Drying Up of External Inflows Chapter 8: Drying Up of External Inflows The fact that Pakistan is currently operating under an IMF program, under the Extended Fund Facility(EFF), should have been a source of comfort to external senders of foreign exchange either in the form of remittances, by purchase of Euro/Sukuk bonds, commercial bank loans or foreign direct investment. Unfortunately, this has not been the case since the start of the current financial year. 8.1 Causes of Decline in Inflows Why is this the case? First, given the precarious low level of foreign reserves of$5.5 billion as of end-December 2022, when the annual external payment obligations are over four times the reserves, international credit-rating agencies have chosen to downgrade Pakistan’s rating to near default level, despite the presence of an IMF program. Second, in recent months the SBP has severely restricted the repatriation of profits of multinational companies. During the first quarter of 2022-23, the amount repatriated is only$58 million as compared to$477 million in the corresponding quarter of 2021-22. This has sent a very negative signal to potential foreign investors. Third, the perception of low credit worthiness of Pakistan has led to a big discount of over 60 percent on Pakistani international bonds. Consequently, the cost of flotation of Euro/ Sukuk Bonds has become excessively high, despite the annual target of new bonds of$3 billion in 2022-23. Fourth, remittances have taken a big plunge recently. They have fallen by over 19 percent in December 2022. Earlier, they had declined by 6 percent in the first quarter. This may be partly due to recession in the USA and EU countries. However, the big reason is the widening of the gap in the exchange rate between the open market rate and the inter-bank rate to almost Rs 40 per US$. This has led to a diversion of remittances from official banking channels to hawala transactions. Fifth, multilateral and bilateral agencies were unwilling earlier to extend loan facilities to Pakistan in the absence of a functional IMF Program. This happened when the seventh and eighth review was completed. The Program was extended to June 2023 with three more 89