- Digital innovation and regulation are key to growing Pakistan’s vital remittance inflows sustainably
Remittances—the funds sent by Pakistanis working abroad to their families back home—have emerged as one of the most vital pillars of Pakistan’s economy. As a country with a vast diaspora spread across the Gulf, Europe, North America, and other parts of the world, Pakistan benefits immensely from these inflows. Not only do remittances provide critical support to households, but they also contribute significantly to the country’s macroeconomic stability.
Over the years, as traditional foreign direct investments and exports have faced volatility, remittances have remained relatively stable and often increased in times of crisis, thereby cushioning the economy. Remittances contribute over 8% to Pakistan’s GDP and are among the largest sources of foreign exchange after exports. In some years, they have even surpassed export revenues. This inflow helps reduce the current account deficit, stabilize the rupee, and build foreign exchange reserves.
The history of remittances to Pakistan traces back to the 1970s when a wave of Pakistani workers moved to oil-rich Gulf countries. Initially, these funds flowed through informal channels due to the lack of a robust financial system. However, with the establishment of formal banking systems and the liberalization of financial policies, formal remittances began to grow steadily.
In the early 2000s, concerted efforts by the State Bank of Pakistan (SBP) and the government to channel remittances through official means bore fruit. The introduction of the Pakistan Remittance Initiative (PRI) in 2009 marked a major turning point, as it incentivized the use of legal channels and facilitated partnerships with global money transfer operators. From FY2010 onwards, remittances saw an average annual growth of over 10%. The COVID-19 pandemic surprisingly triggered an unexpected surge in remittances, reaching a record high of over $29 billion in FY2021. This was attributed to travel restrictions limiting informal transfers, increased use of digital platforms, and greater trust in formal systems.
Bulk contribution
The bulk of remittances come from Saudi Arabia, UAE, UK & USA. These countries collectively contribute over 60% of Pakistan’s total remittance inflows. Migration patterns, labor demand in the Gulf, and strong community networks in the West are key drivers behind these corridors. Efforts to curb illegal money transfer mechanisms such as Hundi/Hawala have led to increased use of formal banking and exchange company channels. The integration of technology, biometric verification, and tighter AML/CFT regulations have further reduced the appeal of informal mechanisms. At the micro level, remittances serve as a lifeline for millions of households. They fund education, healthcare, housing, and daily consumption.
According to the World Bank, remittance-receiving households in Pakistan tend to have better living standards and are more resilient to economic shocks. Certain regions, such as Khyber Pakhtunkhwa and Punjab, have a higher dependency on remittances due to labor migration patterns. The influx of foreign currency into these areas has spurred economic activity, increased real estate investments, and supported small businesses.
Compared to foreign direct investment (FDI), which fluctuates with political and economic uncertainties, remittances have proven to be a more stable and predictable source of inflow. This reliability makes remittances a cornerstone of Pakistan’s external sector strategy.
Exchange companies in Pakistan are categorized into:
- Category A: Full-fledged exchange companies allowed to deal in foreign currency and remittances.
- Category B: Franchise operations under banks or A-category companies (now being phased out and merged under a revised regulatory framework).
These companies operate under strict guidelines issued by the State Bank of Pakistan, ensuring compliance and transparency.
These Exchange companies act as intermediaries between overseas remitters and local beneficiaries. They establish correspondent relationships with global money transfer operators such as Western Union, MoneyGram, and Ria. With thousands of branches and franchises across Pakistan, they offer greater accessibility, especially in rural and underserved areas. Over the past decade, exchange companies have embraced technology, introducing mobile apps, digital wallets, and real-time payment processing. This has enhanced the speed, security, and convenience of remittance transactions. In response to evolving market needs, SBP has introduced reforms to streamline exchange company operations, enhance compliance, and reduce operational fragmentation.
Recent policies aim to consolidate A and B categories into a single, stronger institutional framework with better capitalization and governance. Despite progress, informal channels like Hundi/Hawala persist, particularly in areas with limited banking penetration. These unregulated systems pose challenges for documentation, transparency, and anti-money laundering compliance.
Frequent fluctuations in the PKR/USD exchange rate affect remittance behavior. Often, remitters delay transfers in anticipation of better rates, which can create unpredictable inflow patterns. On the other hand, the exchange companies face rising compliance costs, frequent audits, and high regulatory scrutiny. These challenges are necessary for financial integrity but also pose operational and financial burdens on smaller players. Traditional exchange companies now compete with commercial banks and fintech solutions offering seamless digital remittance services. The competitive landscape is pushing these companies to innovate rapidly or risk obsolescence. Instances of non-compliance or fraud by a few operators have tarnished the reputation of the sector. Building and maintaining public trust is crucial for the continued relevance of exchange companies.
Strategic measures
Government has taken several strategic measures have been undertaken to promote formal remittance channels:
- Pakistan Remittance Initiative (PRI): Launched in 2009 to increase formal remittance inflows.
- Roshan Digital Account (RDA): Facilitates investment and remittance flows from NRPs through digital channels.
- Remittance Loyalty Schemes: Introduced to reward frequent remitters with incentives and benefits.
Forward-looking
The future lies in digital platforms. The integration of mobile banking, blockchain, and AI-based fraud detection is expected to further streamline remittance flows and improve customer experience. Educating the public on the benefits of formal channels, enhancing financial literacy, and promoting trust in regulated entities is essential. Government campaigns and partnerships with community organizations abroad can help bridge this gap.
Moreover, by expanding banking access in remote areas and offering tax incentives or rebates on remittance receipts will also help to fill this gap. Government should encourage private-sector partnerships between exchange companies and fintech firms. On Diplomatic side we should strengthen bilateral agreements with host countries to support formal remittance channels. While remittances will remain vital, the goal should be to utilize them more productively i.e. channeling funds into investments, SME development, and long-term economic projects. A resilient financial ecosystem with robust exchange companies and digital solutions will be key.
Pakistan’s home remittances are not merely personal transfers, they are economic lifelines that support families, stabilise the currency, and sustain the balance of payments. As remittance volumes continue to grow, the infrastructure supporting them, particularly exchange companies must be evolved. Exchange companies, once simple currency exchangers, have now become vital facilitators in a complex financial web. With the right policy support, technological innovation, and public trust, they can continue to drive remittance growth while contributing meaningfully to Pakistan’s economic resilience. The path forward lies in integration, regulation, and innovation. By nurturing a robust and inclusive remittance ecosystem, Pakistan can ensure sustained inflows that support both economic development and the prosperity of its citizens at home and abroad.
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