Role of remittances: The News

By Dr Ashfaque H Khan
Remittances constitute one of the largest and more resilient sources of foreign exchange earnings for developing countries including Pakistan. The flow of workers' remittances to developing countries has grown steadily over the past three decades – rising from $18 billion in 1980 to $328 billion in 2008; approximately an 18-fold increase. Within developing countries, South Asia accounted for 23 per cent, that is, $74 billion. India alone accounted for 70 per cent ($52 billion) remittances in South Asia followed by Bangladesh (12 per cent or $9 billion) and Pakistan (9.5 per cent or $7 billion). These three countries together accounted for almost 92 per cent or a remittance inflow of $68 billion in South Asia in 2008.

Workers' remittances in Pakistan continued to exhibit a rising trend over the last one decade (1999/00-2008/09). These have grown eight fold in 10 years – rising from $984 million to $7.8 billion. United States, UAE, other GCC countries and Saudi Arabia accounted for over 79 per cent of total inflow of remittances.

The surge in remittances flows in Pakistan during 2008-09 has surprised many analysts. In the midst of the global economic meltdown and rise in unemployment, remittances grew by over 21 per cent in 2008-09. This surge in inflow was not only limited to Pakistan but South Asia as a whole registered an increase of 33 per cent. Why did remittances surge in South Asia in general and Pakistan in particular during the outgoing fiscal year? There are several views in this respect. Firstly, migrants may have lost their jobs in host countries and have returned with their savings; hence, the jump in remittances flows. Secondly, Saudi Arabia, UAE and other GCC countries are major destinations for the Pakistani migrants. It appears that these countries have not sent Pakistani workers back home in large numbers. Thirdly, falling property prices, rising interest rate differentials and a sharp depreciation of exchange rate may have played important roles in attracting large remittance inflows for investment purposes as opposed to consumption purposes.

Why are remittances important for developing countries like Pakistan? The developmental impact of remittances is widespread as it affects various sectors of the economy and helps improve living standards; these are non-debt creating inflows and help in developing the financial sector in recipient countries.

In particular, remittances improve households' welfare by lifting recipient families out of poverty and insulating them against income shocks. These flows serve as a means to increase recipient families' income, ease credit and liquidity constraints and allow them to improve their consumption and living standards. The increase in recipient families' consumption leads to an increase in the demand for goods and services which encourages entrepreneurs to invest more. This leads to an expansion of markets, increase in output, higher economic growth, and rise in employment opportunities. Higher consumption expenditure and greater demand for goods and services may increase tax revenue through consumption-based taxes. These additional resources can be used by the government by allocating more resources for strengthening the country's physical infrastructure and for alleviating poverty. Remittances also improve a country's debt sustainability level. Empirical evidence suggests that the recipient country of remittances can sustain higher levels of future debt. Empirical evidence also suggests that remittances have a positive and significant impact on investment and economic growth.

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