Fitch Ratings, in its special report “APAC remittances and the coronavirus shock”, has stated that remittances are set to decline in 2020 despite a recovery in recent months, and forecasts Pakistan current account deficit to widen to 1.7 percent of GDP in the fiscal year 2021, in part as remittances fall and offset gains from lower oil prices.
Pakistan has reduced its current account deficit, from a high of 6.1 percent of GDP in the fiscal year ending June 2018 (FY18) to 1.1 percent in the fiscal year 2020. It has also modestly rebuilt foreign-exchange reserves, in large part from a shift to a more market-determined exchange rate.
High debt-to-GDP ratios in Pakistan constrain the ability to respond to possible rising social-spending needs, said Fitch Ratings.
Fitch forecasts the deficit to widen to 1.7 percent of GDP in the fiscal year 2021, in part as remittances fall and offset gains from lower oil prices. Financing from the IMF through an ongoing $6 billion program and $1.4 billion Rapid Financing Instrument (RFI) facility, along with other multilateral and bilateral support and participation in the G20s Debt Service Suspension Initiative, are a buffer against the fall in remittances.
For countries with fragile external finances, such as Pakistan and Sri Lanka, the expected shock to remittances could exacerbate existing challenges, said the report.
High debt-to-GDP ratios in Sri Lanka (86.8 percent), Pakistan (86.1 percent), and India (71 percent) constrain the ability of these countries to respond to possible rising social-spending needs.
Fitch Ratings examines remittance flows in the first half of 2020 and prospects for the coming quarters in five countries in the Asia region – Pakistan (B-/Stable), Bangladesh (BB-/Stable), Sri Lanka (B- /Negative), India (BBB-/Negative), and the Philippines (BBB/Stable). These countries are reliant on remittances and have timely data.
Remittances appear to have recovered after declining in April and May. In Pakistan and Bangladesh remittances were resilient in Q2 2020 but weaker in Sri Lanka and the Philippines. Declining remittances may affect sovereign ratings through external finances and economic growth.
Remittances are a key source of foreign currency receipts for Bangladesh (6 percent of GDP), Pakistan (7.9 percent), Sri Lanka (8 percent), the Philippines (8.4 percent), and India (2.9 percent). As a result, lower remittances will most likely widen current account deficits, contributing to higher external financing needs.
The fall in remittances is likely to compound the already severe impact of the COVID-19 shock on economic growth. Vulnerable households reliant on remittance income will most likely reduce consumption and require higher social transfers.
Lower remittance flows could also have a second-order impact on public finances through lower revenue collection from weaker consumption and higher social spending to support remittance dependent households as well as returning migrant workers.
High demand for migrant labor has provided an important and stable source of foreign currency receipts through remittance flows for a number of APAC sovereigns.
India is the largest recipient of remittances globally but they account for a small share of GDP at 2.9 percent. Remittance flows have helped offset large trade deficits keeping current account deficits contained. Indeed, without remittances, the Philippines, Pakistan, and Bangladesh would have large current account deficits.
Remittances also provide economic benefits to recipient countries. First, they support domestic consumption by providing an additional income source to households.
According to the ADB, about 14 percent of households in Bangladesh receive remittance income, 8 percent in the Philippines, 4 percent in Pakistan, and 2 percent in India. Second, job opportunities for migrant workers relieve potential stress in domestic job markets by providing employment and income for potentially excess labor supply.
The Gulf region is an important source of remittance flows, particularly for countries in South Asia. The region accounts for roughly half of remittance inflows in Bangladesh (58 percent), Pakistan (54 percent), Sri Lanka (45 percent), and India (51 percent).
Remittance flows in the APAC region were mixed in the second quarter of 2020. Monthly data show a considerable and broad decline in remittances during April and May, but a recovery in June and July. The rebound 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.
Quarterly aggregates can provide a clearer indication of recent trends, as they are less affected by the monthly volatility caused by lockdown measures during much of Q2 2020. Generally, there is a trend of a deceleration in remittance growth, but with considerable differences in performance. Pakistan saw relatively robust growth in Q2 2020, but Bangladesh a slight decline. Both the Philippines and Sri Lanka, however, experienced sharp contractions.
Migrant workers may have been physically unable to transfer funds as lockdown measures of varying severity were widespread around the globe from March to May.
When the restrictions eased, workers had accumulated savings they could send, contributing to a surge in remittances in June. The State Bank of Pakistan cited this as an explanation for June’s record level of remittance inflows. However, this would have also magnified the declines in remittances seen in March to May.