The curious case of Pakistan’s spiralling remittances
Remittances hold towering significance in any developing country. Pakistan – home to a prodigious diaspora – is no different. An influx of foreign exchange not only fuels the financial market but also influences monetary policy development in the recipient country. Besides, remittances yield positive dividends on the human capital front, ensuring unabated economic security in the long-run.
Remittances are considered one of the major sources of foreign exchange in an under-developed country. It seconds Foreign Direct Investment (FDI) in its contribution to foreign exchange, preceding both Foreign Portfolio Investment (FPI) and Official Development Assistance (ODA). For countries ailing with a frequent balance of payment crisis, remittances ameliorate the trade woes with a lower consequent current account deficit.
An upturn in remittances transpired when many Pakistanis – particularly those belonging to the labour class – migrated to the Middle East to seek better job avenues in the late 1970s and early 1980s. This was followed by a nearly two-decade plunge – from 1983 to 2000 – in the wake of appalling economic slowdown domestically coupled with plummeting international oil prices and the cessation of premier infrastructural schemes in the Gulf. The decline in demand for Pakistani labour abroad had repercussions on the amount transmitted back home.
The remittances took a further nosedive as an aftermath of the nuclear detonation in the late 1990s when Pakistan’s foreign exchange accounts were detained. However, post 9/11, the remittances skyrocketed again. This escalation was also due to the rupee’s incessant devaluation, which captivated the expatriates to take advantage of currency differential. Consequently, Pakistan's CAD translated into surplus for three consecutive FYs (fiscal years) from 2001-02 to 2003-04.
It is imperative to highlight that the remittances have pursued an ascending course in the long-run. The long-term upward trajectory is mainly due to an increase in Pakistani workers’ skill composition and the ability of the young generation of Pakistani emigrants to enter into additional contemporary occupations in the UK and USA.
Likewise, in the outgoing FY, Pakistani expatriates remitted a record of $23.12 billion with more than 6% year-on-year (YoY) growth compared to $21.74 of FY 2018-19. The momentum has not only persisted but amplified in on-going FY 21 with a whopping $2.77 billion remittance in July, followed by an inflow of $2.095 billion in August. This unprecedented surge is bemusing, and what has baffled many is the fact that this escalation has occurred during the pandemic. So, what could the potential triggers to this mammoth inflow be?
The extraordinary leap can be primarily due to the tightening of informal money markets, which has augmented the inflow through formal banking channels. In the budget for FY 2020-21, the incumbents allocated Rs25 billion to formalise foreign remittances, which would aid in stockpiling foreign exchange reserves to service colossal national debt obligations.
Pakistanis typically used to carry cash in their luggage physically. But due to flight reduction and sparse international travels, they would have been compelled to access official banking channels for money transfers. Also, remittances might have incremented on account of significant job losses in the Gulf region due to the Covid-related recession. Hence the spiral may demonstrate high one-time repatriation of money back to Pakistan.
On the other hand, the State Bank of Pakistan (SBP) has emphasised an orderly ‘market-based’ exchange rate management and sound policymaking under the Pakistan Remittance Initiative. The SBP sheds the spotlight on the reduction of the threshold for eligible transactions from $200 to $100 under the Reimbursement of Telegraphic Transfer (TT) Charges Scheme. It also stressed on adoption of digital channels and targeted marketing campaigns to promote formal routes. Similarly, IT-related freelance services’ payment limits have increased from $5,000 to $25,000 per individual per month. The SBP believes that it has facilitated to enhance home remittances through formal banking channels in Pakistan.
The crux of the matter is remittances will upslope further in the future due to effectuated compliance of formal banking channels. Still, the recent abnormal increment will ease down in the coming months when the western economies recuperate from the ramifications of the Covid-related slump.