Role of remittances in Pakistan's economy

Remittance flows are ironic in their very nature with respect to motives behind them

GHOTKI:

Remittances have proved to be the most important stabilising variable for Pakistan's economy in the recent past. It is one of those indicators that has shown considerable and sustainable progress in the last few years, so much so that now these inflows have snatched the limelight from exports.

This is a major shift in the economic structure of the country. This year, Pakistan's remittances are expected to reach $35 billion – a milestone that is already being cherished. However, it is very important to understand the effect that these inflows have on the overall makeup of the economy. So, let us dig deep.

Remittance flows are ironic in their very nature with respect to the motives behind them. Academic research shows that these flows in Pakistan's case have been based on both altruistic and opportunistic reasons, which seems a glaring irony.

The altruistic reasons behind these flows are the motivations of family members abroad to help their parents and other dependents in the home country. Due to these reasons, remittances surge when the economic situation is precarious in Pakistan.

Hence, we have witnessed a sharp rise in remittances in the past three years, during which the local economy was in turmoil.

The most pronounced impact of remittances in Pakistan's case has been in the inflationary environment. Studies have shown that these flows increase in times of high inflation as expats are desperate to help their families here.

These are the altruistic motivators discussed above. This also explains the surge of remittances in the tough inflationary environment of the last two years. Without these inflows, it would have been very difficult for households to sustain themselves in such tough situations.

Apart from this, the opportunistic motivations of the entrepreneurial spirit also play a very critical role. When interest rates are up, flows arrive in government papers to take advantage of the lucrative rates.

These flows keep on coming when the economy enters an expansionary mode and real estate and the stock market become attractive avenues for Pakistani expats.

Therefore, the RDA (Roshan Digital Account) and its various investment avenues like Roshan Car and Roshan Ghar were a huge success. These flows were not only robust but also sticky, which provided great support to the ailing economy.

Hence, remittance flows maintain their momentum in both good and bad times, which is a huge plus for a country like Pakistan.

Research literature is also full of other important spillover effects of these remittances on significant economic indicators. Statistically significant results have shown that these flows are a major source of poverty alleviation globally.

The case in Pakistan is also similar, and households with breadwinners abroad jump above the poverty line very quickly. Furthermore, these flows have also improved income inequality, although this relationship is U-shaped.

This means that initially, these flows reduce inequality, but after some time, they become a source of income inequality as households with only local sources of income are at a disadvantage.

The role of economic boom-bust cycles in major host economies in Pakistan's case can't be understated. The United States' (US) economy historically accounts for almost 20% of Pakistan's flows, and these flows rise when the US economy in general and the US stock market in particular are performing well.

Saudi Arabia, which is also a major source of remittance flows along with the United Arab Emirates (UAE), hosts a lot of expats who are employed in the construction sector. As a result, flows from this region rise significantly when oil prices rise.

This is a very important realisation as oil prices are expected to remain docile in the next couple of years. However, as the kingdom diversifies towards non-oil sources of revenue, the resultant impact could be slightly lower.

The government in the last couple of years has taken various steps to attract remittance flows through official channels, and these measures are bearing fruit now. Flows from the banking channel are on the rise and are a major source of comfort for the balance of payments of the country.

The only thing that baffles my mind is that our diaspora, which comprises 10 million people abroad, is sending remittances worth $35 billion, while 250 million people in Pakistan manage to export goods and services worth only $39 billion.

This is a glaring statistic. It means that our people abroad contribute a lot to global economies. Maybe if we give them good opportunities here, our exports and GDP might increase manifold.

All in all, the overall importance of remittance flows in Pakistan's case can't be overstated. They are an important source of stability in the economic environment as they support the balance of payments, reduce poverty, and improve income inequality.

THE WRITER IS A BANKER AND TEACHES ECONOMICS