Going digital: remittances and national development

The year 2021 was a record-breaking year for Pakistani remittances. Pakistani expats transferred $33 billion in 2021, a growth of 26% from the year before. If one considers the size of the economy at $280 billion, which was the number quoted before the moving of baseline to 2015-16, workers' remittances accounted for almost 12% of total GDP. Small wonder that the federal government keeps wooing Pakistani expats and has granted them right to vote in the elections.

According to the World Bank’s Migration and Development Brief, total foreign remittances have surpassed the total foreign direct investment (FDI), over a consecutive two-year period. This only highlights the criticality of foreign remittances for households that rely on them for essential goods and services.

This high growth was consistent across the globe: 21.6% in Latin America and the Caribbean, 9.7% in Middle East and North Africa, 8% in South Asia, 6.2% in Sub-Saharan Africa, and 5.3% in Europe and Central Asia.

Unfortunately, the cost of sending money across borders continues to be a quite high. World Bank’s Remittance Prices Worldwide Database puts it at 6.4% in the first quarter of 2021 which is more than double of the 3% that is the 2030 target of the UN Sustainable Development Goal Number 10.

A deep dive into the data reveals remittance transference costs are lower when sent through some of the upcoming fintech’s as compared to traditional banks or money transmitters that do cash-to-cash transactions.

While the past two years were extraordinary due to unseen circumstances, outward remittances from KSA and UAE have overall been growing steadily on a year-on-year basis.

The biggest source of remittances for Pakistan is Saudi Arabia, followed by the UAE, UK, EU, and the US. Pakistan is not the only beneficiary; overall these countries are dominant with billions of dollars sent outward.

UAE is the world’s second highest outward remittance corridor (after the US) with $48 billion remitted to differed countries in 2020. KSA follows UAE as the third largest outward remittance source with $35 billion. These remittances were sent in a Covid year as the global economy took a nosedive. Given the size of the market, innovation is only natural.

With the UAE’s expat constituting 90% of the population, social media penetration of 99% and 92% smartphone penetration, and similar statistics for the KSA, these markets are highly conducive and lucrative for a technology intervention.

The KSA and UAE governments are fully cognisant of this scenario and are growing the fintech sector by devising regulation to attract more technology partners in the industry. For example, the UAE Central Bank issued revised Stored Value Facility regulations in November 2020, removing the requirement for a JV with a conventional bank and reduced the capital requirements from AED 50 million to AED 15 million, thus allowing for fintech players to get regulated and play a role in the sector.

Financial free-zones in the UAE, such as the Dubai International Financial Centre (DIFC), have their own Providing Money Services regulation that allows fintech companies to get regulated and offer cross border money transmission services.

Similarly, in Saudi, the Central bank of Saudi introduced the Electronic Money Institution license under their Payment Service Provider regulations, to allow for fintech’s to launch and grow quick. These forward-looking policies have had a direct impact on inward flows in countries such as Pakistan as technology channels provide a cheaper, more convenient, and instant method for sending their remittances compared to conventional banks.

The writing is on the wall. Digital transactions are the answer to solving remittance hurdles and many companies in the GCC are embracing a digital transformation. They are seeing their customer base across digital channels increasing by more than twice compared to 2019, with mobile apps accounting for a growing chunk of overall remittance transactions.

Around the time when the KSA and UAE central banks were devising enabling policies i.e., FY 2020, Pakistan received $13.2 total remittances with $6 billion, or 45%, originating from just KSA and UAE.

The correlation can easily be identified, simplifying the process through technology, and using official channels was a contributing factor towards the reporting of higher numbers.

As the fintech industry grows in these principal markets, the Government of Pakistan has responded with its own policies in a bid to attract remittances and investments through formal channels. It was not just the lucrative market, pressure from the FATF on money laundering and terrorist financing was a big factor in promoting money movement through formal and regulated channels as opposed to informal channels such as hawala.

KSA and UAE are critical for Pakistan with almost 50% of total remittances in 2021 and their contribution increased that year compared to previous ones. There are many reasons for this growth. One reason could be that as households suffered rising costs of inflation, the workers in these countries sent more cash.

However, the traceable reasons are simple. As Covid made travel more difficult and imposed mobility issues, the physical movement of cash through unofficial channels of hundi and hawala decreased. Since cash could not be moved across borders, migrant workers had to rely on official channels to send money to their families.

The Pakistan government came up with the Roshan Digital Account scheme, a smart response to a dynamic situation which can be utilized for Naya Pakistan certificates, residential real estate investments, investment in shares quoted on Pakistan Stock Exchange and investment in Bank’s Islamic savings and term certificate products.

It also makes allowances for charity and makes charitable transactions simple. Since September 2020, Pakistanis from 175 countries have opened more than 2.8 million accounts which have account for $24.6 billion in deposits, 69% of which have gone towards purchase of Naya Pakistan certificates. Naya Pakistan Certificates provide relatively better returns to expats than the deposit rates in their own country with USD account annualized return at 7%, many times more than banks in America. All this is resulting in an increase in dollars flowing into the country.

Many incentives have also been provided to overseas Pakistanis remitting money through formal channels, such as low or no tax on import of mobile phones. As per the Baggage Rules 2006, overseas Pakistanis have the facility of customs duty credit at the prevailing rate on every imported item when using Foreign Exchange Remittance Card for payment of duty and taxes on all items including mobile phones.

Pakistan is not the only country to see growth in remittances. In November 2021 the World Bank reported that remittances to low- and middle-income countries are projected to have grown 7.3% over the previous year and will be $589 billion by end of the year. This growth was higher than expected. However, when one considers the flow of funds even in the Covid peak year of 2020 in which remittances declined by only 1.7%, this is just the following of a resilient trend established earlier.

While 2021 was a major year, remittances are forecasted to grow at only 2.6% in 2022. High remittance costs continue even more of a pain point for a worker who is far from their loved ones and labors for them.

In this scenario, Pakistan should do everything to align its policies with the coming change. Pakistani banks are too ready to follow traditional practices. Considering the role remittances play in holding together Pakistani households and that they constitute almost 12% of Pakistan’s economy and are more than the country’s FDI, digital remittances is an area the State Bank of Pakistan should be zeroing into.

However, a high proportion of remittance as a factor of the economy is not a good indicator. China’s inward remittance as a percentage of GDP is around 0.1%. In 2000, Pakistan’s share was 1.3% and since then has only ballooned.

If Pakistan is to prosper and absorb the growing work force it will need to focus on easing the path of inward remittances but much more importantly, focus on expanding the industrial base and exports.

The article does not necessarily reflect the opinion of Business Recorder or its owners