Influx of remittances from overseas Pakistanis after 9/11 has made the annual incremental rate surge to almost $6 billion (on the basis of figure of $4.126 released by State Bank of Pakistan for the period from July 2007 to February 2008 only), thus furbishing forex reserves and providing some cushion to worsening trade deficit in recent years.
These figures of home remittances are however under reported as the remittances through informal channels like 'Hawala' can safely add up another $2.5 billion. Incidentally, Pakistan is now the 5th largest recipient, among the top 25 countries on the globe, and ranks second after India among South Asian countries and is categorised as one of the developing countries with a major stake of remittances on development.
A substantial rise in remittances during last seven years can easily be matched with other inflows in the form of Foreign Direct Investment (FDI) and support funding received from various international agencies. In fact, home remittances have outstripped even the fast growth in FDI, which mainly came for financial institutions and other public sector entities, like PTCL and the KESC, put on sale by the government in recent years.
Although remittances share in total GDP has enhanced to 4% and equals almost 22% of total receipts from exports of goods, yet the component of remittances in the country's total foreign exchange reserves is just enough to hedge against likely adverse exchange rate fluctuations arising from growing the import bill, which now stand further threatened due to rising oil prices and an unabated increase in the import of consumer items.
Growing constraints on the current account deficit and the resultant worsening situation regarding fiscal deficit prompts immediate action for mobilising remittances through official channels and, in this regard, the role of remittances coming in for improving long term growth potentials of the country need to be focused.
According to various studies conducted under the IMF Survey programme to find out the poverty-reducing affect of remittances in developing countries, a 10% increase in remittances to the GDP ratio, at any point of time, can reduce the number of people living below one dollar per day, by little more than one percent.
The impact of remittances on long-term development is to be judged in the perspective of various outcomes associated with the fast increase in the volume of inflows, like giving an impetus to consumption economy, reduction in skilled labour available in the country due to migration and whether remittances are really providing financial deepening, or in other words, development of financial and capital markets, which is essential for sustained economic growth of a country and also in reducing the number of poor in the country.
Increasing number of migrant labour entails cross-inflows of a sizable sum of money, enabling low income households to access formal financial services, prompting banks to float saving products suited to clients from low and lower middle income groups. Further financial assets of this segment of the population builds up with conventional banks prompt financial institutions to provide credit for the setting up micro/small businesses without any reluctance on their part.
Similarly, remittances received in client's accounts with microfinance banks not only broaden the deposit base of the bank, but also provide cover against credit provided to such depositors who intend to undertake any micro business. Accordingly, remittances inflow has a significant role to play in the development of the financial sector of the country.
At the same time, home remittances have facilitated the people to come out of poverty by augmenting recipient households' resources, ensuring improved food intake and health care. Most importantly, home remittances received by poor families become a source of working capital needed for smooth running of their micro businesses. The overall impact of remittances is visible in the form of multiplier effect on economic activity due to increased household spending.
Poverty and remittances have inverse relations. Prevalent poverty in a community and country as a whole prompts the suffering class to look for work abroad. Lack of employment opportunities in the country right from sixties has been the main reason for the exodus of skilled and unskilled labour in large numbers, who in turn have placed the country in a privileged position regarding receipt of remittances, which in recent years have contributed significantly by strengthening external economy of the country through substantial increase in foreign exchange reserves and maintaining, comparatively, a stable rate of exchange despite the sliding dollar to which country's currency is basically linked.
No doubt the bulging size of home remittances has helped the deepening of the financial sector, particularly commercial banks, yet due to a very high remittance fee charged by remitting banks; almost 50% of the remittances are off tracked from formal channels. Besides that, a large number of recipients do not have access to banks and financial institutions due to non-existence of saving products matching their requirements, as such migrants mostly rely on informal money transfer systems like 'hundi' and 'hawala', which are no doubt client friendly due to minimum paper work and high confidentiality and anonymity, but is highly risky.
Further steps taken by financial institutions to eradicate money laundering and financing terrorist activities has necessitated lengthy paper work and identification process for opening an account, which appears quite cumbersome for people from the low and lower middle income population, who are mostly illiterate and shy to channelise remittances through banks.
The identification requirement is also a deterrent to illiterate recipients and prevents them from opening an account with a financial institution. To facilitate account opening for such people, particularly for those from rural and remote areas it is suggested that banks simply rely on communal identification.
Despite the majority of Commercial Banks working on-line, remittances received by their central offices reach the destined customers in a period not less than five days. Banks managements need to make concerted efforts to shorten this period.
Similarly, industrially rich countries and high income developing countries where migrants from low income developing countries have been deployed in their industrial or service sector need to prevail upon their banking sector to reduce the funds transfer fee for migrants of such countries, if they choose to remit funds to their country of origin. No doubt new technologies in the offing will lower the funds transfer cost.
Recent moves in economically developed and developing countries to make use of cell phone encryption technology has facilitated fast and low cost money transfers. Banks in Pakistan, particularly micro finance banks, can make use of these technological innovations to their advantage in areas where they do not have branch net work.
The government of Pakistan, while regulating the inflow of remittances can intervene to regulate the use of remittances by beneficiaries, by compulsory directing a part of remittances for investment in public sector projects in lieu of market-based returns on their hard earned money. It is customary with all developing countries that migrants' families prefer to invest funds in landed property in order to build up their physical assets.
Migrants from northern areas, particularly from Azad Kashmir, have invested in properties, which has given an impetus to construction and its allied industries supplying building material. This has no doubt created employment opportunities, but now the housing industry has reached saturation point in the region, and the remittances received by migrant families no longer remain production oriented.
In Bangladesh and India, particularly in their rural areas, recipients of funds invest their funds in the purchase of agriculture equipment/machinery like tractors etc and equipment needed for non-farming businesses.
In Bangladesh, Grameen Bank and NGOs like BRAC have played an important role in tapping migrant's remittances for development of micro businesses by prompting their families in Bangladesh to place their funds in various mid-long term saving products, giving them handsome returns. At the same time the bank feels comfortable in providing loans to such families for setting up small businesses as the risk is covered against their savings, to some extent.
In this regard micro finance banks operating in the country need to take the initiative to have agency arrangements with leading commercial banks only, for receiving remittances in the accounts of the customers as micro finance banks are not allowed to deal in foreign exchange. For micro finance banks, remittances received can be timely capital infusion to facilitate their operations.
No doubt, growing home remittances, besides boosting the external economy of the country through substantial increase in forex reserves, have eased up budget constraints of millions of recipient households, but at the same time have adversely impacted the economy due to exodus of human capital on a large scale.
A large number of professionals, skilled and semi-skilled workers are needed to undertake various development projects effectively. The country need to create employment opportunities through domestically engineered development programs rather than encouraging unhindered migration of human capital.
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