Overseas Pakistanis regularly send money back home and the amount so sent plays a crucial role in the economy of the country. The remittances sent home are rated to be more than the cumulative exports of the country and acts as a crucial cushion for the battered economy of the country.
In recent years the remittances have shown marked decline owing to the contraction witnessed in the global economy that was badly affected by the pandemic.
The figures show that from the peak of $31.3 billion in 2022 the remittances have come down to $25.8 billion, and in the context of the size of Pakistan’s economy, this decline is pretty dangerous and may cause serious financial implications.
Pakistani policy makers are very worried about the contracting amount of remittances and they feel quite helpless in redeeming the situation. In the last couple of decades, remittances, which have dwarfed Pakistan’s annual export earnings over the last several years have supported the country’s external account in the face of drying foreign assistance.
It is often reported that Pakistani economic policy makers anticipate that the remittances sent by overseas Pakistanis have the potential to increase to double the current amount and may cross $50 billion mark provided some restrictions in their path are effectively tackled and ultimately removed.
The main issue faced by the remittances segment of the economy is their transfer through informal channels instead of sending them through formal and regulated framework. The Hundi/Hawala network is quite strong and hinders the full flow of remittances to the government exchequer causing serious lack of cash flows inside the country.
This difficulty is experienced globally as it is estimated that informal global trade size is 80 per cent of the legitimate transactions of $700 billion and is considered a serious leakage.
It implies that the actual global remittance market is almost twice the size of the legal trade and it is extremely cumbersome to plug this phenomenon. The position may become clear when viewed in the backdrop that Pakistan lost $3.7 billion in remittances during the current financial year and this loss is more than three times greater than the International Monetary Fund (IMF) tranche of $1.2 billion.
Despite the current difficulties experienced by the flow of remittances, the policy makers have targeted $33 billion during the next financial year that is certainly unrealistic given the economic and political turmoil and growth in the grey foreign exchange market.
The growing gap between the official interbank exchange rate and the grey market, which recently surged to over Rs.20 a dollar, is believed to have encouraged overseas Pakistanis to choose informal channels to remit cash for family support and investments.
Import curbs imposed by the government to slow down dollar outflows to protect the meagre reserves and the growing under-invoicing of imports by traders are creating a massive demand for dollars in the market.
The State Bank of Pakistan’s (SBP) decision to allow traders to arrange dollars for imports further pushed this demand as the importers rushed towards the grey market.
Now the traders purchase the required dollars from the Hawala/Hundi operators in Dubai at a significant premium for import payments. These dollars never reach Pakistan or become part of the central bank’s reserves. The consistent currency devaluation is yet another important reason for slumping remittances as many overseas Pakistanis send money for investment in property and in stocks.
They may have made handsome profits in rupees but are accruing losses when converting the cash to remit it back.
Other factors leading to a drop in remittances are poor financial conditions in the US and Europe. The cost of living is surging in host countries across the world, inflation is soaring, rents are increasing and jobs are being lost owing to the bad economy with the disposable income of Pakistanis living abroad shrinking and has become a contributing factor behind falling remittances.
Moreover, overall financial and political instability in Pakistan is also keeping overseas Pakistanis from sending their savings to Pakistan.
Though it may not be possible for Pakistan to attract the entire earnings of its migrant workers into its economy through formal channels, it can make efforts and launch awareness campaigns and reward schemes to encourage them to stop using the risky illicit routes for
their own benefit.
The government needs to improve the environment to increase remittances and launch appropriate initiatives to encourage investments by overseas Pakistanis in their home country.
Policy planners are however hopeful that remittances will increase next year though they will remain short of the target due to the increased migration of workers to the Middle East countries and the UK last year.
It is reported in this article that context that last year about 11.3 million Pakistanis went abroad for work and this may have a positive impact on the size of remittances.
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