Remittances And Their Impact On Pakistan’s Economy

Remittances And Their Impact On Pakistan’s Economy

Remittances are the form of money transfer from a worker to their family or community whose place of work is outside of their originating region but continue to serve as vital income to the receiving person.  The person remitting may have migrated from a rural region to a more urban region within the origin country or to another country altogether. In many regions of the world such as Europe and the United States, high influxes of migrants were exacerbated through programs that gave incentives for workers of underdeveloped regions to come to the developing regions to serve as cheap labour.

Remittances are a portion of the earnings a migrant sends to relatives back home.  Remittances assist in a way of decreasing poverty.  Remittances are private sector transfers that go directly to those who most need them often these flows are critical for the survival of the receivers, and under the right circumstances can be used by the sender and/or recipient to break the grip of poverty. Different studies have shown that those remittances recipients are more possible to send their children to school, have more access to health care, and are more likely to start the small business.

In Pakistan, workers’ Remittances, the third largest source of foreign exchange inflows after exports and foreign investment, continue to maintain its rising trend.  As Pakistan is among the few countries which include worker’s remittances in their gross national income estimate.  Pakistan received the highest amount of more than $5.493 billion as workers’ remittances during the last fiscal year 2006-07.

Remittances are playing a very important role in global development financing, and their impact on poverty alleviation proofs to be considerable.  Recorded remittances sent home to developing countries by international migrants are expected to reach $167 billion in 2005.  Unrecorded remittances through formal and informal channels are estimated to be at least half as large as recorded flows, making remittances the largest source of external financing in developing countries.  Remittances substantially reduce the incidence of poverty and help smooth household consumption in response to adverse events.  International migration generates significant economic gains for the migrants, the countries of origin, and the countries of destination.

Immigrant remittances present three potential benefits to sending regions.  First, they can be used as a mechanism to equalize inequalities within communities, it’s the poorest member of the community move away to make money in other lands, their loved ones left behind are boosted up the social ladder from the remittances they come to depend on.  Second, remittances tend to bring international flows into very peripheral regions making it to the hands of poorer families rather than the usual upper entrepreneurial class.  A third important benefit of remittances is their influence on family maintenance.

Remittances can have a negative impact on the community when multiplier effects are not felt within the migrant-sending community. Remittances are playing an increasingly large role in the economies of many countries, contributing to economic growth and to the livelihoods of needy people (though generally not the poorest of the poor).

Developed countries attract migrant workers, and migrant workers send home money as remittances.  It is believed that far larger amounts are transferred unofficially.  Emigrants may not trust banks and/or there may not be banks operating near their hometowns where they send remittances so in many transition countries most remittances enter through informal channels, often in the back pockets of workers travelling home on visits. This means that significant amounts of money bypass official financial systems, money that could otherwise contribute to building the official economy.

Remittances help their recipients to cover basic needs such as food, housing and healthcare.  But they also allow human and productive investment since they often contribute pay for the education of the children and in some cases to buy land or create a business.  Remittances can and should increasingly flow into productive investment.  This indeed desirable and the conditions for such investment need to be improved.  However, even if they are spent for consumption, remittances still have multiplier effects in the receiving economy.  Since the evidence is clear that remittances contribute to the reduction of absolute poverty measured e.g. by the number of persons living on less than one USD/ day.  Whether remittances also reduce inequality seems to depend on the cost of migrating:  if the poor get the chance to migrate, remittances will reduce inequality.  The development potential of remittances is I believe, huge.  But some words of caution are necessary on the policy attention remittances are now attracting.  Despite the very substantial size of remittance flows, they will not bring a magical solution to development problems.  We can and should- reduce barriers to remittance transfers and to broaden the possibilities of their use at the receiving end.  Furthermore, remittances will flow to productive investment if and only if the conditions for investment in the receiving country are adequate.  Improving the investment climate in recipient countries is, however, not a quick fix, but part of a more comprehensive and long-term development approach. The bad luck for these Third World Countries is that many people who migrate from developing to developed nations are highly educated and skilled. Well, many of these refuges move on an everlasting basis, this perverse brain drain not only represents the loss of valuable human resources but could prove to be a serious constraint on the future economic progress of Third World nations.

Huge funds are also transferred through much-used hundi system, which doesn’t get reported.  Hundi is a system popular both in Pakistan and India, which allows expatriates to send funds reliably, quickly and at a premium price to their families back home.  The bad thing is that it deprives the country of huge amounts of much needed foreign exchange for the benefit of a handful of the individual.

The developing countries like Pakistan have failed to use the inflow of remittances, investment and aid to their own best advantage.  Pakistan too has been unable to capitalize on the sudden increase in their financial resources to generate a developmental momentum, which could utilize the indigenous skills to moderate if not reverse, the brain drains.  Pakistan faced the critical shortage of foreign exchange and remittances provided the much needed ‘breathing space for bringing about structural changes in her economy. 

Remittances also helped in her economy.  Remittances also helped in reducing the chronic deficit in BOP.  The migrant workers largely belonged to either person try or rural unemployed or urban poor.  This helped in extracting their families from below poverty line status. Kharian, a settlement of about 30,000 people and one of the most important army bases in central Punjab, has become known as ‘little Norway’- at least one male member of virtually every third household from this area alone is working abroad, with over 60% of them going to Scandinavian countries, mainly Denmark and Norway with the new ‘money’ coming in, the chief investment has been in property.  The town has boomed as families abandoned homes in the surrounding villages and poured into the urban centre-house prices in Kharian are an astonishing six or seven times highest than those of Lahore or the federal capital, Islamabad.  The network has defied all official attempts to control or damp down on it, and people cannot be persuaded to transact through banks.  Remittances coming in from abroad have actually increased over the past two or three years, as Pakistan communities in the west have grown more increase after the events of 9/11.  The social cost of remittances from overseas can be high:  wives left at home, sometimes for years, often feel increasingly isolated; children grow up with absentee fathers they rarely see.  But, for many impoverished communities, it seems to be a price worth paying.  The largess offers both a better standard of living and hugely improved prospects for families in a country where both are in short supply. In this background, as it is clear that remittances are an important component of Pakistan’s economy,

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