- Remittances uplift families, stabilise Pakistan’s rupee, and provide vital buffer against economic shocks.
In an increasingly interconnected world, home remittances i.e. financial transfers sent by migrant workers to their families and communities in their home countries have emerged as a lifeline for many developing economies. These inflows, often sent through formal channels like banks or money transfer operators, and occasionally through informal systems like hawala, play a pivotal role in supporting national economies, stabilizing foreign exchange reserves, and uplifting household welfare.
Globally, remittances have grown exponentially, with the World Bank estimating that they reached USD 905 billion in 2024, surpassing foreign direct investment (FDI) and official development assistance in many low- and middle-income countries. For countries like Pakistan, remittances are not just financial transactions; they are a cornerstone of economic resilience and social development.
Pakistan ranks among the top remittance-receiving nations, with inflows of USD 34 billion in 2024, according to the State Bank of Pakistan (SBP). This places it alongside countries like India, Mexico, and the Philippines, where remittances form a significant portion of economic activity. The majority of Pakistan’s remittances originate from Gulf countries like Saudi Arabia and the United Arab Emirates, as well as Western nations such as the United States and the United Kingdom, reflecting the global diaspora’s contribution to their homeland. These funds support millions of households, finance imports, and bolster macroeconomic stability, making them a critical area of study.
The mechanics of remittances are straightforward yet diverse. Formal channels, such as banks, Western Union, or digital platforms like PayPal and Roshan Digital Account, ensure transparency and traceability. However, informal channels like hawala remain prevalent in Pakistan due to their speed and accessibility, though they pose challenges for regulation. Understanding these dynamics is essential to appreciating the broader economic and social impacts of remittances, which we will explore in the following sections.
Vital component
Remittances are a vital component of Pakistan’s macroeconomic framework, serving as a reliable source of foreign exchange and a buffer against economic volatility. In 2024, Pakistan’s remittance inflows accounted for approximately 8.5% of its GDP, a figure comparable to other remittance-dependent economies like the Philippines (9.1%) and Bangladesh (6.2%). This section delves into how remittances support Pakistan’s balance of payments, enhance economic stability, and contribute to GDP, while also drawing global comparisons.
One of the most significant contributions of remittances is their role in stabilizing Pakistan’s balance of payments. The country has historically faced persistent trade deficits, with imports significantly outpacing exports. In 2023, Pakistan’s trade deficit stood at USD 30.8 billion, according to the Pakistan Bureau of Statistics. Remittances, which covered nearly half of this deficit, provide critical foreign exchange to finance imports of essential goods like fuel, machinery, and food. Without these inflows, Pakistan would face greater pressure to borrow externally or deplete its foreign exchange reserves, risking currency devaluation and economic instability. For instance, during the COVID-19 pandemic, when global trade contracted, remittances to Pakistan surged by 17% in 2020–21, reaching USD 29.4 billion. This counter-cyclical nature—where remittances increase during crises as migrants send more to support families—proved invaluable. Unlike FDI, which is sensitive to political and economic risks, remittances are relatively stable, making them a dependable lifeline. Globally, countries like India (USD125 billion in 2024) and Mexico (USD 67 billion) exhibit similar trends, where remittances act as a cushion against external shocks.
Remittances also play a crucial role in stabilizing the Pakistani rupee, which has faced significant depreciation pressures in recent years. By increasing foreign exchange reserves, remittances reduce the need for emergency loans from institutions like the International Monetary Fund (IMF).
For example, in July 2023, Pakistan’s reserves stood at USD 8.2 billion, bolstered significantly by remittance inflows. This stability allows the government to manage inflation and maintain investor confidence, critical for a country navigating recurrent economic challenges. However, the influx of remittances can have mixed effects. Increased foreign currency inflows can lead to currency appreciation, a phenomenon known as Dutch disease, which may harm export competitiveness.
In Pakistan, this effect is mitigated by the country’s diverse economic challenges, but it remains a consideration for policymakers. Comparing Pakistan to Bangladesh, where remittances also support reserves but contribute to export-led growth, highlights the need for balanced economic policies. At 8.5% of GDP, remittances are a significant driver of Pakistan’s economy, surpassing sectors like agriculture (7.8% of GDP in 2023) in some years. This contribution is not merely financial; it fuels aggregate demand by increasing household consumption. For instance, remittance-receiving households often spend on durable goods, housing, and education, creating a multiplier effect that stimulates economic activity.
In contrast, countries like India, where remittances constitute a smaller share of GDP (3.5%), rely more on domestic industrial growth, underscoring Pakistan’s unique dependence on these inflows. The macroeconomic benefits of remittances extend beyond immediate financial impacts. By reducing reliance on external borrowing, they provide fiscal space for public investments in infrastructure and social services.
However, this dependence also raises questions about sustainability, which we will explore later in the challenges section. For now, it’s clear that remittances are a cornerstone of Pakistan’s economic framework, with parallels in other developing nations. While remittances have profound macroeconomic effects, their most tangible impacts are felt at the household and community levels. In Pakistan, where poverty affects approximately 24% of the population, remittances serve as a critical tool for poverty alleviation and social development. This section examines how remittances improve household welfare, reduce poverty, and foster community development, with real-life examples to illustrate their transformative power.
Poverty reduction
Research consistently shows that remittances reduce poverty by increasing household income. A 2019 study by the Asian Development Bank found that remittance-receiving households in Pakistan were 12.7% less likely to fall below the poverty line. For families in rural areas, where poverty rates are higher (30% compared to 17% in urban areas), remittances provide a lifeline.
For example, consider the case of a family in a village in Punjab’s Chakwal district. The father, working as a construction worker in Dubai, sends USD 300 monthly. This income enables the family to afford school fees, medical care, and better nutrition, lifting them out of extreme poverty.
Globally, similar patterns are observed. In Bangladesh, remittances have reduced the poverty headcount ratio by 6% over a decade, according to the World Bank. The direct injection of cash into households bypasses bureaucratic inefficiencies, ensuring that funds reach those who need them most. However, the extent of poverty reduction depends on how remittances are spent, which varies across households.
Remittances enhance household welfare by improving access to education, healthcare, and housing. In Pakistan, studies show that remittance-receiving households allocate 20–30% of funds to education,
enabling children to attend better schools or pursue higher education. For instance, in Karachi’s low-income neighborhoods, families receiving remittances from the UK have invested in private schooling, improving literacy rates and future employability. Similarly, healthcare spending increases, with families able to afford private clinics or critical treatments like surgeries, which are often inaccessible to low-income groups.
Housing favour
Housing is another key area of impact. In rural Punjab and Khyber Pakhtunkhwa, remittances have fueled a construction boom, with families upgrading from mud houses to concrete structures. This not only improves living standards but also creates jobs in the construction sector.
A notable example is the village of Kot Addu, where remittance-funded homes have transformed the local landscape, with modern amenities like electricity and running water becoming more common. Beyond individual households, remittances have a multiplier effect on local economies. When families spend on goods and services, local businesses — grocers, retailers, and service providers — benefit. A 2021 SBP report estimated that every USD 1 of remittances generates USD 1.5–2 in economic activity through this multiplier effect.
In small towns like Gujrat, known for its large diaspora in Europe, remittance-funded shops and small enterprises have created employment opportunities, fostering community development. Moreover, remittances contribute to philanthropy.
Overseas Pakistanis often fund schools, hospitals, and mosques in their hometowns. For example, in Mirpur, Azad Jammu and Kashmir, known as “Little England” due to its UK-based diaspora, remittances have funded community centers and vocational training programs, empowering youth and women. These initiatives highlight the social capital that remittances generate, strengthening community ties.
However, not all impacts are positive. Dependency on remittances can discourage local entrepreneurship, and the brain drain associated with migration deprives Pakistan of skilled labor. These challenges, along with others, are explored in the next section. While remittances are a boon for Pakistan’s economy, they come with challenges and risks that must be addressed to ensure sustainable benefits. From economic distortions to reliance on informal channels, this section examines the potential downsides and structural issues surrounding remittances.
One significant risk is the potential for Dutch disease, where large remittance inflows lead to currency appreciation, making exports less competitive. In Pakistan, this effect is less pronounced due to the rupee’s depreciation trends, but it remains a concern for export-oriented sectors like textiles, which account for 60% of exports.
Additionally, remittances can increase aggregate demand, contributing to inflation. A 2022 SBP study noted that remittance-driven consumption led to a 2% rise in inflation in urban areas, particularly in housing and food prices.
Another issue is dependency. With remittances constituting nearly 9% of GDP, Pakistan risks over-reliance, which could be problematic if global economic conditions falter. For instance, a slowdown in Gulf economies, where 60% of Pakistan’s remittances originate, could reduce inflows, as seen during the 2014–15 oil price slump when remittances from Saudi Arabia dipped by 5%. Informal remittance channels like hawala remain a challenge.
Future initiatives
While formal remittances have grown due to initiatives like the Pakistan Remittance Initiative (PRI), informal transfers still account for an estimated 10–15% of total inflows. These transactions bypass regulatory oversight, reducing the government’s ability to track funds and increasing risks of money laundering. The high cost of formal transfers—averaging 6.4% globally in 2023, per the World Bank — drives some migrants to use hawala, which is cheaper and faster but less secure.
High transfer costs and limited financial infrastructure hinder the efficiency of remittances. Rural areas, where 63% of Pakistan’s population resides, often lack access to banking services, forcing reliance on informal systems.
Additionally, digital platforms, while growing, face barriers like low digital literacy and unreliable internet connectivity. The PRI, launched in 2009, has increased formal remittances by 30%, but further investment in digital infrastructure is needed to reduce costs and enhance accessibility. Global economic trends also pose risks. The diversification of Gulf economies away from oil could reduce demand for Pakistani labor, impacting remittances. Similarly, political instability in Pakistan or host countries can disrupt flows, as seen during the 2022 political crisis when remittance inflows briefly slowed due to uncertainty.
To maximize the benefits of remittances, Pakistan must implement strategic policies that enhance inflows, reduce costs, and channel funds into productive investments. This section outlines actionable recommendations and explores future trends that could shape the remittance landscape. Reducing transfer costs is a priority. The global SDG target is to lower remittance costs to 3% by 2030, and Pakistan can achieve this through partnerships with fintech companies like Wise or Payoneer.
The Roshan Digital Account, launched in 2020, has facilitated USD 6 billion in inflows by 2024, demonstrating the potential of digital platforms. Expanding access to such services, particularly in rural areas, requires investment in digital infrastructure and financial literacy programs. Incentives for overseas Pakistanis, such as tax breaks on remittance-funded investments, could further boost inflows.
The PRI’s success in promoting formal channels should be scaled up through awareness campaigns targeting the diaspora in key countries like Saudi Arabia and the UAE. Channeling remittances into productive investments is critical for sustainable growth.
Currently, 70% of remittances in Pakistan are spent on consumption, with only 10% invested in businesses or real estate. The government could introduce diaspora bonds, as India has done, raising USD 40 billion since 1991. These bonds could fund infrastructure projects, creating jobs and reducing dependency on consumption-driven growth. Encouraging small and medium enterprises (SMEs) is another avenue. For example, providing low-interest loans to remittance-receiving families for starting businesses could stimulate entrepreneurship. In Bangladesh, remittance-funded SMEs have boosted rural economies, a model Pakistan could emulate.
The future of remittances in Pakistan will be shaped by global and regional trends. The diversification of Gulf economies may reduce demand for low-skilled labor, necessitating upskilling programs for Pakistani workers. Conversely, technological advancements in fintech could lower transfer costs, with blockchain-based solutions like Ripple potentially reducing fees to below 2%. Political stability will also be crucial, as uncertainty deters diaspora investment. Globally, remittances are projected to grow to USD 1 trillion by 2028, driven by migration and digitalization. Pakistan, with its large diaspora and strategic initiatives, is well-positioned to benefit, provided it addresses structural challenges. Collaboration between the government, private sector, and diaspora communities will be key to maximizing these opportunities.
Home remittances are a cornerstone of Pakistan’s economy, contributing significantly to GDP, stabilizing the balance of payments, and uplifting millions of households. With USD 34 billion in inflows in 2024, they have reduced poverty, improved welfare, and fostered community development, while also presenting challenges like dependency and informal channels. By implementing policies to reduce transfer costs, enhance financial inclusion, and channel funds into productive investments, Pakistan can harness remittances for sustainable growth.
The lessons from Pakistan’s experience are relevant globally, as countries like India, Bangladesh, and the Philippines navigate similar dynamics. Policymakers, financial institutions, and the diaspora must collaborate to address challenges and seize opportunities, ensuring that remittances continue to drive economic and social progress. As Pakistan looks to the future, strategic interventions can transform this vital resource into a catalyst for long-term development and benefit.
The author, Nazir Ahmed Shaikh, is a freelance writer, columnist, blogger, and motivational speaker. He writes articles on diversified topics. He can be reached at nazir_shaikh86@hotmail.com