Moody’s latest report on Pakistani foreign remittances a positive indicator for the economy

Moody’s latest report on Pakistani foreign remittances a positive indicator for the economy

ISLAMABAD - Moody’s in its latest report on Pakistan has stated that the increase in worker’s remittances is credit positive for Pakistani banks because it supports deposit flows and strengthens household finances.

On 12th February, the State Bank of Pakistan (SBP) had released updated monthly data on workers’ remittances showing a 4% increase in the monthly average for fiscal 2020 (which ends 30 June) over 2019 levels.

This increase adds to a continued surge in remittance inflows in recent years, noted Moody’s.

According to the World Bank, Pakistan was the seventh-largest recipient of remittances (money transferred back home primarily by overseas migrant workers) globally in 2018, with remittances inflows reaching $21 billion, or 6.8% of the country’s GDP.

During the fiscal 2012-19 period, remittances grew at a compounded annual rate of nearly 9%, with the majority of inflows arriving from Gulf Cooperation Council countries (54% of total remittances in 2019), the US (16%), the UK (16%) and Malaysia (7%).

In local currency, however, remittances have grown even more because the Pakistani rupee has depreciated by more than 40% over this period, although the US dollar/rupee exchange rate has experienced significantly less volatility since mid-2019.

Moody’s maintained that the high levels of remittances have contributed to 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.

The credit rating agency noted that 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 stated that increased remittances also support Pakistani households’ disposable income and borrowers’ repayment capacity, mitigating the challenges posed by high interest rates.