KARACHI: The government’s decision to reduce remittance-related subsidies might lower official inflows. As a counter, experts suggest direct remitter incentives, improved economic documentation and digitalisation, and more affordable payment methods to sustain remittances through banking channels.
Launched by the government in 2009, the Pakistan Remittance Initiative (PRI) was designed to encourage banks to attract remittances through formal means, thereby reducing the volume of hawala transactions and strengthening foreign exchange reserves. Recently, however, this programme has faced intense debate and criticism from parliamentarians, who argue that it primarily benefits banks. They have noted that the subsidies under this scheme have increased at a faster rate than the remittances themselves.
The government appears to share these concerns, as it has reduced remittance incentives and allocated no budget for the PRI in the fiscal year 2025-26, compared to the Rs85 billion allocated for the previous fiscal year. Although remittances reached an all-time high of $38 billion in FY25, reports indicate that payouts under the PRI scheme and the Telegraphic Transfer (TT) Charges scheme totalled Rs200 billion, exceeding the allocated Rs85 billion.
The Pakistan Banks’ Association (PBA) has rejected the notion that banks profit from government incentives related to remittance inflows, highlighting that they incur significant costs to maintain formal channels for overseas money transfers.
Two weeks ago, during a meeting of the Senate Standing Committee on Finance, Dr Inayat Hussain, acting deputy governor of the State Bank of Pakistan, warned that cutting subsidies could reduce the flow of remittances through banking channels.
Nasir Hussain, head of international home remittances at JS Bank Limited, said that the PRI and its incentive schemes have played a big role in encouraging Pakistanis abroad to send money through official channels.
“We also agree that incentives, combined with effective partnerships with overseas remittance partners, have supported steady growth in inflows through official channels,” Hussain said. He believes that the incentives provided by the SBP and the PRI have contributed positively, but there are other important factors as well. These include macroeconomic stability, tighter checks on the informal market, stable conditions in the Gulf countries, and, crucially, the trust and commitment that overseas Pakistanis have shown in supporting their families back home.
According to Hussain, macroeconomic stability is crucial. When people see a stable exchange rate and clear policies, they are more inclined to use official channels for their transactions. Also, the economic health of host countries, particularly those where most of Pakistan’s overseas workers are employed, directly impacts how much money they can send home.
“We’d encourage policymakers to consider targeted incentives that go directly to remitters, tax benefits, better digital services and easier account access. This would help sustain inflows in a more sustainable way for everyone,” Hussain said.
Each month, millions of overseas Pakistanis send money home to support their families and invest, particularly in property and savings. These remittances play a vital role in supporting Pakistan’s balance of payments. The country recorded a current account surplus for the first time in 14 years in FY25, reaching $2.1 billion, or 0.5 per cent of GDP. This is a significant improvement compared to a deficit of $2.1 billion a year earlier. Pakistan’s central bank forex reserves surged to over $14 billion in FY25 due to inflows from multilateral and commercial sources, along with the increase in remittances.
“While removing subsidies may create some immediate headwinds, this also presents an opportunity to develop more market-driven, sustainable models through fintech innovation, bilateral corridors, and real-time settlement frameworks that do not rely solely on subsidies,” said banking and financial analyst and Chairperson of the Pakistan Freelancers Association Ibrahim Amin.
Awais Ashraf, director of research at AKD Securities Limited, said that the reduction in subsidies is likely to affect growth in remittance flows via banking channels. This could lead to a shift in increased volumes towards the open market as exchange companies lose the incentive to surrender foreign currency.
However, Ashraf believes that several measures implemented by the SBP are expected to support formal remittance flows. These measures include i) allowing exchange companies to disburse inward remittances as sub-agents of banks; ii) the closure of B-category exchange companies; and iii) a crackdown on illegal forex trading. Additionally, regulatory actions taken by the UAE to comply with FATF (Financial Action Task Force) requirements and exit the grey list are likely to help sustain remittance flows through official channels.
Furthermore, increasing economic documentation and digitalisation, along with cheaper payment solutions such as Raast and incentives for Roshan Digital Account (RDA) holders, will likely encourage individuals to route funds through formal avenues.
“The sustainability of remittance growth through official channels hinges on governance. If the government maintains strict oversight of illegal exchange operations and continues pushing for greater documentation, remittance inflows should remain resilient,” Ashraf said.
Could changing the rebate structure impact flows?
Earlier this month, the SBP revised the Reimbursement of Telegraphic Transfer (TT) Charges scheme to expand its scope to include exchange companies. Under the new changes, the minimum transaction size eligible for reimbursement has been increased to $200. Previously, this was $100. Additionally, the government has introduced a flat rebate of 20 Saudi Riyals (SAR) for each eligible transaction, whereas the old rebate rate ranged from SAR 20 to SAR 35.
Hussain believes the changes in the incentive structure naturally affect the commercial arrangements between banks and their overseas partners. The timing and manner of transition are critical.
“Any shift in incentives may create adjustment challenges in the short term,” Hussain said. “We believe a phased approach and more clarity in future direction help all stakeholders adjust and maintain flows,” he added.
Amin believes that the rebate was a crucial financial incentive that encouraged banks and exchange companies to invest in infrastructure for remittance acquisition, outreach, and service excellence. If the new model undermines this motivation without providing a viable alternative -- such as transaction fee sharing, digital wallet rebates, or fintech partnerships -- there may indeed be a temporary decline.
Circular debt concerns
The National Assembly Standing Committee on Finance and Revenue has raised concerns about the growing circular debt issue related to the rewards paid to banks and exchange companies for facilitating remittances
“Regarding concerns about ‘circular debt’ in the rewards mechanism for remittances, we understand the importance of fiscal discipline,” Hussain said.“However, incentives must be balanced to ensure that the cost of formalising flows remains justified by the benefits of documented inflows, which directly support the country’s balance of payments,” he added.
Is the ongoing rupee pressure linked to the reduction in remittance subsidies?
Ashraf said the financial institutions, including money exchangers, have widened their spreads to offset the removal of subsidy-based incentives, which kept the Pakistani rupee under pressure in recent times.
According to Hussain, the exchange rate depends on multiple factors. But if sending money through official channels becomes less attractive, people may turn to informal options, which can widen the gap between the open market and interbank rates. It’s important to keep formal channels competitive to avoid that.
Amin believes, while the reduction in subsidies might slightly diminish remittance inflows through official channels, the rupee’s pressure stems from broader structural factors: debt servicing, current account dynamics, and external financing flows.
Could remittances stay robust in FY26
Experts expect remittances to remain resilient this fiscal year, as Pakistanis living abroad continue to support their families back home. However, growth may begin to normalise, as other countries implement effective strategies -- such as direct sender incentives, enhanced digital services, and tax benefits -- to maintain healthy remittance flows without solely depending on backend subsidies. Analysts believe that Pakistan is well-positioned to sustain remittance levels between $35 billion and $37 billion. Some projections suggest that remittances could grow 7.0 per cent to $41.1 billion in FY26.
