Pakistan & Gulf Economist Pakistan's Business Financial Magazine
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Pakistan was somewhat unusual compared to other countries as regards the unexpected pickup in officially recorded remittances during 2020, particularly in the latter part of the year. Earlier surveys of remittance receipts suggested that remittances were falling during the pandemic. Given the massive displacement of migrants as they faced unemployment in host countries in April and May, earlier forecast expected a drop in remittances in Pakistan during 2020-21. However, despite GDP decline in sender countries due to the pandemic, Pakistan registered growth by end of 2020. Pakistan saw a growth in remittance of 17.4 per cent year-on-year in 2020.
Regarding remittance situation in Pakistan, during the initial months of the Covid-19 pandemic (March to May 2020), official remittances declined as lockdown measures were implemented and many flights from Pakistan were suspended. However, a surge in official inflows began in June 2020, likely reflecting a temporary switch from informal to formal remittance payment channels (given disruptions in international travel), additional transfers to support families and transfers of accumulated savings by returning overseas workers. By March 2021, remittances rose by 43 per cent year-on-year on a 12-month rolling basis.
On one hand, global studies indicate that remittances tend to be countercyclical, as they have a tendency to increase when receiving households experience disasters or recessions. On the other hand, these estimations assume that migrants’ labor situation is uncorrelated with consumption shortfalls at home, but the Covid shock was global. There is also less job stability and great uncertainty as to when life will normalize, which may lead migrants to be more cautious about sending all their savings. Some of the factors that account for large increase in remittances in Pakistan are:
- Many migrants who lost their employment in foreign countries during lockdowns came home and repatriated their savings.
- Another factor is the shift of remittance from informal (unrecorded) to formal (recorded) channels. In the past, a significant share of remittances may have arrived through trips home by migrants or their trusted friends with cash in hands, in-kind transfers, etc.
This was no longer an option during the pandemic amid restricted travel, so migrants had no choice but to adhere to other transfer mechanisms. Financial innovation likely encouraged greater formalization and perhaps higher total remittances. The shift to more formal channels was facilitated by the advent of fintech and digital transfer apps like PayPal and Alipay, which have made the digital transfer of funds more accessible and cheaper. It is also possible that this technology coupled with formalization encouraged a greater volume of total remittances due to decline in transaction costs. Changes in taxation may have encouraged greater remittances, or at least greater formal remittances. Some migrants could access cash transfers offered by host country governments. Workers who did not experience a large fall in income during the pandemic might have been willing to share the receipt of cash transfers (like stimulus payments in the US) with their home country families. Moreover, emigrants could have drawn down their savings to increase remittances to family and friends in need.
While 2020 saw mostly a net migrant outflow as many workers had to repatriate, some have plans to return, but opportunities may dry up if the pandemic continues to affect employment permanently in services sectors in host countries according to a report. The one-off nature of these factors — such as availing opportunities to formalize the sending of transfers and the transfer of savings by migrants — increases the risk of remittances falling in 2021.
