Pakistan must prepare to let go off the crutches of remittances

A key ingredient in attaining external account stability is inward remittances, often hailed as the star performer. Policymakers and analysts have come to take the USD 3 billion per month in remittances for granted. While it is reassuring that this inflow is growing, over-reliance on it is far from a prudent strategy.

There is little visibility on its long-term trajectory, and it cannot be sustainably increased through government or central bank policy measures. At best, authorities can facilitate formal sector flows by curbing informal channels like hundi and hawala.

In contrast, there are tangible policies that can help boost manufacturing and services exports. For instance, if a textile manufacturer expands operations and secures new markets, the resulting inflows exhibit some permanence. Similarly, equipping workers with relevant skillsets can enhance services exports. Firms invest based on favorable government policies, which bear fruit over time. Once a country builds a robust export base, it becomes a trusted global supplier — a legacy the government can rightly claim credit for.

However, remittances tell a different story. The government deserves no accolades for their increase. On the contrary, the state should be criticized for enabling brain drain, allowing other countries to benefit from the productivity of workers educated and trained at home. In return, Pakistan receives only a fraction of their earnings in the form of remittances, which are sent back to support families.

While remittances have been the primary driver of Pakistan’s current account surplus, relying on them is a slippery slope. Structural shifts are already challenging the sustainability of these inflows. First-generation migrants often maintain emotional and familial ties to Pakistan, investing and supporting relatives back home. But these connections weaken with the second generation, who typically lack such ties and show little interest in investing in their parents’ homeland. This trend is particularly evident in the developed world, which accounts for 41 percent of remittances over the past year from the US, UK, EU, Australia, and Canada.

A similar issue exists with labour migrants to GCC countries, who currently contribute around 55 percent of remittances. This group predominantly sends home the bulk of their earnings but operates in cycles, typically returning to Pakistan after 5–10 years. Replacements are becoming harder to secure due to tightening visa regimes and concerns about the discipline and reliability of Pakistani labour. If these issues persist, inflows could decline in the medium to long term.

Moreover, the GCC economies themselves face long-term challenges. As the global reliance on oil decreases with the rise of renewables, infrastructure growth in these oil-dependent states may slow, reducing demand for foreign labour. This could further erode remittance inflows.

The reliance on remittances is fraught with uncertainty, and the available data for analysis remains rudimentary. Unlike textiles, where global markets are measurable and competition is tangible, remittance trends are harder to predict or influence directly.

Geopolitical factors add another layer of risk. Tighter visa policies in the GCC, coupled with growing uncertainty in a post-oil world, could severely impact remittance sustainability—a worrying prospect for a nation with a fragile external account.

Even the once-thriving real estate market fueled by expatriate investment has diminished, with second-generation migrants showing little interest. Although freelancing has emerged as a new avenue, much of this income, recorded as remittances, is actually services exports. Unfortunately, the lack of detailed data hampers any meaningful analysis of this segment.

The bottom line is stark: reliance on remittances is unsustainable. The inflows contribute to import-driven growth, often exacerbating the symptoms of Dutch disease, while their future is clouded by multiple risks. Pakistan must focus on building a resilient, export-driven economy. Depending on remittances to stabilize the external account is akin to building a house on shifting sands.

While remittances have provided temporary relief, the long-term solution lies in fostering competitiveness, expanding exports, and reducing dependence on goodwill dollars. It’s time to shift gears and move beyond the remittance crutch.

Copyright Business Recorder, 2024