Pakistan’s remittance challenge

Pakistan’s labour exports to the Kingdom of Saudi Arabia (KSA) has been weakening March 2016; and, according to the Bureau of Emigration & Overseas Employment (BEOE), the latest tick in labour exports data is also very disappointing. BEOE’s data show that labour migration to KSA dropped 53 percent in 10MFY18, leading up to a 10 percent drop in remittance flows from the KSA in 11MFY18.

This follows a 61 percent year-on-year decline in labour migration to KSA in FY17, and much in line with BR Research’s expectations published earlier. (See also BR Research, Labour export losing steam, Sep 11, 2017 & Saudi remittances blow, Mar 13, 2018)

The reasons for the fall in Pakistan’s labour exports are many. From imposition of taxes per dependent per month on expatriates and their dependents, to higher taxes on private companies that employ foreign workers. In the case of former, the tax was Saudi Riyal (SAR) 100 in 2017, with planned increase of SAR 100 each year to an eventual SAR 400 by 2020. In the case of former, a tax rate of SAR 200 per foreign employee per month was implemented in 2017, and it is slated to increase to SAR 700 by 2020. Companies in the kingdom are also being taxed if they have employed more foreign workers than Saudi nationals.

Lastly, both the KSA and the United Arab Emirates have introduced VAT mode taxation (@5%) on wholesale and retail sales, including restaurants, since the start of this year. Other GCC countries such as Bahrain and Oman are also going to roll out VAT soon – Bahrain by winter 2018 and Oman by spring 2019. These taxes will naturally increase the cost of living for the mostly semi or unskilled workers that Pakistan sends to these countries, which will either deter workers from going to these countries or send lesser monies back home because of VAT’s hit on their wallets.

While remittance inflows from the UAE haven’t fallen sharply in the fiscal year to-date, it has surely slowed. Sooner or later, remittance inflows from that corridor will start following the trends in KSA, since labour migration to the region fell 20 percent year-on-year in 10MFY18, following the decline of 7-8 percent in the last two years.

Considering that the KSA, the UAE, and the GCC attract more than 90 percent of Pakistan’s total labour export and more than 60 percent of total annual remittances, these trends demand a serious look by the government. Efforts like the Pakistan Remittance Initiative can do only so much when labour exports are tanking.

The BEOE is currently working with provincial technical and vocational training authorities to train workers in areas where demand for imported manpower exists. In addition, the government is looking for solutions to reduce the cost labourers have to incur to secure a job in these countries and regions; these costs are several times higher than what labourers in India or other peer economies have to incur. These are steps in the right direction and may bear fruits as well. But without a comprehensive migration policy and reliable data and research, the results of these efforts may be far from desirable.

It is beyond comprehension why research on some key aspects of remittance – a critical component of Pakistan’s external account – still does not exist. For instance, research on the role of foreign exchange companies in remittance market; a periodic survey of families receiving remittances; or by-country-by-category analysis of labour exports has not been conducted by either of public or private sector research institutes.

The Ministry of Overseas Pakistanis and Human Resource Development needs to develop a national migration policy, in consultation with the various stakeholders including foreign offices, provincial vocational training institutions, and the academia to be able to strategize labour exports for at least the next decade.

So far, Pakistan has been exporting labourers to this region, but the region is changing fast. The UAE and the KSA are not expected to witness sharp growth in hard infrastructure requiring construction workers and semi-skilled labourers. These economies will now increasingly need service economy workers – and that’s an area where the likes of India and Philippines can give much fierce competition to Pakistan. Whether any political party will own this challenge and include it in their manifestos remains to be seen.