Retrogression in PRI policy

The proverb advising not to kill the goose that lays the golden eggs was probably never as fitting as it is in the case of proposed changes in the scheme on Pakistan Remittances Initiative (PRI) launched with great fanfare a few years ago to increase the level of money sent from abroad by Pakistani expatriates. Now that the amount of home remittances has increased from a paltry sum of about dollar 2 billion to dollar 15 billion plus per annum within few years, authorities of the country are considering ways to throttle its efficiency by limiting its scope and impact. According to a report in this newspaper on April 1st, 2015, the finance ministry has decided to reduce the rebate being paid to banks as remittance charges by 20 percent from next fiscal year besides enhancing the value of per transaction by 100 percent. At present, the government is paying a 25-riyal rebate as remittance charges to banks on a minimum transaction of dollar 100 to enhance the inflow of remittances through banking channels. As per the new proposal, banks will get 20 riyals per transaction with effect from 1st July, 2015 and the rebate would be paid on a minimum remit of dollar 200 instead of dollar 100. It was also reported that Finance Minister Ishaq Dar, in his recent visit to the State Bank of Pakistan, had discussed the proposed features of the PRI in detail with heads of banks who had agreed with the new rebate formula with certain reservations. As expected, banks also requested the Finance Minister for an early payment of pending rebate claims amounting to billions of rupees.

The government has to absorb the cost of around Rs 12 billion per year (approximately dollar 120 million) in rebates to banks. However, banks have never been paid on time despite home remittances going up from 6.5 billion dollars in 2009 to nearly 16 billion dollars this year. Upon the launch of PRI in May 2009, it was announced that in the second stage lottery prizes such as motorcycles and cars would be given to remitters. In third stage, housing scheme would be launched and skills of expats would be enhanced to earn more. And, to attract the richer expatriates in the fourth stage, these investors could invest in privatised units and five percent of shares would be earmarked for this purpose. The aim was to attract a greater amount of home remittances since countries like the Philippines are attracting nearly 30 billion dollars from workers’ remittances. The new scheme amounts to putting the car in reverse gear.

The premise on which the government seems to have based its case to introduce changes in the PRI is obvious. Of late, authorities must have realised that PRI has been quite successful in meeting the desired objective of enhancing the level of remittances to new heights and there was now less reason to devote budgetary resources for the purpose. As such, government could reduce its expenditures under this head without affecting the flow of home remittances to a great extent. Authorities may have concluded that banks by now have instituted programmes and taken other initiatives including the use of latest electronic technology to speed up transactions and it would not be easy for them to wrap up these arrangements. However, such reasoning is not only flawed but contrary to the earlier promise of the government to increase incentives under the PRI, including other monetary benefits. Also, the government seems to be comparing oranges with apples in designing the new strategy. While the government could gain in rupee terms by proposed changes in the PRI and reduce its fiscal deficit by a small margin, the country may lose precious foreign exchange earnings with a highly negative impact on the balance of payments if the banks chose to be less active in motivating expatriates to send all their remittances through the banking channels. Unfortunately, a drop or even any stagnation in the level of home remittances could force the country to borrow more from abroad as, unlike Pak rupee, US dollar or UK pound cannot be printed locally. Already, the country is heavily indebted to foreigners and is still on a borrowing spree. Therefore, this is not the time to withdraw incentives in PRI. Instead, ways must be found to increase the level of home remittances to compensate for the decline in exports by introducing better terms under the PRI. Also, the increase in value by 100 percent to dollar 200 per transaction to be eligible for rebate would work against the expatriates with smaller means who may again be tempted to send their money back home through informal channels because of indifferent attitude of bankers due to zero rebate on transactions below the value of dollar 200. So far as the discussion of the Finance Minister about the proposed changes in the PRI with bankers is concerned, the less said, the better. No banker could disagree openly with a suggestion floated by a Finance Minister who is so close to the Prime Minister and his words mean a decision from the top. In our view, if the purpose was to reduce subsidy and support the budget, the government should have reduced expenditures by the same amount on motorways, airports, etc, mainly used by the rich. As far as the pending claims of banks under the PRI are concerned, these must be paid immediately. Any further delay in the payment of claims could undermine the credibility of a government in honouring its notified promises.