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Prospects of foreign remittance into Pakistan

Pakistan is one of the major beneficiaries of foreign remittances, whereas the volume of foreign remittances to Pakistan has also increased in recent past. The growth of these flows has outpaced Foreign Direct Investment (FDI) and official development assistance to the country. Pakistan started to export manpower abroad particularly in the Middle East countries following oil price boom in the early 1970s. Because of labor shortage in the Middle East, they had to import foreign labor to gear up huge development activities financed by surplus oil revenues. Since then, exports of manpower and remittance inflows are increasing every year with a few exceptions. We have seen that migrant and diaspora remittances has flowed generously immediately after the COVID-19, which once again demonstrating Pakistan’s cyclical nature of remittances.

Over 6 million Pakistani workers have received overseas employment. It is estimated that more than 0.3 million emigrate every year for jobs from Pakistan. Officially recorded remittances should be channeled through banking networks only. Beyond official channels, a huge amount of remittances also come through hundi or friends or relatives where funds are being transferred through underworld activities, e.g. smuggling, hundi, in which agents collect remittances in the foreign country and their agents pay the equivalent Rupees in Pakistan to the sender agents. At the same time, Pakistani agents also collect Rupees from any local person or smuggler and the collector’s agent pays the collected remittance in the foreign country. These processes deprive the government from taxes and foreign currency inflows decrease.

There are not enough facilities to transfer remittances in Pakistan from different countries. At the same time, transfer fees are also high and remittance transfer to rural areas is also difficult. In this case, the role of public sector commercial banks has gradually decreased while private banks have emerged as major players in channeling remittances. In recently months; due to Financial Action Task Force (FATF), Pakistan has also taken various measures to control unofficial channels being used for the remittance. As per an estimate, in Pakistan, 60 percent of the total volume of remittances have been channeled through the official sources, while remaining 40 through hundi, friends and relatives. If this amount of remittances are made through official banking channels, the current account balance would dramatically be changed and the foreign exchange reserves position would also be improved.

Pakistan heavily rely on foreign remittances where it contributes a lot to maintain foreign exchange reserves. The surge in remittances can reduce the dependency on conditional costly foreign borrowing. As it also plays a vital role in bringing sustainability to the current account balance.

The biggest challenge Pakistan’s labor faces is the difference in salaries due to their skill set. The main difference between skilled, semi-skilled and un-skilled labor is just the command over language especially English language. If a worker knows English language then he, with the same skill set, can be categorized as skilled and not the semi-skilled labor. In order to do this; Government of Pakistan should play a role. Pakistan sends labor in very specific category of jobs. Mostly, classified temporary migrant workers in four categories. Professionals refer to doctors, engineers, nurses and teachers; skilled workers include manufacturing and garment workers; semi-skilled workers include drivers, tailors and masons; and housemaids, cleaners and laborers are considered as unskilled workers. Men mainly work in the construction sector, cleaning, and maintenance work. Skilled people are always highly demanded so their salaries are always on the higher side. If the country sends more skilled and professional labor abroad, remittance inflows would increase at an increasing rate. When people migrate only to specific job sectors, any economic slowdown of these sectors will cause to reduce remittance drastically. Also within a very short period, few specific countries’ specific job sectors will not require more labor. As a result, Pakistan needs to diversify its migration to different job sectors. Qatar require manpower due to football world cup but after completion of construction of required facilities, that manpower will come back thus there will be a drop in remittances.

 

Recruiting data on labor migration shows that small portions of labor are migrated through the government and most of the labors are migrated through individual or by the recruiting agents. The government could increase its role in negotiations and intra country relationships. The state is a more powerful player than individual persons or recruiting agencies, especially when it comes to salary and opportunity negotiations. When people migrate individually or through recruiting companies, they may not have sufficient information and ability to negotiate properly with the actual authority or may not be able to get jobs that use their skills to the fullest. Sometimes people face middlemen who are fraudulent. For these reasons, the resource inflow is low in proportion to the many people who migrate. In such situation, if the government increases the rate of labor migration through government channels, this will accelerate remittance inflows and help to make it sustainable.

In the last few years, many developed countries have hired skilled labor from Pakistan. Despite this, Pakistan government has not prepared a proper migration policy. Media have raised the issue of brain drain due to skilled labor migration. As a labor surplus country, Pakistan can easily remove negative effects of brain drain by providing necessary training to its vast unskilled surplus labor. At the same time, there is no social security system or social insurance for remitters. Pakistan has a huge potential to raise the number of remitters by increasing the export of manpower from large pools of unemployed youths. This would also reduce the level of unemployment and poverty. Pakistan needs to develop a hassle free and transparent sending infrastructure to attract massive inflows of remittances through exporting millions of unemployed youth. Pakistan should make arrangements for legal and transparent contracts between recruiting agency and job seekers including a clause of receiving money through a scheduled bank account of the recruiting agency and mandatory submission of a copy of the deposit slip. Moreover, government should also provide training for skill development and undertaking programs for language learning.

A key weakness of manpower export market from Pakistan is that it is heavily concentrated in the Middle East. To remove this structural limitation, Pakistan needs to diversify its overseas jobs markets through adoption of proper strategies such as expanding existing markets in Middle East and designing aggressive programs penetrating into other countries with aging problem and low population as well as policies to enter into emerging economies like Russia, China, South Africa, East European countries and Middle Asian countries.

Pakistan has to develop its financial sector further to facilitate remittances inflows at a greater pace by adopting measures such as automation of rural bank branches, encouraging private banks to open branches in the rural areas and allowing well-established non-governmental organizations (NGOs) and microfinance institutions (MFIs) to receive and disburse remittances through their vast rural network.

Remittances have brought immense benefit to Pakistan economy in terms of employment generation, poverty alleviation, import financing, and building of healthy foreign exchange reserves. In Pakistan, the stability of remittances inflow has become an important policy issue due to its growing development potentials to affect both the micro and macro economy via current account financing and the injection of liquidity into the banking system. Pakistan as a labor exporting country can influence the inflow of remittances by means of appropriate policies of building a user friendly sending infrastructure, searching new overseas markets, improving the formal channel of fund transfer, and creating investment avenues for non-resident Pakistanis.

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