Are remittances hurting the economy? Atif Mian weighs in

Noted Pakistani-American economist Atif Mian has argued that Pakistan’s increasing dependence on remittance inflows may be undermining Pakistan’s economic growth by fueling consumption, overvaluing the rupee, and weakening exports.

“Remittances are free foreign exchange, straight into households, with no debt attached. Surely that must be good? For the families receiving them, absolutely. But for the broader macroeconomy, the story is more complicated - and more interesting,” wrote Atif on his website atifmian.com on Friday.

“If remittances are not managed properly, they can become a restraint on growth. In fact, the evidence suggests that this is exactly what has happened in Pakistan.”

Remittances play a significant role in supporting the country’s external account, stimulating Pakistan’s economic activity, and supplementing the disposable incomes of remittance-dependent households.

According to the latest data, provided by the SBP, remittance inflows in Pakistan stood at $16.1 billion during the first five months of the ongoing fiscal year, up from $14.8 billion in 5MFY25, a jump of 9.3%.

Meanwhile, Atif, currently a professor of Economics at Princeton University, noted that remittance inflows to Pakistan, sent by nearly 10 million Pakistanis living abroad, are now about $38 billion a year, roughly 10% of GDP.

“They are now about twice as large as what you’d expect for a country at this income level,” he said.

Such figures do have macroeconomic effects, says Atif.

What is Atif Mian 5/50 framework to transform Pakistan’s economy?

“First, they raise consumption and spending power faster than the economy’s own productive capacity. Second, the steady inflow of dollars tends to appreciate the rupee in real terms, which disproportionately hurts the more productive, export-oriented tradable sector. Together, these forces make the country more expensive than its productivity justifies — the classic pattern economists call Dutch disease.”

This trend has become visible in Pakistan as well, as the country’s export sector has steadily weakened during the period, while remittances have become more dominant, the economist said.

“The exchange rate has been overvalued for long periods. Pakistan’s investment-to-GDP ratio is strikingly low—implying an unusually high consumption-to-GDP ratio—compared with other countries at a similar income level,” highlighted Atif.

However, this trend can be reversed by adopting the right economic policies, says Atif.

“That requires two key steps. First, when remittances surge, the central bank shouldn’t just let them spill into consumption and an overvalued currency. It can lean against the wind by building foreign exchange reserves

“Second, the government needs a serious foreign direct investment strategy that channels capital into greenfield projects in tradable and other high-productivity, technology-intensive sectors. These inflows must be carefully regulated: short-term speculative portfolio flows, and investment into low-productivity non-tradable sectors like real estate, should be discouraged.”

Atif also questioned Pakistan’s elite rent-seeking behaviour, which keeps the exchange rate overvalued, allowing them to convert domestically generated rents into foreign assets on more favourable terms.

“The irony is stark here: the remittances of poor workers forced to leave home in search of a livelihood end up helping sustain the external purchasing power of the country’s most privileged groups,” he concluded.