Pakistan must do more to cash in on its remittances
Several years ago and based on a scientific study, an expert had suggested that any reduction in remittances would invariably reduce Pakistan’s national income, investments, and household consumption, and in turn increase the levels of poverty. The same study had suggested that the probability of households becoming poorer decreased by 13 percent if a family were to receive overseas remittances. Given the pivotal role played by remittances, the key challenge for any government is to provide enough incentives to overseas nationals for them to send more money back home through formal banking channels. Authorities also need to ensure that the remittances are utilized in a productive manner instead of being invested in gold and undeveloped real estates – two widely reported saving instruments.
It is not surprising that an exponential growth in population coupled with a weak domestic economy has resulted in a significant export of manpower during the past several decades. Proceeds from remittances remain a reliable source of income for foreign exchange reserves which in turn work as a supporting factor for the country’s balance of payments during difficult times.
At present, with Pakistan facing both trade and fiscal deficits, the government approached Saudi Arabia, China and the International Monetary Fund for financial assistance. While Islamabad has received the first installment from the $3 billion promised by Riyadh, the usual flow of remittances once again rose to the occasion to support the dwindling foreign exchange reserves which were responsible for a major devaluation of the Pakistani currency.
Recently, the World Bank had projected that remittances to South Asia could increase by 13.5 percent to $132 billion this year. This is much higher compared to the predictions for 2017 where growth was registered at 5.7 percent. During 2018, the increase was attributed to an upbeat economic milieu in advanced economies, including the US, coupled with a spike in oil prices which helped GCC countries such as Saudi Arabia and the UAE.
In Pakistan’s case, however, remittances increased by 12.5 percent during the first five months of the ongoing fiscal year 2018-19. A key reason for this increase, according to several analysts, is attributed to the government’s proposal to attract more remittances from abroad, with an offer to partially cover the cost of transactions, including the service fee.
Another possible reason could be the central bank’s actions to curtail remittances through informal means, namely the “hundi” and “hawala”. Under the directives of the Financial Action Taskforce (FATF), such informal transactions will continue to become difficult to operate going forward.
During the first five months of the ongoing fiscal year, the largest inflow of remittances ($2.1 billion) was from Saudi Arabia, followed by the UAE ($1.9 billion), and the United States ($1.4 billion). A new contender this year which contributed majorly was Malaysia wherefrom the remittances were slightly above half a billion dollars.
To mitigate the risks, the government will need to engage with several other economies and promote the entry of Pakistan’s labor force.
Dr. Vaqar Ahmed
It is pertinent to note that an economic downturn in Saudi Arabia affects the overall inflow of remittances in a significant manner. This has been a key concern for institutions that are responsible for the export of manpower in Pakistan. For example, between 2010-11, the peak growth rate of Saudi Arabia’s remittances to Pakistan -- which was 38 percent in 2011-12 – failed to increase as the years progressed. In fact, the growth rate has been on a decline and turned a negative 8 percent during 2016-17.
The future of remittances from Saudi Arabia critically depends on the growth outlook of its economy and oil prices. To mitigate the risks, the government will need to engage with several other economies and promote the entry of Pakistan’s labor force. For example, the ease of procuring visas for Pakistani workers wishing to work in Kuwait and South Korea is a welcome sign. Similarly, the UAE’s Expo 2020 and Qatar’s World Cup 2022 offers opportunities for skilled and semi-skilled workers with relevant certifications.
While it has been established that remittances play a key role in stabilizing foreign exchange reserves and have a favorable short-term impact on reducing poverty as well, such inflows on their own cannot be a panacea for the problems which currently surround Pakistan’s economy. Recent scientific evidence indicates that an inflow of remittances results in increased expenditure by sectors which are not involved in manufacturing exports; thereby disfavoring a key source of foreign exchange reserves.
The increased demand and prices in non-tradable sectors are an incentive for greater output, encouraging labor to be moved away from the tradable sectors. This phenomenon is known as the Dutch disease.
To mitigate this to some extent, the government will need to be more innovative in offering savings instruments which allow for a productive use of remittances. This is possible through foreign currency accounts with the possibility of full and instant repatriation; US dollar-denominated bonds for infrastructure development and with a sovereign guarantee; and through self-employment incentives for a diaspora which does not only wish to send capital but may also be willing to invest in local businesses, to name a few.
Even economies as large as China and India are now pinning their hopes on overseas nationals who are returning home and wish to relocate their wealth.
• Dr. Vaqar Ahmed is joint executive director of the Sustainable Development Policy Institute, Pakistan. His book ‘Pakistan’s Agenda for Economic Reforms’ was recently published by the Oxford University Press. Twitter: @vaqarahmed