KARACHI: With worker remittances covering 45% of the Pakistan’s import bill, few can deny these inflows form the bedrock of the economy as a reliable source of foreign exchange earnings.
But the pattern of remittances has undergone a notable change in recent years. For instance, inflows from the United States, which has traditionally been one of the principal sources of remittances, have slowed down remarkably in recent years.
As opposed to 12.9% growth rate in 2013-14, remittances from the United States increased only 4.8% in 2014-15. More recently, remittances from the United States tallied to $1.1 billion in July-November, which is 1.5% less from the same period of the preceding fiscal year.
This is despite the fact that the US economy is finally getting out of the shadow of the 2008 financial crisis with an improved job market. So why is the Pakistani diaspora in the United States not sending as much money back home as its counterparts in other parts of the world, especially the Middle East?
“Probably this slowdown should be seen in the context of narrowing interest rate differential, which is an outcome of normalising monetary policy in the United States and an easy policy in Pakistan,” according to the State Bank of Pakistan (SBP) latest annual report.
In simple words, the central bank believes that US workers of Pakistani origin are simply holding on to their savings within the United States instead of remitting them back home. They are withholding that portion of their savings that they would otherwise send their families for “investment purposes,” the SBP believes.
In the presence of a wide gap between the rates of investment returns in the United States and Pakistan, US workers of Pakistani origin would prefer investing their savings in Pakistan until recently – something that resulted in healthy annual growth in worker remittances from the United States for many years.
But with interest rates going up in the United States and coming down in Pakistan, the difference in the average investment returns seems to be narrowing.
This analysis reconciles with empirical findings as well, according to the SBP. Referring to an international research study carried out in 2011, the SBP said the difference between investment returns in the host country – United States, in this case – and Pakistan is a “highly significant determinant” of remittance growth for Pakistan.
In addition to the United States, remittances from the United Kingdom have also slowed down in recent years, SBP data shows. From 12.9% growth rate in 2013-14, remittances from the United Kingdom increased only 4.9% in 2014-15. They amounted to $1 billion in July-November, which is up only 4.4% from the same period of the preceding fiscal year.
The situation in UK
But the SBP says the slowdown in remittances from the United Kingdom is entirely due to the exchange rate effect. A sharp depreciation of the sterling has resulted in a decrease in the dollar value of remittances from the United Kingdom.
After adjusting for the exchange rate fluctuation, however, the SBP says remittances from the United Kingdom have actually gathered pace.
Pakistanis based in foreign countries sent home $18.4 billion in 2014-15, which translated into a year-on-year increase of 16.5%. Overseas Pakistanis sent remittances amounting to $8 billion in the first five months of 2015-16, which translates into a year-on-year increase of 7.6%.
The heavy inflows are taking place at a time when global remittance flows are drying up, the SBP notes. Global remittances grew at 6.2% compound annual growth rate in 2010-14, which is one-third of the growth witnessed in the pre-crisis period.
In contrast, SBP data shows remittance growth in Pakistan has accelerated of late. Thanks to an expanding Pakistani diaspora and diversion of remittances from informal to formal channels, remittance growth for Pakistan has been the strongest among top-20 remittance recipients in the world, according to the SBP.