Since January 2022, Pakistan’s economy has been struggling with a significant dip in its remittances, further aggravating its already distressed economic conditions. Given the developmental needs of the country and current inflationary pressure, a further 10 percent decrease in remittance flow in FY23, as per the World Bank’s report[1], is a severe blow to the nation’s economic health. Between 2022 and 2023, the remittances have plummeted by almost 16 percent[2]. To put it into absolute numbers, in FY23, remittances were reduced by $4.25 billion year-on-year.
The situation in Pakistan becomes even more concerning when we contrast it with the rising remittance flow in the South Asian region. As per the World Bank[3], in 2022, South Asia received remittances worth $176 billion, which overshot the forecasts in November 2022. The major contributor to this rise in remittance inflow is neighboring India. In the same year, remittances in Nepal contributed to 23.1 percent of its GDP.
The World Bank pointed out that South Asia’s remittances boom is not being availed by Pakistan as inflows of remittances are not being registered by its Central Bank, leading to negative growth in remittances. The demand for Pakistan’s exports has dwindled in between turbulent internal domestic economic situations and the pressure of rising interest rates compared to other economies of the South Asian region.
Pakistan experienced a depreciation of its rupee against the dollar by 20 percent in 2023. Moreover, the paucity of forex reserves has caused further instability in the exchange rate market. Though the experts have pointed out multiple factors that have led to the looming remittance crisis, a general consensus is that the fundamental reason is one: the persistent political and economic instability of Pakistan.
Institutions determine the socio-economic outcomes and political stability of any nation. Weak institutions, missing markets, and excessive vulnerability to global economic shocks, the very characteristics of crisis-ridden developing nations, are well exemplified by the status quo of the Pakistani economy. We can identify two distinct (yet interrelated) factors contributing to the current state. The external factors include weak global economic growth due to the weakening of labor markets in the West, the Ukraine Crisis, the tension in the Middle East, and the increasing cost of living in Saudi Arabia and the UAE.
Internally, faulty economic policies of the government are held culprits for the declining remittances. The government capped the exchange rate, keeping it artificially at Rs. 220 in 2023, while the dollar appreciated in the open market. This mismatch in the interbank and open market led to the rise of black markets in Pakistan, which offer a markup of Rs. 20-30 for each dollar. This led to the divergence of remitters money, which was erstwhile bound for Pakistan, to other destinations/ or channels for better returns[4][5]. This fueled the illegal hawala activities.As per Pakistani newspaper Dawn, “Large traders and commercial importers are using these[hawala/ hundi] channels to buy foreign exchange from non-resident Pakistanis at much higher than the interbank rate to pay for their imports — to steal taxes as well as circumvent SBP restrictions imposed to slash imports, limit dollar outflow and protect its scanty foreign exchange reserves”[6]. Hence, inefficient government interventions led the remitters to send only necessary sums of money to their homeland via legal channels and the rest via illegal channels or divert the sum elsewhere[7]. The demand of Hawala transactions and the resulting Hundi rates are rising up Pakistan due to demand for illicit import payments and better rate for remittance transactions[8].
Given the rising interest rate due to global monetary tightening, as mentioned, remitters are investing their funds in other destinations, and because of its contradictory[9] policies, Pakistan stands to miss on the remittances. The concern became even more pressing in the middle of the fiscal year 2023 when Pakistan was extremely low on foreign reserves, and an IMF bailout was awaited.
The sticky economic and political instability, through the fall in remittances, is leading to the deterioration of the investment climate as well. There has been a sharp decline in investment in the real estate sector in the last couple of years[10]. Moreover, there has been a significant blow to the confidence of consumers, entrepreneurs, and investors, leading to a further slowdown in the business environment.
What is appalling is that the government maintained such policies despite the fact that the inflow of remittances is an important source for funding development in Pakistan. With the recent massive Pakistan floods and the resulting disruption to the lives and livelihoods, which will take years to recover, missing remittances further jeopardizes the situation, aggravating the economic shock[11]. Moreover, another source of forex inflow, that is, export earnings, has also taken a backseat over the last couple of years, lagging behind remittance earnings, as Pakistani exports were vulnerable to weak global demand due to COVID-19[12].
The economy needs urgent solutions to curtail the inflow of remittances through informal/ illegal channels. In response, the government announced an 80 billion rupees incentive package to encourage remitters. This led to a slight rise in the following months, but the rise was not sustained for long, leading to a dip again in November 2023[13]. Though the incentive schemes were announced by the State Bank of Pakistan, because of inefficiencies in bureaucracy, they were not put in place on time despite the dire need for proper execution to facilitate foreign exchange inflow in the economy[14]. As per Aadil Nakhoda, professor at the Institute of Business Administration Karachi, “Till economic indicators improve, it is unlikely remittances may increase to higher levels, particularly if those receiving remittances are unlikely to invest.[15]” While in 2022, the rest of South Asia enjoyed the lowest remittance costs of all regions in the world, Pakistan could not avail of the benefits of it[16]. The World Bank estimates expect a flat trend in 2024 for remittances in Pakistan due to the excessive presence of informal channels. The Pakistani economy, already grappling with the economic crisis, is experiencing further deceleration in the process of development. The economy is facing a mystery: Are Pakistanis abroad sending less money home? Are they opting for other investment destinations? Or are they sending as much money not through official channels anymore, and hence, the remittance cannot be traced? Lessons from Development Economics reveal that whenever policies and institutions are not strong and competitive, markets are absent, and illegal markets emerge, leading to wastage and loss of welfare. The bolstering of hawala-led grey markets is a response to the inefficient government interventions and long-stretched political and economic stability in Pakistan. If the situations continue, Pakistan will be left behind vis-à-vis other South Asia economies. Unless intervention policies are corrected and proper incentive mechanisms for the remitters are put in place, the economy will continue to miss on its much-needed remittances and resulting investment and the larger goals of development.
[1] https://www.dawn.com/news/1805759
[2] https://www.aljazeera.com/news/2023/7/10/pakistans-flailing-economy-hit-by-drop-in-worker-remittances
[3] https://blogs.worldbank.org/peoplemove/remittance-flows-reached-all-time-high-2022-south-asia#:~:text=Figure%201%3A%20Top%20Remittance%20Recipients,South%20Asia’s%20total%20remittance%20flows.
[4] https://timesofindia.indiatimes.com/world/pakistan/pakistan-lost-over-4bn-in-remittances-due-to-rate-cap-political-and-economic-uncertainty/articleshow/101664648.cms?from=mdr
[5] https://www.reuters.com/markets/asia/pakistans-remittances-recorded-2-bln-august-central-bank-2023-09-11/
[6] https://www.dawn.com/news/1753267
[7] https://tribune.com.pk/story/2425599/remittances-decline-by-14-in-fy23
[8] https://www.brecorder.com/news/40234103#:~:text=With%20the%20increased%20demand%20for,impacting%20the%20current%20account%20deficit.
[9] https://profit.pakistantoday.com.pk/2023/09/12/annual-remittances-have-plummeted-like-never-before-why-has-it-happened/#:~:text=Remittances%20in%20FY23%20were%20down,Pakistanis%20sending%20less%20money%20home%3F&text=Data%20shared%20by%20the%20State,August%202023%20totalled%20%242.09%20billion.
[10] https://tribune.com.pk/story/2418785/pakistan-misses-investment-target
[11] https://conference.iza.org/conference_files/SUMS_2013/ahmed_j8716.pdf
[12] https://www.brecorder.com/news/40279370/a-further-decline-in-remittances
[13] https://www.brecorder.com/news/40279370/a-further-decline-in-remittances
[14] https://profit.pakistantoday.com.pk/2023/09/12/annual-remittances-have-plummeted-like-never-before-why-has-it-happened/#:~:text=Remittances%20in%20FY23%20were%20down,Pakistanis%20sending%20less%20money%20home%3F&text=Data%20shared%20by%20the%20State,August%202023%20totalled%20%242.09%20billion.
[15] https://profit.pakistantoday.com.pk/2023/09/12/annual-remittances-have-plummeted-like-never-before-why-has-it-happened/#:~:text=Remittances%20in%20FY23%20were%20down,Pakistanis%20sending%20less%20money%20home%3F&text=Data%20shared%20by%20the%20State,August%202023%20totalled%20%242.09%20billion.
[16] https://blogs.worldbank.org/peoplemove/remittance-flows-reached-all-time-high-2022-south-asia#:~:text=Figure%201%3A%20Top%20Remittance%20Recipients,South%20Asia’s%20total%20remittance%20flows.