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Digital and legally vibrant model of remittance need of the hour

Digital and legally vibrant model of remittance need of the hour

Interview with Agha Shahab Ahmed Khan – President, Karachi Chamber of Commerce & Industry

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PAKISTAN & GULF ECONOMIST had an exclusive conversation with Agha Shahab Ahmed Khan vis-à-vis foreign remittances. Following are the excerpts of the conversation:

Remittances play a key role in foreign exchange earnings for Pakistan and in helping balance the macroeconomic books of the country. They are especially vital as Pakistan’s exports are very low and the country has a hefty import bill. Due to the high trade deficit, Pakistan has to borrow from lending agencies on tough conditions that push the cost of living for the ordinary Pakistanis and the cost of doing business for industrialists and SMEs. With the global economic shock of the coronavirus, remittances are set to drop due to a fall of income and loss of jobs for overseas Pakistanis abroad. To make matters worse due to low oil prices, remittances will fall from Gulf countries as well, which are a major source for Pakistan. The lower remittances will lead to widening of current account deficits, which will contribute to an even higher external financing need. This is the vicious cycle Pakistan is trapped in. To make matters worse thousands of migrant workers have returned to Pakistan, and travel restrictions have limited manpower exports.

For a country like Pakistan with very weak external finances, the expected shock to remittances will compound all the challenges of the country. Pakistan needs a comprehensive strategy to increase remittances. Pakistan needs to increase its manpower exports based on what the demand is globally. National vocational and technical training commission needs to update its curriculum in this regard. Right now the world needs medical staff so Pakistan needs to fast track the training of nurses and other medical staff and start sending them abroad after meeting the local needs. Ministry of Overseas Pakistanis needs to start lobbying for more MoUs with countries for manpower exports. Secondly a stricter crackdown needs to be launched against hawala and hundi as a lot of Pakistanis still use illegal money transfer methods as they believe they are more convenient and cost saving.



Overseas Pakistanis need to be enticed to send money legally and this will only happen when Pakistan invests in digital solution through the creation of a vibrant fintech ecosystem. Digital remittances help cut costs so that overseas Pakistanis do not have to pay high fees to third parties to send money, or travel to a money transfer agent. Thus creating digital money transfer methods is the need of the hour. Pakistan also needs to focus on import substitution while it grapples with the loss of remittances. It also needs to counter the loss of foreign receipts by lobbying for further relief in debt from international lending agencies as well.

There is no doubt that remittances are an important part for Pakistan’s economy. Sadly, people have found illegal ways such as the ‘Hundi System’ to transmit their funds in a bid to evade taxes and other charges. This deeply hurts the economy. It was reported that when the government made efforts to encourage the use of proper banking channels to remit funds in FY19, a near 12% increase was recorded in 8-months. It is clear that special measures need to be taken in order to ensure that people don’t have any choice but to use proper banking channels to transfer their funds. Since usage of illegal channels cannot be stopped immediately, the government and relevant departments must reduce the applicable charges and remove operational anomalies that allure people towards illegal channels. Transmitting money through official channels will bring benefit to the country on multiple fronts. Not only will the amount of remittance received by Pakistan rise, but government’s tax collection on this amount will also increase accordingly. Furthermore, using banking channels will improve financial transparency which will increase the extent of compliance with international regulations such as those prescribed by Financial Action Task Force (FATF) leading to better international perception of Pakistan.

Pakistan has had a very high current account deficit over the past many years. This combined with other economic issues such as low foreign currency reserves, make remittances a very crucial source of income for the country’s economy. There is a similar situation in a number of other countries including India, Bangladesh and Philippines. In fact, according to 2019 data by World Bank, remittances represent 8% of Pakistan’s GDP and 9.3% of Philippines’s. Therefore, a reduction in remittances because of factors like the coronavirus can become a great source of concern. Lower remittances essentially means that a key source of foreign currency for these countries has been reduced and these countries will face impediments in economic growth as they will face worsening current account deficits and may need to resort to external financing. China on the other hand does not fall in a similar category. Despite still being classified as a developing country, China has over the years focused upon domestic manufacturing to become financially strong. This is a goal that Pakistan and other developing countries should set for themselves. A sound base that supports domestic financial independency can go a long way to protect a country from external economic shocks.

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