FOREIGN REMITTANCES AND THEIR IMPACT ON THE ECONOMY OF PAKISTAN

A Study Lapsing 1947-2014

162 Muhammad Umair190 Ijaz Ahmad205 Muhammad Awais155 Sajjad Husain

Remittances Defined:

A remittance is a transfer of money by a foreign worker to an individual in his or her home country. Money sent home by migrants competes with international aid as some of the largest financial inflows to developing countries.

A sum of money sent in payment or as a

gift

Significance Of Remittances:  According to World Bank estimates, remittances totaled US$ 414

billion in 2009, of which US$ 316 billion went to developing countries that involved 192 million migrant workers.

2012: 550 Billion in the world where Pakistan’s share 14 Billion. Top Two Nations in this regard are India(71B) and China(60B).

 For some individual recipient countries, remittances can be as high as a third of their GDP.

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.

According to some social scientists, remittances have social significance that extends well beyond the mere financial dimensions

The World Bank and the Bank for International Settlements have developed international standards for remittance services.

In 2004 the G8 met at the Sea Island Summit and decided to take action to lower the costs for migrant workers who send money back to their friends and families in their country of origin. In light of this, various G8 government developmental organizations, such as the UK government's Department for International Development (DFID) and USAID began to look into ways in which the cost of remitting money could be lowered.

In September 2008, the World Bank established the first international database of remittance prices. The Remittance Prices Worldwide Database provides data on sending and receiving remittances for over 200 "country corridors" worldwide. The "corridors" examined include remittance flows from 32 major sending countries to 89 receiving countries, which account for more than 60% of total remittances to developing countries. The resulting publication of the Remittance Prices Worldwide Database serves four major purposes: benchmarking improvements, allowing comparisons across countries, supporting consumers’ choices, and putting pressure on service providers to improve their services.

At a July 2009 summit in L'Aquila, Italy, G8 heads of government and states endorsed the objective of reducing the cost of remittance services by five percentage points in five years. To drive down costs, the World Bank has begun certifying regional and national databases that use a consistent methodology to compare the cost of sending remittances.

Overview:

Several European countries, for example Spain, Italy and Ireland were heavily dependent on remittances received from their emigrants during the 19th and 20th centuries. In the case of Spain, remittances amounted to the 21% of all of its current account income in 1946. All of those countries created policies on remittances developed after significant research efforts in the field. For instance, Italy was the first country in the world to enact a law to protect remittances in 1901 while Spain was the first country to sign an international treaty (with Argentina in 1960) to lower the cost of the remittances received.

Since 2000, remittances have increased sharply worldwide, having almost tripled to $529 billion in 2012. In 2012, migrants from India and China alone sent more than $130 billion to their home countries.

Mode of Remittances:

Authorized Dealers should normally avoid issuing drafts in cover of outward remittances whenever remittance can be made by T.Ts, or M.Ts, etc. Where, however, the normal means of transfer is likely to result in unnecessary hardship or inconvenience to the remitter, drafts may be issued in the name of the beneficiaries of the remittance but such drafts should be crossed by the issuing bank as "Account Payee only".

Inward and Outward Remittances:

The term 'inward remittance" means purchase of foreign currencies in whatever form and includes not only remittances by draft, but also purchase of travelers cheques, drafts under travelers letters of credit, bills of exchange, currency notes and coin etc. Debit to bank‘s non-resident Rupee accounts also constitutes an inward remittance.

The term "outward remittance" means sale of foreign exchange in any form and includes not only remittances by T.Ts, M.Ts, drafts etc., but also sale of travelers cheques, travelers letters of credit, foreign currency notes and coin etc. Outward remittance can be made either by sale of foreign exchange or by credit to non-resident Rupee account of banks' overseas branches or correspondents. Authorized Dealers may sell foreign exchange for approved transactions

Remittances and Pakistan:

First influx towards UK and Western Europe in the late 50’s due to war. Mostly unskilled and Manual Labour.

2nd influx in 1973 in the wake of Oil price shock. $107 Million in 1971-72 which was low keyed growth. 1982-83 peaked to $ 2886 Million i.e 9% of GNP. Total Imports then were $5616 Million and thus exceeded the merchandise exports of nearly $ 2672 Million.

2000-01: saw a declining trend in remittances with a migration trend.

Causes: i. Steep decline in Oil Prices.ii. Competition from India and SK in

Skilled labour and Bangladesh, Sri Lanka in unskilled and semi skilled.

iii. The Trend was specially evident when it came to female labor force

Social and cultural freedom gave boast in Remittances to Philippines, Bangladesh and Thailand in Female Labor Force as Pakistan was unable to compete with the structural changes taking place in the world economies.

Post 9/11 period has seen a 2nd resurge of Remittances. More than $8 Million in 2009-10. 43.4% of total exports and 22.4% of Total Imports. BOT was a negative by $17 Billion and came down to about 46%.

1998: Fall in Remittances due to confidence fall due to carrying out of Nuclear Tests in May 1998.

2010-11: 11,200.97 Million with $890.42 Million in the month of September and 924.92 Million in November.

2011-12: More than $13 Billion which was the highest for our Nation in the history. $13,186.58 Million during the last fiscal year that ended on June 30, 2012. Growth of 17.73 %. $1 Billion in the last 10 months.

GDP and Remittances Trend:

Province Wise Stats:

Skill Wise:

Country Wise Stats:

Reasons for Remittances:

Unemployment Poverty Attraction of Higher wages Better amenities of life Better education opportunities Political Freedom

Advantages:

Budget Deficit Bridging Trade Deficit Foreign Reserves Redistribution of income and wealth Increase in consumption ( last ten years 62%) Increase in Savings (16%) Increase in Investment (20%) Impact on BOP Impact on GNP Standard of Living improved

It should be mentioned here that remittances only prove a temporary breathing space to economies under stress but their continuation over time is never guaranteed.

Disadvantages:

Brain Drain: Professional and skilled people leave the country causing loss in productivity.

Inflation Demonstration effect Failure in adjustment in new social

system Social and Psychological and Sexual

Effects

Conclusion:

Foreign Remittances are important for a Nation. They help to bridge the gap in BOP but this support is not mostly transitory. An Economy can’t rely on ‘em solely as their continuation over time is not guaranteed.

Conversely, some economists are of the view that they are essential for the developing countries. In some cases even more than official development assistance. As in case of Pakistan where they are even more than FDI.

Policy Implications:

By raising the level of education in the country. Academic as well as skilled.

Investment in Human Capital Training of Labour Force. Removing of Economic Barriers. Attitudinal Changes. Social and Psychological

improvement. Political Changes and Diplomatic Attitude. Terrorism. Note: Labour Force Restrictions due to Health

concerns.