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Economic Determinants of Workers’ Remittances in Pakistan

Article  in  Lecture Notes in Electrical Engineering · September 2014

DOI: 10.1007/978-3-642-40078-0-36

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Chapter 36
Economic Determinants of Workers’
Remittances in Pakistan

Asif Kamran, Sadaf Alam, Kaleem A. Ghias and Syed Nayyer Ali

Abstract Workers’ remittances have become the second foremost source of mon-
etary flows to developing countries. Pakistan has experienced fluctuations in eco-
nomic indicators in the past that hindered the flow of workers’ remittances in the
country. According to World Bank data, Pakistan has become fifth largest remit-
tances receiving developing country in 2011. This paper explores the economic de-
terminants of workers’ remittances of Pakistan using annual data spanning from
1990 to 2010. Research aims to analyze the extent to which multi variables impacts
the flow of workers’ remittances in Pakistan. The research is causal and explanatory
in nature and follows quantitative research design. This study identifies empirically
verified economic determinants of workers’ remittances of Pakistan by using multi-
ple regression. The quantitative substantiation of multiple regression analysis shows
that FDI, exchange rate and GDP appeared to be important determinants of work-
ers’ remittances, other determinants of workers’ remittances are inflation rate and
interest rate. In particular, workers’ remittances increased with the increase in GDP
and FDI. Contrasting to this, rise in interest rate and fluctuation in inflation level
lowers the inflows of workers’ remittances in Pakistan, as greater insecurity in rela-
tion to price changes in future period and high inflation reduces the return on funds
remitted.
Keywords Remittances (R) · Foreign Direct Investment (FDI) · Inflation Rate
(IR) · Gross Domestic Product (GDP) · Real Interest Rate (RIR)

A. Kamran (B)
School of Management & Economics, University of Electronic Science & Technology of China,
Chengdu 610054, P. R. China
e-mail: asifkamrankhan@gmail.com
S. Alam · A. Kaleem
Management Science Department, Bahria University, Karachi 75260, Pakistan
S. Ali
General Studies Department, Yanbu Industrial College, Madinat 30426, Yanbu Al Sinaiyah King-
dom of Saudi Arabia

J. Xu et al. (eds.), Proceedings of the Seventh International Conference 415

on Management Science and Engineering Management (Volume 1),
Lecture Notes in Electrical Engineering 241, DOI: 10.1007/978-3-642-40078-0_36,
Ó Springer-Verlag Berlin Heidelberg 2014
416 A. Kamran & S. Alam & et al

36.1 Introduction

Worker’s remittances are the segment of cross-border income that migrants send
to residence country. Worker’s remittances are considered as fundamental external
source of investment for developing countries. Global transfers of remittances to de-
veloping countries have grown steadily in the last 10 years and exceed $100 billion
worldwide [6]. Pakistan has also experienced same trend in the flow of workers’ re-
mittances like other developing countries. State Bank of Pakistan (SBP) data showed
that workers’ remittances recorded a substantial growth of 17.7 percent as compared
to fiscal year 2010-11 and reached a record level of $13.186 billion.
Remittances do respond to staged changes in economic activity in recipient coun-
tries and overall price stability. Pakistan has experienced cycles in inflation and real
economic activity in the history that has hindered the flow of worker’s remittances
in Pakistan. Remittances are not only the source of investment but play a fundamen-
tal role in poverty alleviation for the developing countries as it is a great source of
income generation and employment. Increased income helps economies to provide
individuals with numerous investment opportunities.

36.2 Literature Review

The relationship of remittances with many variables is well discussed in many re-
search studies carried out all over the world. Russell [8], Burney [2, 3], Gupta [5]
identified the economic determinants of remittances using technique of Ordinary
Last Squares (OLS). By taking the data of different countries they all have tested
the empirical relationship between workers’ remittances and its economic deter-
minants. El-Sakka [4] in his study considered the macroeconomic determinants of
immigrants’ remittances in Egypt by using data spanning from the period of 1967
to 1991. Study used Ordinary Least Square (OLS) regression technique. Wage rate
of worker, domestic income, domestic price level, the domestic and world interest
rates, and the official and black market exchange rates were the determinants of
remittances.
According to the study difference in exchange rate and interest rate are imperative
in directing the flow of remittance through authorized channels. Low interest rate
in home country induces workers to send fewer remittances. High rate of inflation
in home country reduces the income which forces them to migrate and therefore
increases the remittances. The research also finds that with high income elasticity,
when remittances are used to financed imports it has also the significant impact in
attracting the flow of remittances in that nation.
Adams [7] studied the factors that influence the different level of remittances
flowing in developing nations by using OLS regression. Study utilized data of 76
low- and middle-income developing countries.
Variables considered for the study were exchange rate, poverty, interest rate, level
of per capita GDP and skills of migrants. The paper discovered that skills of mi-
36 Economic Determinants of Workers’ Remittances 417

grants matter a lot in determining the flow of remittances. Remittance flow was
higher in countries from where low skilled workers went abroad. Results also sug-
gest that an inverted-U shaped curve subsists between the level of per capita GDP in
a country and the receipt of remittances. Exchange rate and interest rate does matter
in determining the flow of remittances whereas; poverty does not have significant
impact on flow of remittances in developing countries.

36.3 Research Methodology

36.3.1 Hypothesis

This research tests this hypothesis:

H0 : β1 = β1 = β2 = β3 = β4 = β5 = 0. All slope coefficients are simultaneously zero.
H1 : β1 = β1 = β2 = β3 = β4 = β5 = 0. Not all slope coefficients are simultaneously
zero.

36.4 Data and Construction of Variables

The main purpose of this study is to examine empirically the economic determinants
of the price of workers’ remittances in Pakistan.
To find out the determinants of remittances this equation was developed. Paren-
thesis shows expected signs of the coefficients.

(+) (−) (−) (−) (+)

log(WR) = β0 + β1 GDP + β2 EXR + β3 INT + β4 INF + β5 log(FDI). (36.1)

Graph (a) of Fig. 36.1 shows trends in exchange rate of Pakistani rupee. From
1990 to 2010 Pakistani rupee has continued to depreciate, stability in exchange rate
can be seen from 2001 to 2007 due to political and economic stability.
Graph (b) of Fig. 36.1 indicates trends in foreign direct investment. From 1990
to 1995 FDI has increased slightly. From 1996 to 2000 it has fallen from $1 bil-
lion to $0.332 billion due to political instability and economic sanctions that can
also be observed in graph (a) where large fluctuation can be observed in currency
depreciation. FDI has reached to $5.41 billion in 2005 due to political stability and
consistency in economic policies. One of the main reasons of this highest level of
FDI was interest rate that was recorded at its lowest level in the same period.
Graph (c) of Fig. 36.1 shows the trends in GDP growth rate of Pakistan’s econ-
omy. From 1990 to 2010 economy has faced unpredictability in economic growth
rates. In 1990 GDP growth rate was 3.5 percent; in 1993 it fell to 2.3 percent due
to political instability in the country. From 2002 to 2005 Pakistan’s economy has
418 A. Kamran & S. Alam & et al

(a) m($) (b)

Y
Years Yeaars

% (c) % (d)

Years Yeaars
% m($)
(e) (f)

Y
Years Yeaars

Fig. 36.1 Trends of dependant and independent variables

experienced very good economic conditions due to political stability and inflow of
FDI.
It can be easily seen in graph (d) of Fig. 36.1 that in 1990 inflation rate was 6
percent; in 2002 it was at its lowest level of 3.1 percent as the monetary policy stance
was towards increasing GDP. Large fluctuation in inflation rate can be observed in
36 Economic Determinants of Workers’ Remittances 419

2009 when inflation rate of 20.8 percent was recorded, the reasons for this increase
were oil price shocks and after effects of bubble economy of previous regime.
Graph (e) of Fig. 36.1 shows the trends in interest rate in the economy. Highest
interest rate of 10.66 percent was recorded in 1990. During the period of 2002-04
interest rates were low, indicating easy monetary policy stance of SBP.
Trends in workers’ remittances can be observed from graph (f) of Fig. 36.1. Dur-
ing the early 1990s, the Gulf crisis declined the export of Pakistani workers to the
Middle East. Precipitous decline in remittances can be observed in 1998 to 2000,
when the foreign currency accounts of Pakistan were seized after nuclear explosion.
From 2001 to 2004 workers remittances has increased remarkably and first time
reached to $4.23 billion in the comparable time period. One of the reasons is 911
incident and continuous depreciation of Pakistani rupee that has enforced people to
take advantage of currency differences.

36.5 Empirical Results

Results of output of regression run in Eviews are presented as follows.

log(WR) = 7.651 − 0.008INF + 0.160 log(FDI) − 0.003EXR − 0.069INT

+0.000000243GP.

Table 36.1 represents descriptive statistics of all variables taken into the regres-
sion equation. Statistics of skewness and kurtosis indicates that all variables are
normally distributed except GDP and FDI. As values of skewness is close to zero
and kurtosis near 3, fulfilling the criteria of normal distribution.

Table 36.1 Descriptive statistics

EXR FDI GP INF INT WR

Mean 51.22524 1489.871 4924913. 8.961905 4.893333 3121.491

Median 57.57000 682.1000 3778155. 9.300000 5.300000 1866.100
Maximum 86.64000 5410.200 15402783 20.80000 10.66000 8905.900
Minimum 22.42000 246.0000 892843.0 3.100000 0.950000 983.7300
Std. Dev. 19.01892 1616.914 4107906. 4.263622 2.303568 2362.939
Skewness 0.153479 1.391741 1.183814 0.734446 0.213387 1.138461
Kurtosis 2.158112 3.620242 3.483825 3.851548 3.250949 3.155463
Observations 21 21 21 21 21 21

The correlation matrix reveals pair-wise correlation. Results indicates that three
variables including FDI, exchange rate and GDP are highly positively correlated
with workers remittances as its values are 0.67, 0.78 and 0.95 respectively where as,
two variables inflation rate and interest rate are moderately correlated with workers
remittances as it can be observed from their values of 0.39 and 0.49 respectively.
420 A. Kamran & S. Alam & et al

Table 36.2 Correlation matrix

EXR FDI GP INF INT WR

EXR 1.000000 0.565793 0.917644 0.070599 −0.638862 0.788391

FDI 0.565793 1.000000 0.667524 0.145480 −0.563883 0.676894
GP 0.917644 0.667524 1.000000 0.308073 −0.528916 0.954089
INF 0.070599 0.145480 0.308073 1.000000 0.227503 0.391459
INT −0.638862 −0.563883 −0.528916 0.227503 1.000000 −0.490431
WR 0.788391 0.676894 0.954089 0.391459 −0.490431 1.000000

36.5.1 Analysis of Results

(1) Coefficients and intercept

Coefficient corresponds to the regression equation between workers’ remittances
(dependent variable) and inflation rate, interest rate, FDI, exchange rate and GDP.
The parameters signs are as expected. As it can be easily noticed, the relationship be-
tween workers’ remittances and inflation rate, interest rate, FDI, exchange rate and
GDP fulfill the criterion on coefficient signs, which implies a positive relationship
between workers’ remittances, GDP and FDI, and negative relationship between
workers’ remittances, inflation rate, interest rate and exchange rate thus correspond
the theoretical model.
Results show that over the period of time 1990-2010, workers’ remittances in
Pakistan have increased very slightly about 0.000000243 percent for a percent in-
crease in GDP. Workers’ remittances have decreased about 0.033 percent, 0.069
percent and 0.008 percent for a percent increase in exchange rate, interest rate and
inflation rate respectively. Workers’ remittances in Pakistan for the same period have
increased about 0.106 percent for a percent increase in FDI.
The intercept value of 7.65 percent shows that if the FDI, GDP, inflation rate,
interest rate and exchange rate were zero on average, worker’s remittances per year
would have been 7.65 percent.
(2) R square and adjusted R2
R squared measures the goodness of fit also called goodness of fit, its value of
0.911 means that about 91.1 percent variations in mean workers’ remittances are
explained by all variables (FDI, inflation rate, interest rate, exchange rate and GDP)
incorporated in the model.
For multiple regressions adjusted R2 gives true results as it is calculated after ad-
justing degree of freedom. Its value of 0.88 is indicating that 88.0 percent variation
in mean workers’ remittances is explained by all variables taken into the model.
(3) Sum squared residuals
Statistics for sum squared residuals in Table 36.3 shows that around 14 percent
variation in workers’ remittances is not explained by the model, whereas around 86
percent variation in the model is explained by all explanatory variables taken into
regression.
36 Economic Determinants of Workers’ Remittances 421

Values of S.E regression 0.23 indicates that the average amount of error in pre-
dicting workers remittances is 0.23.

Table 36.3 Regression result

Dependent variable: log(WR)
Method: Least squares
Sample: 1990-2010
Included observations: 21
Variable Coefficient Std. Error t-Statistic Prob.

C 7.651830 0.936610 8.169707 0.0000

INF −0.008152 0.016996 −0.479644 0.6384
log(FDI) 0.160107 0.107620 1.487703 0.1575
EXR −0.033584 0.009152 −3.669564 0.0023
INT -0.069935 0.040393 −1.731357 0.1039
GP 2.43E − 07 4.71E − 08 5.152285 0.0001
R-squared 0.911485 Mean dependent var 7.801966
Adjusted R-squared 0.881980 S.D. dependent var 0.698417
S.E. of regression 0.239935 Akaike info criterion 0.218057
Sum squared resid 0.863530 Schwarz criterion 0.516492
Log likelihood 3.710401 F-statistic 30.89245
Durbin-Watson stat 1.343185 Prob (F-statistic) 0.000000

36.5.2 Hypothesis Testing

(1) Hypothesis testing about regression coefficients

T-statistics: T calculated value for inflation rate is 0.47 which is greater than
tabulated value of t at 5 percent confidence interval. P values are insignificant to
reject null hypothesis. So, null hypothesis that β1 = 0 can be rejected.
T calculated value for FDI is 1.48 which is less than tabulated value of t at 5 per-
cent confidence interval. So, null hypothesis that β2 = 0 can be rejected at 15 percent
confidence level. T calculated value for exchange rate is 3.66 which is greater than
tabulated value of t at 5 percent confidence interval. P values are also significant to
reject null hypothesis. So, null hypothesis that β3 = 0 can be rejected.
T calculated value for interest rate is 1.73 which is greater than tabulated value
of t at 10 percent confidence interval. P values are also significant to reject null
hypothesis. So, null hypothesis that β4 = 0 can be rejected.
T calculated value for GDP is 5.15 which is greater than tabulated t value at 5
percent confidence interval. P values are also significant. Result of tstatistics shows
that P value of obtaining t-value of as much as or greater than 5.15 is very small,
P values indicates that probability of committing a type I error is zero. So, null
422 A. Kamran & S. Alam & et al

hypothesis that β5 = 0 can be rejected.

(2) Testing overall significance of multiple regression
F-statistics: F calculated value is 30.89 which is greater than tabulated value of
F.P value of F statistics is also significant to reject null hypothesis of β0 = β1 =
β2 = β3 = β4 = β5 = 0.
(3) Findings
The quantitative evidence shows that GDP and FDI are positively related to work-
ers’ remittances during 1990 to 2010. A positive but negligible relationship between
workers’ remittances and GDP has been found, implying that although remittances
are associated with higher economic growth but these inflows are affected by some
other factors as compare to GDP. These results seem to support the proposition
developed earlier that remittances had positively contributed to output growth in
Pakistan during 1990 to 2010. Thus, the increase in GDP may not be an important
prerequisite for the sustainable level of workers’ remittances.
If money supply exceeds trend GDP levels, disequilibrium in the money and
goods market will occur creating thus inflationary pressures. Inflation creates an
unattractive environment for all forms of foreign capital, including remittances. The
estimated coefficient of inflation shows a negative impact on workers’ remittances
as instability in the prices decrease the incentives to send money to the home coun-
try. Pakistan’s economy is facing double digit inflation for last several years and this
high inflation has an economic cost. It undermines the economy’s ability to generate
long-lasting gains in output, incomes, and employment. It also creates uncertainty
for consumers, businesses, and investors, and erodes the value of incomes and sav-
ings. Therefore, decrease the worker’s remittances.
A strong positive relationship between workers’ remittances and FDI has been
found, implying that remittances are associated with higher inflows of foreign in-
vestment that reflects the confidence of remitter on economic and political stability.
The investment return in Pakistan is highly significant, and with unpredicted
signs indicating that remitters responded to increase in interest rate negatively in
Pakistan. More depreciation in exchange rate of home country decreases the trans-
fer of money. Less amount of money is required to spend on consumption as
home country’s exchange rate depreciation increases purchasing power of popu-
lation working abroad. In Pakistan depreciation of exchange rate has slowed down
the worker’s remittances as household can consume more with the same amount of
remittances.

36.6 Conclusions

This study identifies the economic determinants of workers’ remittances of Pakistan

by estimating multiple regression equation which is found empirically verified. The
results are encouraging, as they show that the FDI, interest rate in Pakistan, inflation
rate, exchange rates, and Pakistan’s economic conditions all play a strong role in
explaining remittances. Result shows that flow of remittances is not highly linked
36 Economic Determinants of Workers’ Remittances 423

with the GDP. This signifies that GDP is not a very vital determinant of the inflow
of remittances to Pakistan as compare to other factors.
Exchange rate (depreciation) is a strong incentive for workers’ remittances to
home state. Opposing to this, an increase in interest rate and fluctuation in inflation
rate lowers the inflows of worker’s remittances in Pakistan, as ambiguity about price
changes in future periods and high inflation lower the return on money remitted.
Negative relation has been observed between interest rate and worker’s remittances
in Pakistan that implies that being a Muslim country people are more concerned to
other incentives rather than interest rate. Summing up the results, variables fulfilled
the entire condition imposed on the model. The response of workers’ remittances
is also consistent with existing data on all independent variables. In response to
currency depreciation, increase in inflation and increase in interest rate, workers’
remittances decline, whereas FDI and GDP has the tendency to increase the flow of
remittances.

36.7 Policy Implications

The findings of the study suggest that accurate policies can direct remittance flows
into more prolific investment activities in the future. Keeping in view the multiplier
effects and potential benefits of remittances on the economy, more wise policies can
be formulated to encourage the remitters to send more remittances. As a policy mat-
ter, the government should provide striking investment opportunities to attract more
remittance flows. These opportunities may include housing schemes, microenter-
prises and other kinds of development projects.
It has been observed during the study that an accurate record of numbers of work-
ers is lacked that also influence the formulation of appropriate policy. Additional ef-
forts are required to be made to send workers through legal recruitment procedures,
which will not only help to maintain an accurate record of number of workers go-
ing abroad but would also help to rise the level of workers’ remittances sent to the
financial system of the country.
Foreign policy of Pakistan should be revised with neighboring countries to min-
imize the barrier from export of manpower in order to get sustainable flows of re-
mittances.

References

1. Khattak DA (2005) Handbook of Statistics on Pakistan Economy 2010. Retrieved 30, January
2012, Annual Report of State Bank of Pakistan 2010-11
http://www.sbp.org.pk/departments/stats/PakEconomy HandBook
2. Aydas OT, Neyapti B, Metin-Ozcan K (2004) Determinants of workers’ remittances: The case
of Turkey. Bilkent University Department of Economics Discussion Paper
 424 A. Kamran & S. Alam & et al

3. Burney N (1987) Workers’ remittances from the Middle East and their effect on Pakistan’s
economy. The Pakistan Development Review 26:745–761
4. El-Sakka MIT, McNabb R (1999) The macroeconomic determinants of emigrant remittances.
World Development 27(8):1493–1502
5. Gupta P (2005) Macroeconomic determinants of remittances: Evidence from India. Interna-
tional Monetary Fund, Working Paper No. WP/05/224
6. International Monetary Fund (2005) World economic outlook: Globalization and external
imbalances, Chapter 2, Washington, DC.
7. Adams Jr RH (2009) The determinants of international remittances in developing countries.
World Development 37(1):93–103
8. Russell SS (1986) Remittances from international migration: A review in perspective. World
Development 14:677–696

Appendix

Trend of GDP, inflation rate, real interest rate, FDI, workers’ remittances, and ex-
change rate are shown in Table 36.4.

Table 36.4 Trend of GDP, inflation rate, real interest rate, FDI, workers’ remittances, and exchange
rate
Years Inflation rate Interest rate FDI m$ WR m$ Exchange GDP (Rs.
% % rate (Rs = $1) million)
INF INT FDI WR EXR GP

1990 6.0 10.66 246 1942.35 22.42 892843

1991 12.7 6.0 335.1 1848.29 24.84 1044508
1992 10.6 6.38 306.4 1467.48 25.95 1223922
1993 9.8 6.09 354.1 1562.24 30.16 1351589
1994 11.3 6.7 442.4 1445.56 30.85 1577085
1995 13 6.35 1101.7 1866.1 33.56 1879965
1996 10.8 6.62 682.1 1461.17 38.99 2113037
1997 11.8 6.38 601.3 1409.47 43.19 2408962
1998 7.8 6.69 472.3 1489.55 46.79 2653292
1999 5.7 5.82 469.9 1060.19 51.77 2912832
2000 3.6 5.3 322.5 983.73 58.43 3778155
2001 4.4 4.33 484.7 1086.57 61.42 4155391
2002 3.5 3.35 798 2389.05 58.49 4476319
2003 3.1 1.13 949.4 4236.85 57.57 5027460
2004 4.6 0.95 1524 3871.58 59.35 5765058
2005 9.3 1.86 3521 4168.79 59.85 6634243
2006 7.9 2.53 5139.6 4600.12 60.63 7773106
2007 7.8 2.66 5410.2 5493.65 62.54 8830640
2008 12 4.38 3719.9 6451.24 78.49 10451715
2009 20.8 4.29 2205.7 7811.43 83.8 13070268
2010 11.7 4.29 2201 8905.9 86.64 15402783
Source: SBP Handbook of statistics on Pakistan’s economy 2010 and Statistical Supplements
(2008-09) ministry of finance, Pakistan.

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