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Quest to raise the remittances: An attempt to rejuvinate economy of Pakistan

The COVID-19 pandemic delivers a powerful shock to economies and exposes uncertainty all across the globe. Government’s brakes on imposing lockdowns vary time to time as per the rate of infections along with the negative interest rates on governmental debt as there are massive increase in central bank bond holdings. Huge fiscal deficits will add substantially to total government debt. Trade patterns will be adjusted, some permanently as many nations move toward producing more goods themselves. Some argue the crisis was unforeseeable while others retort that the failure to build emergency savings was inexcusable but as the pandemic and economic crisis continues to spread causing the fall in amount of money migrant workers send home by almost 14% by 2021 compared to the pre COVID-19 levels in 2019. Remittance flows to low and middle-income countries (LMICs) are projected to fall by 7 percent, to $508 billion in 2020, followed by a further decline of 7.5 percent, to $470 billion in 2021. The foremost factors driving the decline in remittances include weak economic growth and employment levels in migrant-hosting countries, weak oil prices and depreciation of the currencies of remittance-source countries against the US dollar. The importance of remittances as a source of external financing for LMICs is expected to amplify in 2020, even with the expected decline. Remittance flows to LMICs touched a record high of $548 billion in 2019, larger than foreign direct investment flows ($534 billion) and overseas development assistance (about $166 billion). The gap between remittance flows and FDI is expected to widen further as FDI is expected to decline more sharply.

But despite of all the negative and harmful effects of pandemic 2020 witness almost 9% rise in remittances for Pakistan, totaling about $24 billion for use as a formal way of sending money to the home country. Instead of all negativity COVID diverts remittances from informal to formal channels due to the difficulty of carrying money by hand under travel restrictions as well as the incentives to transfer remittances. World Bank report titled Phase-II Covid-19 crisis through a Migration Lens, noted that Pakistan had introduced a tax incentive in July 2020, whereby withholding tax was exempted from cash withdrawals or the issuance of banking instruments or transfers from a domestic bank account. The tax incentive was capped by the remittance amounts received from abroad into that account in a year. Despite the overall damaging impact of the pandemic on economy, a new World Bank report has projected Pakistan’s remittances to grow at around 9 percent in 2020, totaling about $24 billion for use as a formal way of sending money to the home country.

Cumulatively, remittances have risen to $21.5 billion during July-March 2021 fiscal year, up by 26% over the same period of 2020 fiscal year. Saudi Arabia was the main source of remittances to Pakistan at $5.7 billion, followed by the UAE ($4.5 billion), the UK ($2.9 billion) and the USA ($1.9 billion). According to the central bank proactive policy measures by the government and SBP encourage more inflows through formal channels, limited cross border travel in the face of the COVID-19, introduction of Roshan Digital Accounts (RDAs) are contributing to the sustained rise in remittances. Roshan Digital Account was launched by the central bank in cooperation with eight banks of the country to attract more remittances in order to boost foreign exchange reserves. Almost 600-700 accounts are being opened on daily basis from which daily remittances transferred are almost $6-$7 million, totaling around $ 800 million through these accounts. From RDAs almost 35% of remittance flows are from the UAE, making the Emirates one of the top locations for Roshan Digital Accounts.

When the boom in remittances began in April 2020, policymakers were surprised to see remittance flows rise, and did not expect the trend to continue. The surge was attributed to Pakistani workers overseas losing their jobs, coming home and bringing their savings with them. But against all expectations, the boom continued into summer. Lockdowns and a significant reduction in air travel stopped travelers from bringing cash into Pakistan by hand. Many of them turned to digital remittance providers instead coupled with new anti-money laundering efforts brought large volumes of remittance payments into regulated, measurable channels for the first time. It’s no surprise that so many Pakistanis chose to bring money into the country by hand until it became impossible. For decades, remittance providers were slow, expensive and unreliable. Banks and money transfer shops had little competition, and could charge up to 10% of any transfer in fees. But the fintech revolution has changed that. Digital technology has democratized financial services, bringing faster, cheaper players into the market. The average cost of remittances worldwide has been steadily falling and now stands at around 7%. The breakneck growth enjoyed by digital remittance providers in 2020 is largely due to offline customers leaving their local bank or money transfer shop for the promise of better exchange rates and faster delivery online. Now that they have experienced the benefits of sending money online, they are unlikely to return to the slow, expensive methods of past years.

The implications of digital transfers for the Pakistani economy are huge. Billions of dollars that once passed from hand to hand are now being paid into bank accounts. As a result, millions of remittance recipients are coming onto the financial ‘grid’ for the first time. This creates new markets for other financial services and turns remittances into an investment in financial infrastructure at a crucial time of digitization. Pakistan has a bright future as a truly digital economy as 60% of Pakistan’s population is under the age of 30. The country has over 80 million smartphone users, presenting a huge market for mobile payments and other e-commerce services, which shows bright future as an acceptor of technology that intern reduce cost of remittance transfer promising more inflows.

The COVID-19 lockdowns of the last few months have accelerated Pakistan’s appetite for digital services specially in banking activities reducing cash transactions which means higher tax revenues and economic activities which a country like Pakistan always dreaming for.

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