Foreign Remittance

This year we are expecting more than $10 billion in foreign remittance. A very large number of Pakistanis are currently working and living in countries that are not their home, and sending funds regularly back to their families in Pakistan. Foreign remittance is making a huge contribution towards macroeconomic stability, or any semblance of it, in Pakistan currently.
It is allowing us to keep foreign reserves looking ok and keeping exchange rate steady. Right now our import bill, due to economic slowdown, is also low and this, in addition to the remittance inflows, is giving the breathing space that we see on foreign account side. With large deficits, large debt stock, few international lenders willing to give us loans, existing IMF programme held in abeyance, this breathing space is important.
But there are interesting things to think about regarding remittance flows as well. Remittance started increasing substantially only a few years ago. Initially it was speculated that the significant increases in remittances were the result of one time increases where Pakistanis were, after 9/11 and the crack down on Hundi as well as harder living conditions outside of Pakistan, shifting back their wealth and savings to Pakistan.
This was specially the case as remittance increased even when the world economy went into a recession. But if this was indeed the case increases in remittance should have stopped and things should have gone to pre-increase days. But to the contrary, we continue to see healthy growth in remittances. This calls for some explanation and someone, State Bank research department or other macroeconomic researchers, should look into this. It is important to understand what sort of money is coming in as remittance and why because in some cases this might not be the kind of money Pakistan wants to attract too much of: if it is 'hot money' and is coming in for speculative reasons, for example, it could flow out as easily as well and this could get the Pakistani economy in really hot waters. So we should be looking at who is sending the money, what is the source of their income, and what is the money being spent on in Pakistan.
But one can speculate and have hypotheses as to why this could be happening. It is not the case that the world economy has improved or there is a boom in the countries where Pakistanis live and/or work in, and/or a lot of new jobs have been created for Pakistanis, so how do we make sense of healthy growth rates in remittances?
One possibility is that given the government/State Bank's efforts to keep the exchange rate steady Pakistanis see the possibility of getting a higher return on Rupee deposits (13-15%) in Pakistan, compared to dollar or other currency deposits abroad (1-2%) and they are sending their money for these higher returns. Of course, the risk is higher in Pakistan and so it might be more Pakistanis who are taking this risk than foreigners, but the possibility that something like this might be happening, and thus bringing in 'hot money' which could leave the country if the underlying interest rate differentials changed or other factors changed, must be looked at. The risk-adjusted returns, even after allowing for possibility of exchange restrictions or risk of nationalisation, might still be positive and significant.
Another possibility is that since all foreign remittance that Pakistan gets is considered to be 'white money' and there are no questions asked about source of funds, and there are no taxes on it as well, at least on entry, there might be people in Pakistan who earn through non-documented sources, evade taxes and then just 'whiten' the money by taking it out through Hundi and bringing it back as foreign currency.
I made Rs 10 million from my work in Pakistan, but evaded paying taxes on it, which is not uncommon in Pakistan but now need to whiten the money so that I can bring it into legitimate and documented economy so I send the money, through hundi, to UAE and then have it remitted back to me in dollars. I do pay some transaction cost for it, but all of the money gets legitimacy and so the transaction cost is a small amount to pay for this 'whitening'. Now the FBR cannot do anything about it either.
If this happens the question really is about the size of such flows: how big are they and do they help us explain the growth in foreign remittance or a significant part of it? There is the further question of what impact this has on our GNP figures and so on, but that is of more academic interest and not related to the question at hand.
Foreign remittance is, right now, saving us from major troubles. If our import bill starts increasing, which can if oil prices go higher or remain high, or if our imports start picking up, then remittance flows become even more important to keep us in good stead. Given our budget deficits and debt stock, these flows are the main source of foreign capital for us. And remittance has been showing robust and sustained growth. But it is not clear where this growth is coming from.
This is essential for us to understand if we are to figure out whether the increased flows are good for us or not and how to ensure that they continue if they are. And if they are not good for us, how are we to deal with it. We have only discussed some hypotheses but if there is any truth to them, and that is an empirical question, we have a lot to worry about.