The government must provide facilitation to overseas Pakistanis and continue to reduce the costs of formal remittances
he foreign exchange shortage has been a near permanent problem for Pakistan. The boom-bust cycles all too familiar to the people in the country. As soon as the GDP growth rate rises beyond the 5 percent mark, imports start rising without a complementary rise in exports. Emergency measures are then required to cool down the economy.
We are going through a similar cycle currently. A growth rate of nearly 6 percent has produced the largest trade deficit in the country’s history estimated at $47 billion. Worker remittances - $31 billion for FY 2022 – are the single biggest item helping to plug this gap and limiting the current account deficit to around $15 billion.
The importance of these remittances for the national economy, at around 10 percent of the GDP, is hard to overstate. Without these the country would face certain default on external payments.
Pakistan has not taken the hard steps to permanently resolve this problem. It has relied on external help/circumstances throughout its 75 years of existence. This has come in various forms, such as the rise in prices of jute in 1950 due to the Korean War, signing of SEATO, CENTO pacts in the 1960s, joining the Afghan war in the 1980s and assistance received in the aftermath of 9/11. Naturally, external help is not sustainable over long periods. This has caused the economy to develop a kind of Dutch disease that we need to overcome.
The oil boom in the 1970s in the Middle East proved a boon for the region as well as South Asia. Countries like Lebanon, Pakistan, India, Bangladesh and Nepal were able to export labour to the GCC countries to work primarily in the construction sector. During this era, Pakistan liberalised its passport policy and the country made a concerted effort to export labour. This triggered the first wave of Pakistani migration, primarily to the Gulf countries.
Zulfikar Ali Bhutto is widely credited with a forward thinking approach that would prove a major source of foreign exchange. The importance of remittances as a source of foreign exchange has only increased with time. While in FY 1980 they amounted to 58 percent of the exports, in the FY 2021, they accounted for 116 percent of the exports.
In FY 2021, remittances from Saudi Arabia and the UAE accounted for 47 percent of all receipts. Transfer through informal means, such as hawala/ hundi remained a major challenge as the cost of transfer through formal channels was high. Over the years, the cost has come down due to an increase in digitalisation as well as government’s crackdown on informal transfers on account of pressure from the FATF.
An important initiative in this regard has been Roshan Digital Accounts which had attracted $4.356 billion deposits by the end of May 2022. This, coupled with travel restrictions due to Covid, has been credited with the extraordinary growth in remittances recorded over the past two years.
The 9 million overseas Pakistanis sending remittances abroad are supporting millions of families in the country whose only source of income is these transfers. Businesses, especially in the real estate sector, target this demographic as a source of investment and develop projects directly catering to overseas Pakistanis and their dependents in the country looking for secure investments.
These projects come in various shapes and sizes, including Emaar and Bahria Town as well as Sukooks and Bonds. The intention behind these remittances is certainly either family support or investment but they also end up supporting the country’s reserves as the foreign exchange is surrendered against the Pakistani rupee.
The dual dependence of the country’s reserves as well as the livelihood of millions of families on these remittances makes the overseas Pakistanis an important constituency. This has led to several questions like the right to vote and the right for dual citizens to participate in elections. This also gives the host countries significant leverage over Pakistan and is the primary reason why the country is so sensitive about its relations with the GCC countries, particularly Saudi Arabia and the UAE.
There is an important difference between the workers residing in the GCC countries and those in Europe and North America. This is due to a stark contrast in the immigration policies. The GCC countries do not offer citizenship to foreigners but the Western countries do. Consequently, workers in the GCC countries are compelled to retain strong ties with Pakistan in the form of family and investments.
While this causes distress and uncertainty among the overseas Pakistanis in the GCC countries who are unable to plan for the long-term, it works well for the country’s remittances.
Remittances are not the only thing flowing in from abroad. The country has had its fair share of overseas workers returning to the country to take important positions or participate in politics. The most prominent example of this is the IMF and World Bank veterans coming home to take the stewardship of the country’s central bank in the person of Dr Reza Baqir and Dr Ishrat Husain.
However, we have also had wapistanis take part in the country’s affairs either by invitation, such as Moin Qureshi or on their own volition, such as Faisal Vawda, Shahbaz Gill and Zulfi Bukhari. The value of their contributions remains a topic of serious debate.
Today, Pakistan is a part of the global economy and depends on external circumstances for its well-being. Slowdowns in the Gulf region due to lower oil prices around 2015 and then Covid-induced lockdowns in 2020 sent a wave of concern in the country because of our dependence on remittances from the region.
We need to recognise the value of these relationships with the world abroad and be cognisant of the sensitivities of our partners. By all indications, due to a burgeoning population and a lackluster economy at home, the volume of remittances is set to rise over the coming years and become an even more important part of the GDP.
The government must redouble its effort to provide facilitation to overseas Pakistanis to make the process easier and continue digitalisation to reduce the costs of formal remittances.
Prepared by: Sufia Mohsin
Insights by: Data Pilot
The writer is a career civil servant with the Pakistan Administrative Service (PAS). He has previously worked with the State Bank of Pakistan and is currently pursuing a Master of Public Administration (MPA) degree at Princeton University