Increase in workers’ remittances bodes well for Pakistan: Moody’s

1
390

KARACHI: An increase in worker’s remittances is positive for Pakistani banks and borrowers, as it supports deposit flows and strengthens household finances, according to the credit rating agency Moody’s.

In a report published on Monday, the agency said that the high levels of remittances have contributed to reported double-digit growth in residents’ household deposits.

Earlier on 12 February, the State Bank of Pakistan (SBP) released updated monthly data on workers’ remittances, which showed a 4pc increase in the monthly average for the fiscal year 2020, compared to the previous corresponding year.

According to SBP data, workers’ remittances received during the first seven months of FY20 amounted to a cumulative total of $13.3 billion.

The agency noted that the growth [in remittances] has provided a stable and low-cost deposit base to Pakistani banks, which in turn has enhanced banks’ profitability and increased their liquidity buffers.

The report further stated that the growth might help mitigate the effect of government deposit outflows. The SBP is considering introducing a Treasury Single Account, which will require government deposits to be placed with the SBP instead.

Despite Pakistan’s high-interest rates (unchanged since July 2019 at 13.25pc), the remittances have helped negate any associated challenges. That’s because households are better positioned to meet their financial obligations with banks.

Non-performing loans have also been maintained at historically low levels; 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.

According to the World Bank, Pakistan was the seventh-largest recipient of remittances globally in 2018, with remittances inflows reaching $21 billion or 6.8pc of the country’s GDP.

During the fiscal 2012-19 period, remittances grew at a compounded annual rate of nearly 9pc, with the majority of inflows arriving from Gulf Cooperation Council countries (54pc), the US (16pc), the UK (16pc) and Malaysia (7pc).

Remittances also grew in local terms due to the significant depreciation of the rupee by over 40pc during the same period.

Moody’s expects the increase in income to positively impact the historically low demand for personal credit and support financial inclusion. Personal credit accounted for 12pc of total private sector credit in December 2019, based on SBP data.

The agency also predicted that technological advances will further help grow remittances. Currently, the cost of remittances takes up to 7pc of the transferred funds, according to the World Bank. But the SBP’s focus on digitization and the wider availability of digital payment platforms will help reduce that cost.

This is especially true in Pakistan, where remittances are carried out primarily by various remittance and payment service providers, through collaborations with commercial banks.

1 COMMENT

  1. Thanks for the decision taken by government and Pakistan Overseas Ministry, In order to increase the flow of remittances from Pakistani expatriates to the country to provide incentives to them for using legal channels to send money instead of Hawala or Hundi.

LEAVE A REPLY

Please enter your comment!
Please enter your name here