In a scenario of consistently increasing flow of migrants remittances despite slow down in economically rich countries who deploy major chunk of Pakistan’s workers, there is need to regulate monetary policy transmission, effecting banks lending and borrowing decisions, fiscal policy particularly government spending pattern and ultimately economic growth trend of the country.
Pakistan ranks fifth among recipient countries of overseas workers’ remittances, which amounts to $19.9 billion received during last fiscal year and it is expected that inflow will further increase due to ambitious program of State Bank of Pakistan (SBP) to enhance level of financial inclusion through digitalization leading to minimization of account opening intricacies and promoting branchless banking. Apart from aiming for reaching greater number of depositors and borrowers by banks it envisages sizeable increase in volume of remittances from overseas Pakistanis. Through a recent notification SBP asked all categories of banks including micro finance banks to open special online accounts of overseas workers immediate relations in Pakistan who receive remittances. Such account holders will be allowed maximum withdrawal limit of Rs50,000/ per day with monthly cap of Rs500,000/-. This initiative on the part of financial sector will help arresting growing external imbalances due to falling exports and unabated rise in imports.
No doubt workers’ remittances are bringing tangible benefits to the country, supporting income and consumption pattern of workers’ families in Pakistan, as stated in report of research conducted at World Bank that heavy inflows of remittances in course of time effect overall economy of the recipient country. Apart from benefits pouring in to families and economy of the country, it may experience adverse effects in exchange rate, sustainability of tax structure, public sector spending policies, institutions and governance, long term economic growth and monetary policy. According to findings of said report in majority of heavy remittance receiving countries an upward pressure is exerted on long term real exchange rate, which makes recipient country’s exports more expensive, thus volume of exports is curtailed in the long run particularly effecting external economies of the countries where volume of exports of goods and services is already low. However in some of the middle income developing countries including Pakistan heavy inflow of remittances exceeding 7% of the GDP make a major contribution to forex reserves thus forming hedge to adverse movement in foreign exchange rate.
Besides that any economic down turn in rich economies where workers of recipient countries are employed impacts workers propensity to save and remit funds thus volume of remittances is greatly effected as has happened in recent years due to persistent slow down of rich economies particularly of oil producing countries rate of growth of yearly volume of remittances has slowed down in case of Pakistan also. In such circumstances corrective measures are need to be taken by affected countries through modification in monetary and fiscal policies. Mr. Ralph Chami — a senior economist at IMF has stated in IMF working paper that remittances can affect conduct of monetary policy in receiving countries in two ways:
In the first place banks balance sheets expand without any increase in cost of funds as such funds continue to come irrespective of change in policy rate of the central bank concerned. Thus recipient countries tends to have larger banking system. Accordingly remitted deposits enhance the amount of financial intermediation that is process of matching savings and borrowings of the banks thus making monetary policy transmission effective for all sectors of country’s economy.
At the same time there is another scenario with both low and middle income countries that despite heavy flow of workers’ remittances banks’ financial intermediation does not take place in the sense that due to reluctance of banks (other than micro finance banks) to extend credit to private sector freely due to dearth of credit worthy borrowers. They restrict their lending only to so-called selected group of qualified borrowers of private sector and hold major chunk of funds as liquid asset in inter-bank market and government securities and also build up high reserves. Hence in the presence of heavy inflow of migrants remittances any change of policy rate of central bank is found of little significance for augmenting private sector credit.
Impact of CPEC
The advent of China-Pakistan Economic Corridor (CPEC) has provided immense avenues to banks for financing infrastructure projects needing long term financing. Similarly remittances coming to micro finance banks in accounts of their clients need to be utilized for financing community based infrastructure development programs both in urban and rural sectors particularly in areas of solar energy producing plants, water supply projects, agriculture equipments, ware houses and cold storage etc for benefit of community as a whole and also for creating enabling environment for promoting small and medium size businesses both in urban and rural sectors.
Moreover in order to provide incentives to overseas Pakistanis and their families in Pakistan, Directorate of National Savings must float high yielding saving products on pattern of high profit deposit schemes introduced for benefit of senior citizens and widows. According to a recent news item Directorate of National Savings intends to float foreign exchange certificates for overseas Pakistani in near future. These certificates must be high yielding. These funds coming to government direct will contribute towards funds allocated for public sector development programs, particularly in areas of energy, transport and water supply development projects particularly those to be under taken by government in partnership with China under CPEC program.
Further, banks particularly smaller banks and micro finance banks must strengthen their strategy to seek information about dependability of prospective borrowers apart from relying on information provided by credit information bureau of State Bank of Pakistan for effective lending risk management. This will also broaden the private sector credit portfolio, which is essential for attaining speedy growth rate.
Besides that structural reforms need to be taken in areas of property rights and speedy settlements of court cases against defaulting borrowers and arresting growing corruption to reduce risk involved in lending to private sector.
Regarding remittances interaction with fiscal policy of the country it is obvious that high inflows will broaden the tax base. However in order to ensure effective utilization of remitted funds recipients should be encouraged to invest funds in micro and small businesses to make unemployed youth of the family self-employed. This will reduce poverty and unemployment as a whole from recipient country. Small businesses started by migrants’ families should be given at least three years tax holiday for the start up period.
Secondly heavy inflow of remittances helps receiving countries to maintain fiscal sustainability and reduce the public debt. Unfortunately it is not happening in quite a number of developing economies because of irrational public sector spending or in other words funds are being utilized for wasteful expenditures, which is true in case of Pakistan also where both at provincial and federal governments level funds allocated for projects particularly in social sector either lapse or utilization of funds is not transparent.
It also happens that families receiving remittances do not bother to avail government provided facilities like regular water supply, maintenance of roads and footpaths in their surrounding residential areas due to expected delayed action on request to concerned government department as such migrant’s financially well off families spend their own funds to address such issues. Thus ignoring the accountability and responsibility of government gives rise to poor governance and corruption in all government departments. To remedy the situation it is imperative that local governments are strengthened and take care of all civic amenity needs of communities in areas of their responsibility/ jurisdiction.