Pakistan’s reliance on remittances masks weak industry, low exports, stalled reforms

KARACHI:

The strong rupee is luring imports, impacting domestic industry competitiveness and hurting exports. For the past three years, the government has been celebrating rising home remittances as its politico-economic success that has helped stabilise the rupee and achieve a current account surplus, but has buried its head in the sand instead of fixing structural weaknesses in manufacturing, agriculture and exports.

Finance Minister Muhammad Aurangzeb and PM Shehbaz Sharif have repeatedly announced structural economic reforms but on the ground there is hardly any progress. Now, an amazing proposal is being touted – taking two loans worth $1 billion for enhancing government efficiency and reforms.

Neither remittances nor loans can bring growth as these two sources are nasogastric: remittances – a lifeline, not a growth engine. During the past three fiscal years, Pakistan has received around $96 billion in remittances, more than export earnings, but with no significant growth in industry, agriculture and exports. During 4MFY26, overseas Pakistanis have sent $12.9 billion, up 9.3% year-on-year (YoY), but industrial growth is stagnant or has contracted, and the entire amount is used to finance consumption.

The remittance numbers are heartening as they demonstrate the resilience and loyalty of the Pakistani diaspora, who continue to prop up the national economy. Yet, beneath this strength lies a troubling reality: Pakistan's growing dependence on remittances reflects the chronic weakness of its industrial, manufacturing, and agricultural base, and the failure to generate a sustainable export surplus.

On the other hand, the SBP has spent more than Rs200 billion in cash incentives called the Pakistan Remittance Initiative (PRI) to increase remittances through the official route – a subsidy to keep the rupee stable.

Remittances have long been a stabilising pillar for Pakistan's external account. They help bridge the trade deficit, cushion the foreign exchange reserves, and support the rupee in times of volatility. In FY25, remittances contributed nearly 8.5% of GDP, a share that has grown over the past decade.

However, this dependence is a double-edged sword. It signals economic fragility rather than resilience. Pakistan is effectively outsourcing its labour to sustain domestic consumption and imports, while the productive sectors at home remain stagnant or forced to halt production. Remittances provide short-term relief to external accounts but fail to build industrial capacity, create large-scale employment, or generate exportable surpluses. Unemployment is rising alarmingly, and skilled, educated youth and experienced workforce are now doing less productive jobs of driving online cabs and delivery rides. Is this truly economic growth and prosperity?

The IMF has repeatedly flagged that Pakistan's reliance on remittance inflows is masking underlying weaknesses, especially a declining manufacturing base, an uncompetitive export structure, and poor agricultural productivity.

A closer look at sources of remittances tells a more nuanced story. The largest inflows come from Saudi Arabia and the UAE, where the bulk of Pakistani workers are semi-skilled or unskilled and employed in construction, transport, and domestic services. They remit small amounts, but the sheer number of workers creates a large cumulative flow.

In contrast, remittances from advanced economies like the UK and the US are lower, despite a higher concentration of professionals – doctors, engineers, IT experts, and MBAs. This difference is not due to lower incomes, but rather due to settlement patterns: Pakistani professionals in the West often integrate economically and socially, channelling their savings into property or investments in their host countries rather than routine monthly remittances.

This composition underscores that Pakistan's remittance success is driven more by labour export than by knowledge export. The nation's strongest economic link with the world remains manual labour, not manufactured goods, technology, or services – a sobering reflection for a country of 250 million people.

Export malaise: shrinking industrial, agri-competitiveness

The rise in remittances coincides with Pakistan's declining share in global trade. The country's exports have hovered around $30 billion annually, stagnant for almost a decade. By comparison, Bangladesh exports over $55 billion and Vietnam over $350 billion, both countries that were once comparable to Pakistan in size and development.

Pakistan's industrial base, particularly textile and other manufacturing sectors, has suffered from chronic energy shortages, high production costs, and outdated technology. Exporters face policy uncertainty, burdened by high taxes, poor logistics, and an uncompetitive exchange rate. Instead of expanding into high-value manufacturing such as electronics, pharmaceuticals, or engineering goods, Pakistan remains locked in low-value textile and raw material exports.

The agriculture sector, too, shows structural decay and high input costs. Basmati rice and other rice exports are shrinking. Once self-sufficient in key staples, Pakistan now imports wheat, cotton, and pulses, reflecting declining yields and poor crop management. This has turned a potentially exportable sector into a net importer.

The combined effect of a weak industrial base and declining agricultural productivity is an economy increasingly unable to generate its own foreign exchange, turning remittances into a substitute for export earnings.

Pakistan's trade deficit continues to widen despite the inflow of remittances. Imports of petroleum, machinery, food items, and luxury goods remain high, while export growth remains tepid. Remittances, therefore, are being used largely to finance imports rather than investments.

This pattern creates a consumption-driven economy: households depend on remittances to sustain spending, real estate demand rises, and imports of cars, phones, and consumer goods expand. The State Bank of Pakistan (SBP) has frequently noted that such remittance-led consumption fails to generate long-term growth or create jobs. The government must end the PRI cash incentives – a rent-seeking policy.

Moreover, remittances are highly vulnerable to external shocks. Economic slowdowns in the Gulf, restrictive labour policies in Saudi Arabia or the UAE, or geopolitical tensions could easily dent inflows. The overreliance on this single source poses a serious balance of payments risk.

Turning remittances into investment

While remittances remain crucial, the challenge is to channel them from consumption to investment. Pakistan has repeatedly attempted to mobilise diaspora savings through Roshan Digital Accounts (RDA) and various bond schemes, but the uptake remains modest.

The diaspora's trust deficit – due to weak governance, inconsistent policies, and poor property rights protection – discourages formal investment. Many overseas Pakistanis prefer sending money informally or investing in real estate rather than in manufacturing or startups. The government must create diaspora investment vehicles with guaranteed repatriation and tax incentives; simplify business registration and banking procedures for overseas investors; promote joint ventures between local exporters and overseas Pakistanis; impart vocational and technical training to export skilled, not just unskilled, labour; and harness the diaspora's financial and intellectual capital to transform remittances from a consumption buffer into a growth driver.

The dependence on remittances should be viewed as a warning signal rather than a comfort. To reduce vulnerability, Pakistan must: Revitalise industrial policy: Encourage value-added manufacturing through export incentives, energy reforms, and regional industrial clusters. Reform agriculture: Modernise irrigation, seed quality, and marketing systems to restore food security and export potential. Diversify exports: Move beyond textiles to technology, engineering goods, and processed foods. Stabilise policy framework: Offer predictable tax and tariff policies to attract FDI and support exporters.

The writer is a former vice president of KCCI, a commodities and international trade expert