Role of Remittances and their Inflow In Pakistan from 1976-2008

Presented by:
Maliha Khan & Wahid Ali Shah Hashmi

Introduction
• Over a period of 40 years, remittances have become a major part of the Pakistani economy. • Starting from a bare minimum in 1970s, the country is now ranked the 7th largest emigrant country and has received remittances worth $1.2billion a month. • Our paper analyzes the major trends in the inflow of remittances with the time period of 1976-2008. • The paper also identifies the major impact of the remittances on the economy in general and investments in particular. • Recommendations are provided in the end to eliminate the root cause and tackle the key issue.

Introduction • Remittances have played a significant role in the economy by not only increasing the household consumption but also increasing savings and investments in the country. • Studies have proven that the impact of these remittances is much impressive on the microeconomic level rather than the macroeconomic level. • However. . fluctuations have also been observed in the inflow of remittances throughout these four decades.

2012.3 million) followed by Oman and Kuwait. • Out of these. approximately 5 million Pakistanis have migrated to different countries around the world. 432) • Another research found that 62% of the total remittances have been spent on consumption while 35% has been either invested or saved. (Javid. . majority has migrated to the Middle eastern countries such as Saudi Arabia (2. p.Key Facts about Migration & Remittances • During the period of 1970 to 2008.3 Million) and UAE (1.

44% Highly skilled.Skill Composition of Migrant Workers Unskilled. 2% Semi. 45% Skilled. 2% . 7% Highly Qualified.Skilled.

Geographical Distribution of Origin of Migrant Workers Azad Kashmir 6% Sindh 9% Baluchistan 6% Punjab 49% NWFP 25% Tribal Areas 5% .

Trend of Remittances from 1976-2008 .

and expectations of higher earnings abroad are some of the fundamental causes of the emigration. remittances experienced a sharp increase in between 1976 and 1980. as those countries had liberalized their policies. and this is one reason for the increasing remittances inflow to Pakistan. • The Middle Eastern countries demanded higher labor because of their booming petroleum sectors. . • Hence. because of the increased demand of labor and the inability of the local market to supply that. • Most of the emigrations between 1976 and 1980 were to the Middle-East.Remittances during 1976-1980 • Pakistan experienced a sharp increase in emigrations starting 1976 onwards. abject poverty. High unemployment.

a downward trend is observed with around a 17% decline from the first half decade.Remittances during 1981-1990 • The decade of remittance reception (1981-1990) can be divided into the period 1981-83 and 1983-1990 respectively. . • In the first period the country experienced an upward trend in remittances growing to around 3000Million USD from almost half the figure three years ago. • Also the coefficient of variation which related the responsiveness of changes in remittances to factors in the market was at 22 units which reflected high remittance responsiveness. • But in the second stage.

• Average remittances in this decade fell to USD 1426. . • Remittances gradually decreased from 1991 reaching an all-time low of $997.4 million as compared to USD 2323.Remittances during 1991-2000 • Remittances from expatriates experienced a downfall during the years 1991-2000.1 Million in 1999 before picking up again. • The reasons for such drastic decrease in remittances can be attributed to various factors including but not limited to the political changes in the country affecting government economic policies and the Asian financial crisis in early 1993-97.6 million in the previous 1981-1990 period.

• Most of the remittances were generated from the Gulf States particularly UAE.Remittances during 2001-2008 • 2001 was the year when there was a phenomenal shift in the remittances inflow. . • Although the number of migrants for UAE had declined from in the past decade. 21% from North American and almost 47% from the Middle East. • After 2001. the remittances increased from $1. As a result. the new migrants are usually more skilled and educated and therefore they have higher pays.3 billion in just 7 years. the inflow of remittances showed a sharp increase and within a passage of 8 years. the remittance amount is much higher. 15% of the remittances can from Europe.2 billion to 7.

Remittances during 2001-2008 • After reaching the level of 3. .3 billion. • From 2006 to 2008. • Studies also reveal that 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 remittance saw a huge boost as the people started returning in the wake of the financial crisis and brought their savings with them. the rate of increase of remittances slowed down because of the constrained economic conditions in UAE.

Impact of Remittances on Pakistan’s Economy • Remittances have a positive impact on the economy in terms of aggregate consumption. investment. • Consumption and savings also have a positive relation with remittances where in these variables have increased with increase in remittance inflows. reduction in current account deficit. . • Furthermore. labor migration is considered to be a useful source of foreign exchange earnings. external debt burden and improved education/skills for the households.

. consumption has also increased which has also proved beneficial to the economy. • These remittances also accelerate economic growth by enabling households to finance investments and reduce liquidity constraints.Impact of Remittances on Pakistan’s Economy • With an increase in remittance income. • Real GDP growth is positively correlated to workers’ during 1972-73 to 2002-03 and workers’ remittances emerged to be the third important source of capital for economic growth in Pakistan.

Remittance as percentage of GDP .

Impact of Remittances on Investment • Research reveals that 60% of the remittances are spent on the consumption of households while the remaining 40% is spent on investments and savings. • People are keen on investing the remittances due to two major reasons. • People invest their remittances because they believe that investment can lead to increased levels of consumption in future. . • The other reason is that they believe that investment can act as insurance against reduced consumptions in crunch financial times.

• It is also observable that with every unit increase in remittances. . these two reasons are disregarded when it comes to consumption. the consumption level on remittances is so high. consumption increases proportionally as well. rate of time preference is greater than the rate of interest on investments or savings and therefore.Impact of Remittances on Investment • Yet. • For most households. • People are impatient and they consider the economic situation of the country unviable and so they are reluctant to invest or save.

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Factors Affecting Remittance Utilization .

. we need to target the root cause. • This can only be done through land reforms and redefining of power structures. and apply the concepts of distribution before growth. power and prestige. • The root cause is the vested interests of those in power and the comprador groups who want to retain their position. The governments need to take responsibility.Conclusion and Recommendations • In order to tackle with the core issue identified through the analysis of remittances and their impact on investments.

The policies of the government will be no longer be stricken by urban bias. • It will culminate into the elimination or a drastic reduction in congestion. investment will flow in both sectors more equitably. • The gap between the urban and rural sector will diminish and so. the infrastructure will develop in the rural market too. and also remove the first-city bias from the minds of the general public as the policies will not be tilted towards the development of only first cities. The investment ratio will also increase because the people will be more inclined to invest. .Conclusion and Recommendations • When the land will be distributed equitably.