Remittances have been on an uphill journey in the ongoing fiscal year. These inflows increased significantly by 34 percent in the first five months of FY25, reaching $14.77 billion compared to $11.05 billion in the same period last year. This growth is often attributed to a stable exchange rate over the last year, economic recovery under the IMF program, and a rise in Pakistanis migrating abroad for jobs, with Saudi Arabia, the UAE, the UK, and the US being the primary sources of remittances. In November 2024 alone, remittances totaled $2.92 billion, a 29 percent year-on-year increase, although slightly lower than October’s $3.05 billion.
While the connection between FDI and sustainable growth is often discussed, the critical role of remittances in the country’s sustainable economic development remains largely underexplored. A recent IMF working paper, “Remittances in Times of Uncertainty: Understanding the Dynamics and Implications,” finds that remittance flows are significantly influenced by economic uncertainty in both sending and receiving countries. Uncertainty in remittance-sending countries reduces remittances as migrants prioritize savings amidst income volatility. In receiving countries, domestic uncertainty has a dual effect: it increases remittances in nations with low public spending on health and education, acting as a social safety net, but decreases remittances where private investment opportunities are high. The findings underscore the countercyclical and procyclical nature of remittances depending on their intended use, with critical implications for policy strategies in developing economies.
Pakistan’s reliance on workers in countries like Saudi Arabia, the UAE, and the UK exposes it to risks from economic volatility and policy changes that could affect migrants’ income stability. The dual effects of domestic uncertainty resonate with Pakistan’s situation, where limited public investment in health and education often compels migrants to send additional funds to support families during crises. However, uncertainty linked to reduced private investment opportunities may hinder remittances aimed at long-term growth, a pressing concern for Pakistan amidst its economic challenges. Addressing domestic uncertainty, increasing public service investments, and creating a private investment-friendly environment are essential to channelizing remittances into more productive sectors
Compared to India and Bangladesh, Pakistan faces distinct challenges, including a higher remittance-to-GDP ratio, a declining manufacturing share in GDP, and slower growth in exportable sectors. A recent CDPR study, “Are Overseas Remittances a Source of Dutch Disease in Pakistan?” underscores how remittances contribute to Dutch Disease in Pakistan through multiple mechanisms. They lead to an appreciation of the Pakistani Rupee, reducing export competitiveness—unlike Bangladesh, which implements policies to mitigate this effect and support its export industries. Moreover, remittances have fueled demand for non-tradeable goods like real estate and services, diverting focus from export-oriented sectors and accelerating manufacturing decline. This shift, combined with rising consumption and increased imports, has worsened the trade deficit, a key symptom of Dutch Disease. Over the last three decades, stagnating export growth and GDP rates have created a cycle where economic stagnation drives more emigration and remittances, exacerbating Dutch Disease symptoms and reinforcing stagnation.
To break this cycle, Pakistan must channelize remittances into productive investments like export-oriented industries and infrastructure. Strengthening public services, reducing domestic uncertainty, and promoting financial literacy are essential to ensuring remittances drive sustainable economic growth and contribute to long-term national development.
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