Explaining the Ten-Fold Increase in Remittances to Pakistan between 2001-2011

Project Active from to State and Macroeconomics

This study for the IGC is part of a broader study being undertaken by the Pakistan Institute of Development Economics on remittances and their impact on the Pakistan economy including explaining its over ten-fold increase between 2001-2012 from around US$ 1 billion in FY 2001 to US$ 12 billion in FY 2011. The focus of this preliminary study by Rashid Amjad, G.M. Arif and M. Irfan is to attempt to explain this increase. ContextPossible reasons for the increase in remittances would include:(i) Shift in remittances from formal to informal channels(ii) Increase in the number of Pakistani workers abroad(iii) Change in the skill composition of Pakistani workers abroad(iv) Whitening of black money earned in Pakistan through remittances(v) Transfer of undeclared export earnings through remittances(vi) Transfer of earnings from illicit/illegal activities (kickbacks, commission, drugs, artifacts etc.)(vii) Transfer of receipts from sale of assets abroad (apartments, houses, real estate) acquired through genuine earnings/transfer or through transfers of black money or income earned through illicit/illegal activities. Main Results- The large manifold increases in recorded remittances in the last decade can be explained to a significant extent by the increase in the stock of Pakistani migrants working abroad and changes in their skill composition (more skilled and better paid). However, this explanation is critically dependent on the assumptions regarding remittances sent through formal and informal channels.- The study reveals that the major part of the recorded remittances cover not just remittances from Pakistani workers abroad but in fact cover all remittances sent by the Pakistani diaspora (many of whom have acquired nationality of their resident country).- The study suggests that the Pakistan Remittances Initiative (PRI) jointly started by the State Bank and the Ministry of Finance has played an important role in diverting remittances from the informal to formal channels. In this effort they have received sterling support from the major commercial banks.- Based on estimates by the PRI and our guessestimates suggest the total amount of remittances being sent to Pakistan is around US$20 billion. Recommendations- There is still a large pool of remittances that can be tapped and diverted into formal channels. This requires continued efforts by the PRI, State Bank and Commercial Banks.- The major commercial banks have a major grievance that their efforts which have yielded very positive results are being hampered by changes in policy and/or non-payment of incentives offered to banks to transfer remittances. By so doing confidence of banks abroad that transfer such money is seriously impaired.- There is need to examine current procedures and rules and regulations in countries which encourage transfers through informal channels as well as transfer of such resources into foreign accounts. This is especially so in the UK which (through Third Party Settlement Accounts) as well as in the US and other countries where banks do not allow walk-in transfers.- Some commercial banks were also of the view that Pakistanis should be allowed to open foreign accounts abroad. This would encourage them to deposit money in Pakistani banks abroad rather than foreign banks. This needs further examination.