Pakistan is the sixth largest recipient of remittances in the world, with the State Bank of Pakistan declaring a total of $29 billion received in 2022. Remittances play an important role in Pakistan’s economy, contributing 8.99% to its GDP, outpacing the global average of 5.32% (World Bank, 2021).

The Pakistani diaspora is also the sixth largest in the world, with migrants located in virtually every continent. The majority of remittance earnings arrive from Saudi Arabia ($5.7 billion), followed by the United Arab Emirates ($4.3 billion), and the United Kingdom ($2.9 billion).

The nation’s earnings outcompete Bangladesh’s and Vietnam’s, whose received remittances were $21 billion and $19 billion, respectively, for the same year. However, these were still below the Philippines’ at $38 billion and India’s at $100 billion.

Pakistan’s remittance earnings have been increasing over time, coinciding with the establishment of the Pakistan Remittance Initiative in 2009 and subsequent increased outreach of banks in the remittance market. In 2021, the Planning Commission recommended initiatives to increase remittances, which focused on making it easier for Pakistani labour to gain employment abroad.

This initiative should be approached with some caution, as little is mentioned about the use of remittances domestically to promote growth. As the nation attempts to expand this inflow, important questions arise, both macroeconomic (its relationship to economic growth, investment, and trade balance) and also microeconomic (its role in determining consumption patterns and labour supply).

                 Figure 1: Sources of Remittances (Millions of USD)
                         2023                         July-March
Country          March           February        FY23           FY22         YoY Growth
USA              316.0           219.4           2,288.60       2,218             3.20%
UK               422.0           317.0           3,053.20       3,193.40          4.40%
Saudi Arabia     563.9           454.6           4,910.60       5,827.80         15.70%
UAE              406.7           324.0           3,604.30       4298.0           16.10%
EU               298.6           245.3           2,334.40       2,508.40          6.90%
Total            1269.2          919.3           16,191.10      13,748           46.30%
Source: State Bank of Pakistan

The existing research is divided on whether remittances have a net positive or negative impact on Pakistan’s political-economy. What can be said with certainty is that the relationship between remittance inflows and long-term economic growth is highly heterogeneous. While remittances definitely increase consumption amongst recipients, that consumption, however, does not necessarily translate into long-term, non-volatile growth.

The State Bank of Pakistan’s (SBP’s) empirical analysis shows a positive correlation between remittance growth and economic growth. With the findings indicating a 1% increase in remittance flows results in a 0.15% increase in GDP growth as of 2017.

However, more recent econometric analysis in 2020 from the World Bank, Asian Development Bank (ADB), and independent research from economic institutes, have all shown that increases in remittance flows actually decrease economic growth for Pakistan. Perhaps this contradiction can be resolved through the one conclusion all the literature holds common - remittances have a negligible to negative impact on investment.

This conclusion is supported by the fact that the nations that have consistently shown a positive link between remittances and economic growth, such as India and Singapore, have placed considerable resources into channeling remittance flows towards investment into industry. Pakistan must shed its reliance on remittances, because while they may work as a short-term tool for poverty alleviation, they entail a host of negative externalities that hurt the nation’s long-term growth potential.

Research conducted in 2008 by the Social Science Research Network and in 2016 by the International Journal of Organizational Leadership has found that remittances do contribute to unemployment. Even when migration flows are excluded from the equation, remittances decrease incentives for labour force participation among recipient households.

Furthermore, a slight linkage exists between remittances and decreased working hours. Implying that those households which do work, have incentives to work for fewer hours knowing that wages can be substituted. The only caveat being that when remittances are directed towards productive investments such as small scale enterprises then unemployment decreases.

However, the consumption patterns in Pakistan do not support this argument. Pakistan’s average ratio of investment to GDP has been 17.2% since 1960, one of the lowest in the world, standing at 151 out of 175 countries. As of June 2022, the ratio of investment to nominal GDP was 15.2%. Compared to regional competitors, Pakistan’s savings are less than half of India’s (30.2% of GDP) and Bangladesh’s (36% of GDP).

A limited amount of research under the State Bank of Pakistan has shown that remittances are mainly used to acquire consumer durables and plots. Research by the ADB (Asian Development Bank) has shown that remittances are majorly utilized for consumption as well. Increased consumption is generally favourable, as it stimulates demand and generates employment. However, the larger pattern is one of dependency.

Both at the household level, where remittances depress labour-force participation, but also at the policy level where the state is less motivated to promote job expansion. Therefore, though remittances can help alleviate poverty, they cannot eliminate its structural determinants. Unless they are paired with long-term growth through promotion of industry, remittances only exist as a short-term solution for the nation’s balance of payments crisis.

While increased consumption on its own is beneficial for economies, remittances pose an opportunity cost that must be highlighted. Remittance inflows lead to exchange rate appreciation, decreased trade competitiveness, and a deteriorated balance of payments. The simplest way to understand this process is to envision remittances as a type of capital inflow. Economies become vulnerable to the Dutch disease when there are large, uncontrolled surges of capital inflow towards a particular sector.

(To be continued)

Copyright Business Recorder, 2023

Author Image

Shahid Sattar

PUBLIC SECTOR EXPERIENCE: He has served as Member Energy of the Planning Commission of Pakistan & has also been an advisor at: Ministry of Finance Ministry of Petroleum Ministry of Water & Power

PRIVATE SECTOR EXPERIENCE: He has held senior management positions with various energy sector entities and has worked with the World Bank, USAID and DFID since 1988. Mr. Shahid Sattar joined All Pakistan Textile Mills Association in 2017 and holds the office of Executive Director and Secretary General of APTMA.

He has many international publications and has been regularly writing articles in Pakistani newspapers on the industry and economic issues which can be viewed in Articles & Blogs Section of this website.


Comments are closed.

Tulukan Mairandi Apr 19, 2023 11:32am
90% of Pakistani migrants are low skilled low pay workers, another 9% are convicts languishing in foreign jails. The remaining <1% do not fall in those 2 categories.
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Ahmad Apr 19, 2023 11:45am
This article is written with different angle.very interesting.
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Fazeel Siddiqui (Overseas Pakistani) Apr 19, 2023 12:38pm
Pakistan govt for 20 years exchanged Overseas Pakistanis FX remittances to PKR on forced 25-50% lower rate at SBP defying market. That amounts to $4 to $5b per year loss ($20b loss aggregate in PMLN 13-18 only) to OPs just to make available cheap & discounted dollar for importers & money launders. Isn't it state's pickpocketing technique? Govt makes further its taxes revenue on imports turnover. By giving huge loss to OPs Darknomics maintained dollar “under control”. No surprise why OPs are denied voting facility bc they are treat as machines only and their future doesn't matter to resident Pakistanis.
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Fazeel Siddiqui (Overseas Pakistani) Apr 19, 2023 12:41pm
After being robbed at SBP by GoP Overseas Pakistanis are brutally robbed in Real estate of Pakistan which is 90% fraud and rest 10% non-yielding bad investment. Fake valuation, unregistered plots sell in name of files, haven for black money of corruption & crimes, terror & extremism financing and much more, this all kills economy but benefits only to mafia's Malik Riaz & gang in Bahria Town and establishment in DHA as well as millions of estate dealers who produce nothing but make millions in a month.
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Fazeel Siddiqui (Overseas Pakistani) Apr 19, 2023 12:43pm
Overseas Pakistanis have finally lost confidence in democracy, politics, economy & rule of law in Pakistan. To remain in infinite rule neutrals need lame democracy and state sponsored Ponzi economy (e.g. artificially fixed FX rate to buy OP's remittances at cheap rate and secondly the fraud real estate schemes backed by people from powerful corridors). Now OPs will not burn their precious hard earned FX for artificially lowered rate and either keep it cash in hand or invest in host country. Now deep state handlers should sell ubermensch politicians & estabilshment's stalwarts to master countries as to raise this $35b per year.
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Fazeel Siddiqui (Overseas Pakistani) Apr 19, 2023 12:47pm
Now ECP itself declared on behalf of PDM/PPP/Military govt that Pakistan isn't safe for living and not safe for investments. Overseas Pakistanis should invest in host country in currency they earn for fair returns and to protect hard earned money. From govt to govt to real estate to business partners and friends all are eying to rob OP as this is the only bread & butter of miserable people.
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Tulukan Mairandi Apr 19, 2023 01:14pm
Whilst our country is living off the remittance of these low pay workers working in slave-like conditions, you should see how Pakistani missions ill-treat them if they lose a passport or even a leg in the course of their work. In some cases, they actually receive cash aid from the Indian missions or charities, as the Pakistani mission staff basically chase them away. That's a sad fact.
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Abdullah Apr 19, 2023 01:37pm
How much more do you want the ruppee to be weak.We dont have anything to export what competitevenes does the writer talk about. Except textiles and vegetables whats there too export.We need stronger dollar as of now as we are a consumer scoiety.
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Az_Iz Apr 19, 2023 11:57pm
The government should end giving subsidies. Then family members will have more incentive to work, when they, like everyone else will have to pay full price.
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