pakistan had its first cricket test series at home in a decade with the visit of the Sri Lankan cricket team.

International Relations:

Pakistan's relations with India sank to a new low when Prime Minister Narendra Modi ordered bombing of Balakot in February 2019 and Pakistan responded by crossing the Line of Control and shooting down two Indian fighter jets in Kashmir and capturing an Indian pilot.  It was Pakistani Prime Minister Imran Khan's deft handling of the regional crisis that prevented further escalation into a full-blown India-Pakistan war that could have gone nuclear. The year 2019 ended with Pakistani economy stabilizing and Indian and Kashmiri Muslims facing the threat of genocide at the hands of newly re-elected Indian government of Hindu fanatic Prime Minister Narendra Modi.

Prime Minister Imran Khan's visit to the White House and meeting with President Trump helped warm up ties with the United States. Speaking with the media in a joint press conference with Prime Minister Imran Khan in the Oval Office, President Trump said: "It's my honor to have the very popular and great athlete, the Prime Minister of Pakistan at White House". The President added that Pakistan was helping the US to "extricate" US troops from Afghanistan, through political negotiations.

Prime Minister Imran Khan's rally drew nearly 30,000 Pakistani-Americans to Capital One Arena on Sunday, July 21, 2019. It was the largest ever public gathering of any diaspora to welcome a foreign visiting leader in the United States until the more recent Howdy Modi rally in Houston that drew nearly 60,000 people. Earlier record of 18,000 was set by Indian Prime Minister Narendra Modi's rally at New York City's Madison Square Garden in 2014.

China, Saudi Arabia and United Arab Emirates maintained close ties with Pakistan and offered valuable assistance to Islamabad to deal with its economic difficulties. United States and the European Union (EU) nations also supported IMF's bailout of Pakistan.

Massive Migration:

Nearly 600,000 Pakistanis went overseas for work in the first 11 months of 2019, according to figures recently released by Pakistan Bureau of Emigration and Overseas Employment. This phenomenon helped contain unemployment in a country where about 2 million young people are entering the job market each year. It has also helped remittances soar nearly 21X to nearly $21 billion since the year 2000.

Emigrants From Pakistan 1990-2019. Source: Pakistan Bureau of Emigration


Pakistan is in the midst massive migration, both internal and external. Over half a million Pakistanis are migrating overseas while about 2 million are migrating internally from rural to urban areas. These trends are transforming the nation. Overseas remittances are soaring. Pakistan is becoming more urban. The country is also seeing growing foreign cultural influences from both the West and the Middle East.

Summary:

Pakistan faced serious economic and security challenges in 2019. While Pakistan's internal security challenges subsided, the external security concerns grew with India's attack on Balakot in 2019. Tough actions by PTI government have started to pay off at the end of year 2019.  Toward the end of the year, Pakistan's twin deficits declined substantially and credit rating agency Moody's upgraded Pakistan's outlook from negative to stable. Mass migration continued both within and outside Pakistan. About 600,000 Pakistanis went to work overseas in 2019. And at least 4 times more Pakistanis moved from rural to urban areas.  Pakistan had high profile visits of the royal families from the UK and the Netherlands as well as the visit of the Sri Lankan cricket team, the first foreign team to play test series in Pakistan in a decade. Conde Nast Travel picked Pakistan as the top tourism destination for 2020. Regional security situation worsened with Indian and Kashmiri Muslims facing the threat of genocide at the hands of newly re-elected Indian government of Hindu fanatic Prime Minister Narendra Modi.

Related Links:

Haq's Musings

South Asia Investor Review

Pakistan's Debt Crisis

India's Attack on Balakot and Pakistan's Response

Internal and External Mass Migration in Pakistan

Retired Justice Katju: Dark Clouds Over India

Pakistan Tourism Boom

Digital BRI: China and Pakistan Building Fiber, 5G Networks

LNG Imports in Pakistan

Growing Water Scarcity in Pakistan

China-Pakistan Economic Corridor

Ownership of Appliances and Vehicles in Pakistan

CPEC Transforming Pakistan

Pakistan's $20 Billion Tourism Industry Boom

Riaz Haq's YouTube Channel

PakAlumni Social Network

8 comments:

Riaz Haq said...

#PAKISTAN SEES 31% DROP IN #TERRORISM-RELATED FATALITIES IN 2019. Of the total fatalities, 332 were civilians, 193 security and government officials, and 154 militants. #security https://www.newsweekpakistan.com/pakistan-sees-31-drop-in-terror-related-fatalities/

Pakistan in 2019 saw a nearly 31 percent drop, year-on-year, in terror and counter-terror related fatalities, according to a study released by the independent Center for Research and Security Studies (CRSS).

Using data compiled through media reports and independent monitors, the think-tank announced that in the past year restive Balochistan province remained the most affected by militancy and insurgency. Despite this, it said, it witnessed the largest drop in fatalities—44.2 percent—going from 405 in 2018 to 226 in 2019. Similarly, almost all regions witnessed a drop in fatalities caused by terror or counter-terror-related actions.

In Khyber-Pakhtunkhwa province, there was a 39 percent drop in fatalities, with the region seeing 156 deaths in 2018 against 148 in 2019; Punjab dropped by 11.8 percent, going from 93 to 82; Sindh saw a 19.1 percent decline from 121 to 98; Gilgit-Baltistan went from 7 to 0; the Federally Administered Tribal Areas dropped from 192 to 117, a 39 percent drop. The federal capital was the only monitored territory to see an increase in fatalities, going from 6 in 2018 to 7 in 2019—a jump of 16.67 percent. In total, 679 people died of terror- or counter-terror-related actions in 2019, against 980 last year.

Detailing the breakdown of the terror attacks nationwide last year, the CRSS reported that there were around 370 such incidents in 2019, as compared to almost 400 a year earlier. A major reason for the plunging fatalities, notes CRSS, is the decline in suicide attacks. In 2018, there were 26 such assaults, resulting in 295 deaths; in 2019, they dropped to 9, with 56 deaths.

Examining the breakdown by month, the most violent period of 2019 was May, with 82 fatalities. The ‘safest’ month proved to be December, with 31 fatalities.

Despite the declines, CRSS warned that civilians remained the most vulnerable to terror. Of the total fatalities, 332 were civilians, 193 security and government officials, and 154 militants.

The CRSS maintained that one of the causes of bringing militancy under control was the arrest of members of various banned outfits throughout the year. In total, says the think-tank, 141 militants were arrested of whom 32 belonged to the TTP; 24 to Jaish-e-Mohammed; 2 to Jamaatud Dawaa; 11 to Lashkar-e-Jhangvi; 3 to Al Qaeda in the Indian Subcontinent; 4 to I.S.; 2 to the Balochistan Liberation Army; and 5 to the Baloch Republican Army.

Significantly, noted the think-tank, there were no drone strikes anywhere in Pakistan in the past year. This marked the first year since 2004 that there has been no U.S. drone attack on Pakistani soil, it added.

Of the perpetrators of terror attacks, the annual report noted that it was primarily the Tehreek-e-Taliban Pakistan and Islamic State that were claiming responsibility for such incidents. In 2019, I.S. claimed one attack, while TTP and its splinter groups, Hizbul Tahrir and Jamaatul Ahrar, claimed 12.

Both Chief of Army Staff Gen. Qamar Javed Bajwa and Prime Minister Imran Khan have repeatedly said that Pakistan’s security situation is improving and is on track for enduring peace. This peace is essential for facilitating economic activity, and will help the country overcome the crises facing it.

Riaz Haq said...

#UAE Fund Allocates $200 Million to Support Small and Medium Businesses in #Pakistan. Prince Sheikh Mohammed bin Zayed al-Nahyan, instructed Khalifa Fund for Enterprise Development to allocate the funds after meeting with PM #ImranKhan in #Islamabad.
https://nyti.ms/2QIldPt

The de facto United Arab Emirates ruler, Abu Dhabi Crown Prince Sheikh Mohammed bin Zayed al-Nahyan, instructed the Khalifa Fund for Enterprise Development to allocate $200 million to support small and medium economic projects in Pakistan, state news agency reported on Thursday.

The Crown Prince is in Islamabad where he met Prime Minister Imran Khan, and the two discussed "regional and international issues of mutual interest as well as ways to enhance bilateral ties," according to Sheikh Mohammed's tweet earlier in the day.

(Reporting by Tuqa Khalid, Editing by William Maclean)

Riaz Haq said...

#CAA_NRC_Protest: Why is Narendra #Modi so obsessed with #Pakistan? And why should Modi care more about minorities in Pakistan than the #Muslims of #India currently facing unprecedented brutality in #UttarPradesh under #Yogi #Adityanath’s govt. #Hindutva https://gn24.ae/9348027c8a2e000


The Modi government’s singular obsession with Pakistan has got the hyphen with Pakistan back. Says a senior foreign office official wryly: “Our institutional memory should remind us that all governments worked hard to ensure that the world should stop the hyphenation of India with Pakistan. Now the Modi government only compares us to Pakistan.”

The Modi government’s Pakistan obsession is puzzling. Modi said at a rally that the Opposition and students protesting against the CAA and its bigoted twin the NRC, should protest against the way the minorities are treated in Pakistan.
----------------------

The Narendra Modi government’s controversial domestic actions such as the religious filter in the proposed National Register for Citizens (NRC), the abrupt removal of Jammu and Kashmir’s special status and whittling down India’s only Muslim state to a municipality are finally beginning to have international consequences.

The world is wondering that with the application of a religious filter to policy decisions can India still be called a secular republic?

How has the world’s largest democracy (our prized tag) snuffed out the Internet and democracy in Kashmir?

Indulge me when I tell you about a phone call I got from the fiery young Iltija Mufti, the daughter of Mehbooba Mufti, former chief minister of Jammu and Kashmir. Mufti along with two other former chief ministers, Omar Abdullah, and his father, 83-year-old Farooq Abdullah, have now been in detention for five months.

A tearful Iltija told me that she had been detained in her Srinagar home and was not being allowed to visit the grave of her grandfather Mufti Mohamed Sayeed, also a former chief minister of Jammu and Kashmir.

Iltija asked me: “What is my crime? Was I going to throw stones? Is it a sin to want to seek comfort from my family when my mother has been detained for five months? They will never release her. My mother will die.”

The brave firebrand I know was openly sobbing on the phone gulping down her tears.

I felt stricken -- unable to offer her any comfort. What could I say? What reassurance could I offer a daughter about her mother in detention for months.

Riaz Haq said...

Central Bank Quarterly Report: #Pakistan #economic stabilization process picked up momentum in Q1 of FY2020. Currency devaluation helped #exports. Likely to miss #GDP growth target of 4% in FY2020. http://www.sbp.org.pk/press/2020/Pr-06-Jan-20.pdf

In case of GDP, the report noted that the revised estimates for the kharif season suggest that the production
of important crops is likely to fall short of target for FY20. The large-scale manufacturing sector witnessed a
decline of 5.9 percent in Q1-FY20 on YoY basis. This contraction was broad-based, as construction-allied
industries, petroleum and automobile industries continued on downward path. In contrast, previous
corrections in the exchange rate helped the export-oriented industries, as reflected in the relatively better
performance of textiles and leather. On balance, however, achieving the real GDP growth target of 4 percent
appears unlikely.
The report further highlighted that the average headline CPI inflation reached 11.5 percent in Q1-FY20,
extending the steep upward trend persistent since the beginning of FY19. Not only this level was double the
inflation observed in the same quarter last year, it was also the highest level of quarterly inflation since Q4-
FY12. This outcome was attributed to the lagged pass-through of the exchange rate depreciation towards the
end of FY19; rationalization of energy tariffs; and revenue-led fiscal measures taken in the budget 2019-20,
which included the imposition of federal excise duty on a number of consumer items, and the ending of the
zero-rating regime for export-oriented sectors and of the reduced GST regime on sugar.
On the external front, the balance of payments continued to improve during Q1-FY20. Beside significant
improvement in trade deficit, and with the receipt of the first EFF tranche from the IMF and increase in foreign
portfolio investment, the current account gap was plugged by the available financial flows. These inflows also
helped the SBP to increase its foreign exchange reserves by US$ 656.2 million and reduce its net forward
liabilities by US$ 1.3 billion during the quarter.
Going forward, the report emphasizes, it is vital that the government continues to address the underlying
structural vulnerabilities and put the economy on a balanced and sustainable growth trajectory. Furthermore,
there is a need to build on gains on the ease of doing business front. Side by side, it is equally important for
firms to leverage on the facilitative policies, particularly the export-promotion incentives, and gain a foothold
in the global value chains (GVCs). As mentioned in a separate special section in the report, increased
participation in the GVCs would not only align the country’s product mix with trends in global demand, but
also put the exports on a sustainable growth path.
**

Riaz Haq said...

#Pakistan sees #FTA with #China, Belt and Road as path to recovery. #CPEC has entered a new phase, focusing not only on #energy and #infrastructure but also #industrialization and #socioeconomic development, and #modernization of #agriculture and #tourism https://asia.nikkei.com/Editor-s-Picks/Interview/Pakistan-sees-FTA-with-China-Belt-and-Road-as-path-to-recovery

On Jan. 1, the second phase of the Pakistan-China free trade agreement kicked-off. According to the minister, the first phase "resulted in a huge trade deficit in Pakistan," but the country recognized the need to correct the problem. "Under [the second phase], we can export 313 new items -- especially textile, surgical instruments, sportswear and agricultural products -- to China with zero duties."

Pakistan expects the new phase of the FTA will increase exports by $500 million to $600 million.

The 38-year-old minister noted other bright spots in the economy, saying that "tax revenues in July-November 2019 rose 17% from last year," driving down the current-account deficit by 73% in the same period.

Continuing on the upbeat note, Azhar said that Pakistan rose in the World Bank's Ease of Doing Business ranking to 108th, up 28 places from last year. He also pointed out that foreign portfolio investment has returned after three years, and that the benchmark stock index Karachi Stock Exchange 100, rallied 11,000 points in five months, hitting the 40,000 mark.

Furthermore, ratings agency Moody's upgraded Pakistan's outlook in December 2019 from Negative to Stable, based on a positive evaluation of policy changes and improvement in the country's balance of payments.

"The Pakistani economy has been stabilizing since last year," Azhar said. "Once we've completed stabilization, then we'll shift gears and enter a higher growth phase from [fiscal 2021]. I think we're out of the economic crisis."

Regarding GDP growth next year, the minister said it "depends on whether inflation and interest rates come down, but it will be certainly higher than the current fiscal year."

However, Pakistan is not yet out of the woods. Retail inflation in November was 12.7%. In addition, due to servicing a $6 billion bailout package from the IMF, the country had to hike gas and power tariffs. Inflationary pressure remains high.

"Most of the inflation is in food, and is seasonal. 20% to 25% of our economy is based on agriculture," Azhar explained, adding that suspending trade with India affected food prices. To reverse the trend, the minister stated that "our cabinet is already considering to lift the import embargo on medicines and essential items from India."

Pakistan also needs to increase tax revenues, partly by improving domestic tax collection. "Despite [declining] imports, tax collection is rising," he said. "If you look at domestic tax collection, it's growing at close to 25% to 30%."

The minister added that the government is becoming more aggressive in its approach. "We're using the latest technologies to track the flow of money and [guarding against] smuggling."

Pakistan's industry lobbies are chiming in with more demands for business-friendly policies to promote investment. They also want custom duties lowered and more government incentives. Last December, import duties on cotton were slashed to help the country's textile industry. In addition, Azhar has promised to increase lending to small and medium-sized enterprises, which contribute almost 40% to Pakistan's GDP.

Riaz Haq said...

Credit Suisse Wealth Report 2019:


https://www.credit-suisse.com/about-us/en/reports-research/global-wealth-report.html



Interesting facts and figures
~361
trillion USD - global wealth in 2019
~47
million millionaires worldwide
70849
USD - average 2019 wealth per adult in 2019
459
trillion USD - global wealth by 2024

Winners and losers among countries

Comparing total wealth gains and losses across the most important countries, the United States (USD 3.8 trillion) again leads the way by a considerable margin, continuing an astonishing spell that has seen wealth per adult increase each year since 2008 (however, even the United States is not immune to temporary blips: wealth per adult fell by 2% during the latter half of 2018, then recovered during the first half of 2019). China (USD 1.9 trillion) is in second place again, followed by Japan (USD 930 billion), India (USD 625 billion), and Brazil (USD 312 billion). The main losses occurred in Australia (down USD 443 billion), Turkey (down USD 257 billion) and Pakistan (down USD 141 billion).


Viewed in terms of wealth per adult, Switzerland tops the winners (up USD 17,790) followed by the United States (USD 11,980), Japan (USD 9,180) and the Netherlands (USD 9,160): see Figure 2. The main loser was Australia (down USD 28,670), with other significant losses in Norway (down USD 7,520), Turkey (down USD 5,230) and Belgium (down USD 4,330).

------------


Emerging Markets refer to China plus Argentina, Brazil, Chile, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, Taiwan (Chinese Taipei), Thailand, Turkey and United Arab Emirates. To avoid double count- ing, countries in this list are excluded from
the “Europe” and “High-Income Asia-Pacific” categories.

Riaz Haq said...

#Moodys: #Remittance growth good for #Pakistani #banks. Bullish on remittances to Pakistan by #tech-driven ease in funds transfer, lower wire cost, hints at inability of Pakistani banking sector to move money without the help of expensive wire services. https://www.thenews.com.pk/print/615485-remittance-growth-credit-positive-for-pakistani-banks

Rating agency Moody’s has termed growth in remittances in Pakistan as credit positive for banks, saying foreign inflows improve their access to low-cost and stable deposits.

Moody’s, citing the State Bank of Pakistan’s (SBP) data, said workers’ remittances showed a 4pc year-on-year increase in the monthly average so far during the current fiscal year of 2019/20.

“This increase is credit positive for Pakistani banks because it supports deposit flows and strengthens households’ finances,” Moody’s Investors Service said in its credit outlook report.


During the fiscal 2012/19 period, remittances grew at a compounded annual rate of nearly nine percent, with the majority of inflows arriving from gulf cooperation council countries – 54pc of total remittances in 2019 –, followed by the US (16pc), the UK (16pc) and Malaysia (7pc). Remittances have grown even more, in terms of local currency, because the rupee has depreciated by more than 40 percent over this period, although the US dollar/rupee exchange rate has experienced significantly less volatility since mid-2019, Moody’s said.

Moody’s said the high levels of remittances contributed to a reported double-digit growth in residents’ household deposits. “Such growth benefits Pakistani banks by providing a stable and low-cost deposit base, which in turn enhances banks’ profitability and increases their liquidity buffers,” it said. “The growth will also help mitigate the effect of government deposit outflows from the potential introduction of a treasury single account that will require government deposits to be placed with the SBP instead.”

Moody’s is bullish on continued surge in remittances to Pakistan due to technology-driven ease in funds transfer and reduction in wire cost.

“We expect further growth in remittances, despite subdued growth in developed markets over the outlook period because of technological advances and the Pakistani authorities' focus on remittances and digitisation, which will further reduce the cost of repatriating funds,” it said.

Moody’s said increased remittances also support households’ disposable income and borrowers’ repayment capacity, mitigating the challenges posed by high interest rates.

“Households are better positioned to meet their financial obligations with banks and have historically maintained low nonperforming loan (NPLs) levels despite challenging conditions for borrowers,” it said. “Consumer NPLs accounted for 5pc of total consumer loans as of the end of September 2019, while the system average NPL ratio was 8.8pc.”

Moody’s expected a gradual increase in the ‘historically-low’ demand for personal credit and support to financial inclusion owing to increase in income. Personal credit accounted for 12pc of total private sector credit extended by banks as of December-end 2019, it said, citing the SBP’s data.

“Also, as households accumulate sufficient funds we expect them to overcome one of the main factors for financial exclusion and access a variety of banking products beyond loan services,” it added.

Moody’s, however, hinted at inability of Pakistani banking sector in carrying out remittances without the help of wire services.

“Domestic banks’ ability to offer this service on a stand-alone basis is constrained by their insufficient presence overseas,” it said. “Pakistani authorities have made continuous efforts to facilitate the faster and cheaper flow of remittances with efficient end-to-end use through increasing the number of channels and offering appropriate guidance.” Currently, remittance and payment service providers, through collaborations with commercial banks, primarily carry out remittances in Pakistan.

Riaz Haq said...

Fitch has warned of decline in remittances amid the #Coronavirus shock. But #remittances have been robust in #Pakistan and Bangladesh. ADB says 14% of households in #Bangladesh, 8% in #Philippines, 4% in Pakistan and 2% in #India receive remittance income. https://www.fitchratings.com/research/sovereigns/apac-remittances-to-decline-amid-coronavirus-shock-08-09-2020

Fitch Ratings-Hong Kong-08 September 2020: The coronavirus pandemic and subsequent impact on the oil market are having a considerable effect on migrant workers and are likely to supress remittance flows in the APAC region, Fitch Ratings says in a special report. We expect flows to weaken in the coming quarters, even though recent amounts have been surprisingly robust in some countries due to temporary factors. Declining remittances in economies that are dependent on them may affect sovereign ratings through pressures on external finances and economic growth.

Demand for migrant labour has provided an important and stable source of foreign-currency remittance flows for a number of APAC sovereigns, including Bangladesh (6.0% of GDP), Pakistan (7.9%), Sri Lanka (8.0%) and the Philippines (8.4%). India is the largest recipient of remittances globally but they account for a small share of GDP at 2.9%. Remittance flows have helped keep current account deficits contained by offsetting large trade deficits. Indeed, without remittances the Philippines, Pakistan, Sri Lanka, and Bangladesh would all have large current account deficits of between 7%-10% of GDP.

Remittances in APAC also provide economic benefits to recipient countries. First, they support domestic consumption by providing an additional income source to households. According to the Asian Development Bank, about 14% of households in Bangladesh receive remittance income, 8% in the Philippines, 4% in Pakistan and 2% in India. Second, job opportunities for migrant workers relieve slack in domestic job markets.

Remittance flows in APAC were surprisingly mixed in the second quarter of 2020. Monthly data show a considerable and broad decline in remittances during April and May, as Fitch expected, but a recovery in June and July. The rebound in flows was particularly robust in Pakistan and Bangladesh, where flows broke records in both June and July. Sri Lanka and the Philippines also saw an improvement in remittance flows in June, but much more modest.

Anecdotal evidence points to temporary factors for the increase in recorded remittances in the recent period. These include migrant workers transferring their savings in preparation to return home, the impact of lockdown restrictions on transferring funds and a shift to formal remittance channels, which are picked up in the official data.
Fitch forecasts a 12% decline across the region in the second half of the year as the temporary support factors fade.

The deterioration in remittance inflows is likely to widen current account deficits, contributing to higher external financing needs. For countries with fragile external finances, such as Pakistan and Sri Lanka, the shock to remittances could exacerbate existing challenges. Lower oil prices and subdued import demand, however, are likely to soften the aggregate impact on external balances.

Remittances typically provide a countercyclical buffer for economic activity and vulnerable households. In domestic economic shocks, family members working abroad can increase remittances to help mitigate the impact of sluggish domestic activity. The pandemic, however, represents a much more synchronised global economic shock than previous downturns. This limits the potential support of the remittance channel.

Lower remittance flows could affect public finances through two channels: lower revenue collection from weaker consumption and higher social spending to support remittance-dependent households as well as returning migrant workers. Many countries in the region already have limited fiscal space to address the current coronavirus shock and the decline in remittances could exacerbate current challenges.