Role of remittances in strengthening the economy with reference to Pakistan Introduction

A remittance is a transfer of money by a foreign worker or domestic worker to his or her home country or city or simply sending an amount of money from one country to another or one city to another. Remittance can also refer to the concept of a monetary payment transferred by a customer to a business. Remittances are a source of economic wellbeing for a large number of families of expatriates living in home countries and also lead to economic growth through consumption and development, where the state and banking sector play a key role in channelizing the remittances for productive economic activity. Remittances have become an important source of foreign exchange earnings, predominantly from developed countries to developing countries. The availability of foreign exchange through remittances has not only helped the recipient countries in achieving a reasonably high economic growth by reducing the current account deficit, it has also reduced their external borrowing as well as external debt burden. Remittances can be foreign or domestic. Domestic remittances occur, for example, when there is migration from rural to urban areas within a country. Domestic Remittance is a significant financial service and a need for many people across Pakistan. It is important for families, friends or acquaintances to have a convenient banking channel for remitting money that is safe, fast and reliable. The flow of funds from migrant workers back to their families in their home country is called foreign remittances. These remittances have a positive impact on Pakistans economy through improved balance of payments position and reduced dependence on external borrowing.

Impact of remittances on pakistans economy:

The role of workers remittances in economic development of recipient countries is considered to be an important area of economic growth. The flow of funds from migrant workers back to their families in their home country is an important source of income in many developing economies. The recipients often depend on remittances to cover day-to-day living expenses, to provide a cushion against emergencies or, in some cases, as funding for small investments. During the last three decades, Pakistan received a significant amount of workers remittances, which are sent by millions of Pakistanis working abroad. For capital deficient countries, like Pakistan, workers remittances are considered to be an important source of foreign exchange.

These remittances have a positive impact on Pakistans economy through improved balance of payments position and reduced dependence on external borrowing. Significant flows of remittances also helped Pakistan recover from the adverse effects of oil price shocks, reduced the unemployment problem, and improved standard of living of recipient households. Overseas Pakistani workers remitted an amount of $9,234.72 million in the first eight months (July to February) of the current fiscal year 2012-13 (FY13), showing a growth of 7.47 percent or $641.93 million when compared with $8,592.79 million received during the same period of last fiscal year, Daily Times learnt on Monday. The inflow of remittances in July to February 2013 from Saudi Arabia, UAE, USA, UK, GCC countries (including Bahrain, Kuwait, Qatar and Oman), and EU countries amounted to $2,627.78 million, $1,865.73 million, $1,461.13 million, $1,284.75 million, $1,067.50 million and $242.61 million, respectively as compared with the inflow of $2,325.98 million, $1,903.89 million, $1,525.45 million, $991.20 million, $968.91 million and $244.91 million, respectively in July to February 2012. Remittances received from Norway, Switzerland, Australia, Canada, Japan and other countries during the first eight months of current fiscal year (July to February FY13) amounted to $685.17 million as against $632.45 million received in the first eight months of last fiscal year. The continued growth in workers remittances is the result of the efforts made by Pakistan Remittance Initiative (PRI) in collaboration with other stakeholders to facilitate both overseas Pakistanis and their families back home. Since its inception, PRI has taken a number of steps to enhance the flow of remittances through formal channels which include: (a) preparation of national strategies on remittances (b) taking all necessary steps to implement the overall strategy (c) playing the advisory role for financial sector in terms of preparing a business case, relationship building with overseas correspondents, creating separate efficient remittance payment highways and (d) becoming a national focal point for overseas Pakistanis through round the clock call centre with toll free lines, separate web site etc.

Impact of remittances on raising social standards:

Remittances contribute to economic growth and to the livelihoods of people worldwide. Moreover, remittance transfers can also promote access to financial services for the sender and recipient, thereby increasing financial and social inclusion. Remittances are playing an increasingly large role in the economies of many countries, contributing to economic growth and to the livelihoods of less prosperous people (though generally not the poorest of the poor). As remittance receivers often have a higher propensity to own a bank account, remittances promote access to financial services for the sender and recipient, an essential aspect of leveraging remittances to promote economic development. The stability of remittance flows despite financial crises and economic downturns make them a reliable financial resource for developing countries. As migrant remittances are sent

cumulatively over the years and not only by new migrants, remittances are able to be persistent over time. Remittances are often sent by circular migrants, migrant workers who move back and forth between their home and host countries in a temporary and repetitive manner. These workers have the benefit of working in a high-income country and sending their remittances to a low-income country, thus benefitting financially. At the state level, countries with diversified migration destinations are likely to have more sustainable remittance flows. From a macroeconomic perspective, remittances can boost aggregate demand and thereby GDP as well as spur economic growth.

Usage of remittances:
For capital deficient countries, like Pakistan, workers remittances are considered to be an important source of foreign exchange. These remittances have a positive impact on Pakistans economy through improved balance of payments position and reduced dependence on external borrowing. Significant flows of remittances also helped Pakistan recover from the adverse effects of oil price shocks, reduced the unemployment problem, and improved standard of living of recipient households. on a macro level, along with providing balance of payment support, these inflows also help in lending a hand to the economy. A majority of these remittances are believed to be devoted to consumption expenditures, followed by debt repayment, construction/renovation of house, expenses related to weddings/dowries for children, purchase of real estate, starting a business, and performing the Islamic religious act of the Hajj that involves financing returned travel to Mecca in Saudi Arabia.

Remittances are an important and growing source of foreign exchange for Pakistan. Currently, remittances provide enough foreign exchange to finance almost 80 percent of Pakistans oil imports. The importance of remittances has been increasing not just at the macroeconomic level but also among recipient households. At the macro level, the share of remittances now is about 90% of foreign direct investment (FDI), surpassing official capital flows and other private flows (Acosta et al. 2006), while the number of recipient households keeps increasing. At the household level, remittances have helped smooth consumption expenditure and in some cases have also reduced poverty. Pakistan has gained enormously from remittances both in the past and recent years.

Role of government:
The main obstacle preventing the government from utilizing the remittances effectively is essentially the informal nature of these inflows, meaning lack of recording and regulation. The government has been strongly encouraging migrant workers to send their remittances through formal channels. As part of the liberalization of the foreign exchange regime, migrant workers are allowed to maintain foreign currency accounts with free inflows and outflows of foreign currency. The floating exchange rate policy adopted also reduced the gap between official and market exchange rates. Additionally, the government provides exemptions to migrant workers on custom duties for sending remittances through formal channels. It also introduced foreign exchange bearer certificates and foreign exchange currency certificates for migrants to provide attractive returns on long-run investments.

Conclusion:
Huge remittances are a big national asset for a country, as they help in alleviating poverty, shoring up foreign exchange reserves and improving the economic development. Since remittances have been mainly used for consumption purposes only, policy initiatives should be developed that can help channelize the remittances towards productive investment and entrepreneurship promotion in Pakistan. These initiatives should be focused towards providing information and avenues on investment opportunities in Pakistan. Assistance should be provided to overseas workers in finding ways to remit money at a lower transaction cost. Developing a substantial incentive based package that accommodates the needs of not only the high income overseas Pakistanis but also the low income workers would give an impetus to investment. The development of appropriate remittance structure can induce investors and importantly the recipients to invest in lucrative projects and schemes that can trigger development in Pakistan. This will also help recover Pakistans creditworthiness which in turn would open doors for international capital.