For developing countries, the three main sources to garner dollars are FDIs, exports and remittances. The inflows from these channels play an equally important part in stabilising local currency and improving economic activity. Nevertheless, each revenue front portends different economic conditions in the home country.
Strong activity on the export front is symptomatic of improving industrial motion. Hefty inflows in the form of FDIs largely mirror the home country's sound infrastructure, improving economic activity, consistency in policy making, and stable political and law & order situation.
On the flip side, fat remittances, though lead to prosperity by the time it rises, is principally indicative of poverty and a growing unemployment level that cause higher migration of labour force in the home country. In the case of Pakistan, with FDIs floundering, export proceeds and workers' remuneration have become two prime sources of earning greenbacks.
The jump in exports has provided breathing space to the economy. But the irony is that the growth in exports is price-centric rather than due to fortifiable production levels, and that may have a similar impact on the import bill. Thus, for the country that holds borrowed funds in its foreign reserve pockets, the only silver lining at the moment are remittances as the country received a record inflow of remittances during the last fiscal year - up around 26 percent to $11.2 billion - after making a record high for the sixth year in a row.
OUTPACING REGIONAL INFLOWS
Even though all developing countries have registered growth in remittances during the past few years, the best and astonishing part is that Pakistan managed to outwit other regional countries on a growth scale. If comparison is done on a calendar-year basis, the remittances were nearly nine times higher than in CY10 from CY00 level. This quantum of jump glows in comparison to other countries such as 5.5 times in Bangladesh, four times in India, 3.4 times in Philippines and four times in Vietnam during the same time period, according to World Bank data.
This helped increase the ratio of remittances-to-GDP to around 5.5 percent in CY10 from 1.5 percent in CY00. But even in the face of phenomenal growth, Pakistan's remittances-to-GDP ratio pales in comparison to that of many Asian countries, such as 11 percent in Philippines and Bangladesh, eight percent in Vietnam and more than 20 percent in Nepal. Money sent home by overseas Pakistanis is appreciated by the government as much as by their families back home.
But in the absence of quality data on migration and remittances, and a parallel informal transaction channel "Hundi" that still facilitates a substantial portion of domestic inflows, the exponential growth raises doubts as to whether this growth trend will continue.
Several economists question the sustainability of remittances, thus raising concerns that Pakistan may not be able to rely on them to fill the external account imbalances. It is hard to rake through the mystery surrounding ifs, ands, or buts. But close analysis of factors which directly and indirectly result in growth in remittances could to some extent solve the riddle.
THE ONE-OFF FACTORS
In part, the credit goes to huge strides taken by the government to transfer the flow of funds from illegal channels to formal channels in the past few years. The scale of funds transfer through the informal channel is huge. This clear from the World Bank's finding. "Econometric analysis and available household surveys suggest that unrecorded flows through informal channels may add 50 percent or more to recorded flows," according to Global Economic Prospects 2006.
This also chimes with a local Household Survey on Overseas Migrants and Remittances (HSOMR) conducted by IOM along with Pakistan Institute of Development Economics (PIDE), a 2009 survey of 548 households with at least one family member working in Saudi Arabia.
The survey concluded that 40 percent of the total remittances were received by households through the banking channel, 29 percent were transferred through the 'hundi' system and one-third of remittances were either transferred through friends or relatives or were brought to Pakistan by the migrants themselves during their visits home.
The upgradation in banking infrastructure and arrangement with foreign banks, which has increased reach and reduced delivery time, could help explain the growing enthusiasm for remitting funds through formal channels. Economists also attribute this growth to widening interest rate differential between home country and host countries amid monetary easing in the developed countries. In the same breath, the banking crisis across the world has also reduced faith in the renowned global banks, thus, forcing the Pakistani diaspora to invest in the home country.
The inquisitive increase might also relate to whitening of black money. But some opponents tampered this hypothesis by highlighting the fact that the size of remittances is quite small. God only knows! Black money senders are savvy enough not to get caught.
If we believe that confluences of the above-mentioned factors are responsible for rise, these effects will likely dissipate over time. However, not to mention, the market might not overlook the other two main documented factors that are certainly responsible for hefty jump in workers' fund from abroad.
THE ROUTINE DRIVERS Beyond a reasonable doubt, with employment opportunities short in supply, along with poor political conditions, migration from Pakistan in pursuit of overseas employment has been playing a crucial part in increasing worker's income from abroad.
The data complied by the Bureau of Emigration and Overseas Employment indicates that 1.89 million people have moved out of the country for employment since 2006. And as they settle abroad, their prime objective is to send money home. Second, is the jump in wages across the globe. The wages level in real terms across the globe leapt by 5.7 percent between 2000 and 2007 and by 1.5 percent annually in 2008 and 2009, according to the ILO.
The upshot is that if both non-routine and demographic factors, as explained above, are contributing towards growth, then soon the time will come when the growth rate will become directly proportional to the net number of Pakistanis travelling for employment abroad.
NEED TO BE CAUTIOUS Still policymakers need to be cautious, because the current mix of remittance portfolio poses risks to future inflows. This can be scrutinised from the fact that nearly 75 percent of remittances are coming from just four destinations, such as the US, UK, Saudi Arabia and UAE. Most of all, out of all Pakistanis who went abroad since 2006, nearly 83 percent of people went to Saudi Arabia and UAE.
These numbers suggest that the country needs to look beyond to a wider mix of countries since any significant development in these countries might definitely mow inflows down.
The workers remuneration from US is vulnerable on the back of growing unemployment level and weak economy. Even though the remittances from the US increased by 17 percent in FY11, its share in total remittance reduced to 18 percent in FY11 from 20 percent and 22 percent in FY10 and FY09.
The fiscal health in UK is also in a fragile state and might become prey to the fiscal flu spreading in the euro zone. However, the share of remittances from UK is on the upside; it stood at around 11 percent in FY11, as opposed to ten percent in FY10 and eight percent in FY09.
The economic condition in oil rich Saudi Arabia is in much better shape than other countries. However, lately, an aggressive initiative launched by Saudi Arabian government to cap work permit tenure for foreign nationals to address its own unemployment issues poses a serious threat to remittances. The share of remittances from KSA has been continuously increasing; it surged to 24 percent in FY11, from 22 percent in FY10 and 20 percent in FY09.
SOMETHING IS BETTER THAN NOTHING There is no harm having a rising remittance level. But growing dependence on this foreign exchange source, when it is highly unpredictable on account of lack of research on the said topic, has been a great concern for policymakers. This stresses the need for establishing a dedicated national overseas employment market research department.
With the country pinning hopes on remittances amid declining aids and investments from abroad, the government needs to introduce initiatives for young workforce on the lookout for employment abroad to make this avenue bankable. Moreover, the government also needs to design and launch investment vehicles, primarily a diaspora bond, that would provide investment opportunities for Pakistanis living abroad.
Last, but not the least, there is a need to do homework to ramp up marketing activities. Promoters criticise that the government is backing the wrong horse by spending too much to attract investments which has been proved futile due to energy shortages and poor law and order condition.
The government should also send high-level foreign delegates to the market as skilled labour, as this is the only investment where the country can amass foreign currency without making any investment and tough bargaining with donor agencies.
The writer is a Research Analyst at Business Recorder. She can be reached at [email protected]
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