Remittance has been playing a pivotal role in the country’s economy since the last two decades or so and has been fulfilling the government’s dream of curtailing current account deficit, giving the much-needed support to the domestic currency where banks have been on the driving seat to bring hard earned money influencing national economy.
After chasing the data of remittance way back to fiscal year 2004-05, arrival from expatriates was around $4.168 billion whereas exports were to the tune of $17.796 billion while imports were around $25.7 billion, the growth of remittance was quite dismal. Though remittance grew manifolds but exports failed to even double, the country hasn’t seen export numbers touching to $34 billion despite a series of incentives offered to export houses. Every budget carried out special packages for the export industries, and each received refunds to the tune of Rs 150 billion to Rs 250 billion.
Also reforms in the foreign exchange regime where the banking sector developed speedy transfer of the funds from the global arena to Pakistan, increased demand of Pakistani labors and increased participation of the government to align with other countries offering hundreds of services paving the way for migration of people of Pakistan, increasing the volume of remittance.
Remittances, which was quite low at the $1 billion level recorded in the fiscal year 2000-2001 jumped to the high record mark of $31.2 billion in the financial year 2021-22, showing significant improvements in the last over two decades. But some critics are of the view that as per the migration numbers, the country has the potential to increase to $40 billion per annum.
As per the data collected from Bureau of Emigration and Overseas Employment which showed two years were difficult ones-pandemic period of 2020 and post COVID-19 year when number of workers flew amounting to 225,000 and 288,000 approximately while in 2022 and 2023 the numbers recorded exorbitant jump settling around 832,000 and 862,000 respectively. The huge numbers reflected in the remittance numbers as well.
Pakistan has witnessed a significant increase in labour migration in FY22 and FY23 compared to the preceding two years. However, according to annual migration data of BEOE, the recent surge in emigration is not the first of its kind, as the country has previously experienced similar spikes as well, such as during FY15 and FY16. Pakistan’s labour migration flow by skills composition shows that highly-qualified and highly-skilled labour force each year account for only 2.0 percent (on average) of the overall emigration between FY20 and FY23.
Number of migrants under each skill composition increased during FY23 and FY22 after a significant dip during FY21. The recent spike in emigration could also be due to post-pandemic resumption of international travel and opening up of host economies. Overall migration under occupational trades identified as highly-qualified and highly-skilled has been increasing between FY20 and FY23. As they constitute a very small portion of emigrants, they can hardly have any significant impact on remittances. However, top occupational trades recruited for overseas work during FY23 consist of mostly blue-collared jobs. Further, comparison shows that remittances in US$ have declined during FY23, whereas remittances in rupee were on a rising trend.
This implies that: (i) exchange rate depreciation has lowered remittances in US$, as lower dollar amount results in higher remittance in rupee terms compared to the previous year; and (ii) the continuing dominance of blue-collared workers in total migration mix leads to lower average ticket size and hence lower US$ denominated remittances.
Provided that global and domestic economic conditions begin to improve going forward, increasing migration may improve the flow of remittances to Pakistan.
In financial year 2019-20, the remittance amounted to $21 billion in 2020-21 it rose to $23.1 billion while in 2021-22 it reached to historic high of $31.279 billion, in the same fiscal year on monthly basis the remittance topped to $3.2 billion in April 2023. However, the remittance in 2022-23 dropped to $27.024 billion.
Ali Nawaz Chief Executive Officer of Chase Securities said that the recent fall in Pakistani remittances stems from a mix of global (economic slowdown), domestic (currency fluctuations), and structural (informal channels) factors.
“Boosting remittances requires banks to offer competitive rates and digital solutions, while the government and SBP can incentivize formal transfers, crack down on hundi, and engage the Diaspora”, he said.
Compared to India and Bangladesh, Pakistan’s higher dependence on remittances makes it more vulnerable, but concerted efforts by all stakeholders can attract and retain these crucial inflows, supporting the economy’s development, said Ali Nawaz.
Abdul Azeem, head of research at Spectrum Securities said that remittance experienced a decrease attributing to the widening gap between the interbank and open market rates, encouraging the use of informal channels like the hundi/hawala system.
“This decline was further influenced by elevated inflation rates in countries that are major senders of remittances and increased interest yields”, he added.
To recall that following delay in getting IMF nod (some months of 2022 and 2023) the burden of external debt payments weighed heavily on the domestic currency. The parity last year at one stage reached to Rs 330 to Rs 340 a dollar with interbank rate reaching to Rs 307, the difference between the official and kerb market encouraged overseas Pakistanis to send their hard-earned money mainly through exchange companies while few were opting illegal, hundi, hawla and gray market where the rate was more than the kerb market leading to substantial fall in remittance flows. Even the smuggling of dollars made heavy dents in the local foreign exchange market, however extensive crack down by the government arresting dozens of hundi and hawla operators, SBP’s decision to clamp down several exchange companies and some import restriction, helped the currency to recover. But confidence of the expatriates has been shattered as the remittance has not yet picked up the pace yet.
According to a report of World Bank, the top five remittance recipient countries in 2023 are India ($125 billion), Mexico ($67 billion), China ($50 billion), the Philippines ($40 billion), and Egypt ($24 billion).
Economies where remittance inflows represented substantial shares of gross domestic product (GDP) – highlighting the importance of remittances for funding current account and fiscal shortfalls – are Tajikistan (48%), Tonga (41%), Samoa (32%), Lebanon (28%), and Nicaragua (27%).
Banks continue to be the costliest channel for sending remittances (with an average cost of 12.1%), followed by post offices (7%), money transfer operators (5.3%), and mobile operators (4.1%).
Future inflows of remittances can be used as collateral to lower the costs of international borrowings by developing countries. Due to their large size relative to other sources of foreign exchange, counter-cyclical nature and indirect contribution to public finances, remittances can also help improve a country’s sovereign ratings and its ability to repay debt.
Remittance flows to South Asia are estimated to have grown 7.2% in 2023 to reach $189 billion, tapering off from the over 12% increase in 2022. The key drivers of remittance growth in 2023 are historically tight labor market in the United States, high employment growth in Europe reflecting extensive leveraging of worker retention programs, and a dampening of inflation in high-income countries.
Sending $200 to the region’s cost of4.3% on average in the second quarter of 2023. In 2024, growth in remittance flows is expected to fall to 5% due to projected weaker economic growth in the United States, the Euro Area, and GCC countries, major hosts of migrant workers from the region.
Zafar Paracha, secretary, Exchange Companies of Pakistan said currently the banks and Pakistan Remittance Initiative are getting Rs 20 to a dollar each on handling the remittances of overseas, the government at this juncture should take some bold decision, cut the incentive paid to these institutions by at least Rs 5 or Rs 10, and the same be paid to overseas Pakistanis. If the workers abroad will get more Pakistani rupees against their hard-earned money, we are pretty much sure, that remittances will increase.
Having said this, remittance arrivals are still limping and way behind the earlier target of $29.5 billion, in the nine months of the current fiscal year, remittance amounted to $21 billion which has been around one percent higher compared to same period last year but almost 10 percent lower compared with figure of $23 billion of fiscal year nine months of FY22.
Hopefully, the economy is limping back to normalcy. Overseas Pakistanis have a vital role to play in boosting remittances yet political stability is the key.
