The Pakistan economy and a significant proportion of its population depends on the flows of remittances from overseas workers and the broader Pakistani diaspora. At over US$20 billion in official remittances expected in FY 2018-19, they provide critical support to a precarious current account situation. Remittances to households also have a favorable impact on poverty reduction and job creation. Also accounting for around 7 percent of GDP, remittances inject much needed additional aggregate demand into an economy that has been struggling to maintain the momentum for the last few years.
By the close of Amnesty Scheme 2018 on July 31, 2018, declarations from 5,363 entities had disclosed foreign assets worth Rs1,003 billion (US$8.1 billion), with a major share of declared assets located in the UAE. The total volume of Dubai properties is over Rs. 4,240 billion with annual investment and growth of Rs. 220 billion where Pakistani property agents, investors are counting them as over 5,000 individuals, entities. The authorities who have been investigating illegal accounts and properties set up abroad revealed that $350 billion or Rs. 43 trillion assets have been hidden abroad by Pakistani nationals. Nowadays, a mammoth figure of USD 200 billion stashed in Swiss banks by Pakistanis is also talk of the town in the print and electronic media.
With such huge amounts lying abroad, launching of diaspora bonds, an inexpensive financing mechanism, whereby the country can borrow from its own expatriates is not a new proposal. India opted for diaspora bonds at the time of the liquidity crises in the 1990s to support its balance of payments needs, and succeeded in raising about US$40 billion. The merits and complications of issuing such bonds to raise foreign exchange from the Pakistani diaspora need to be examined. The perceived concerns of the diaspora — such as the depreciation of the Pakistani rupee, high level of inflation, and other obstacles related to macroeconomic stability and governance — have to be addressed. The design of the bond must reckon with the economy’s ground realities. Mechanisms have to be evolved to dispel expatriates’ fears, which may necessitate the involvement of international financial institutions and possibly the need for their extension of partial guarantees. Diaspora bonds can be packaged to meet the preferences of the investors.
Funds raised from diaspora bonds, or bonds targeted at the diasporas in remittance-source countries, can be used to finance development projects in the developing world. These bonds are an attractive source of stable external finance that allows a country to leverage ‘good-will’ funds from diasporas into substantial development resources, helping to grow the economies of diasporas’ home countries.
According to the World Bank, use of these securities is possible if the following elements are in place: sizeable diasporas, effective contract enforcement, absence of civil strife, and presence of national banks and other FIs. Not surprisingly, the larger the diaspora, the higher the likelihood that a developing country will be able to issue a significant number of bonds. Because sovereign bonds are issued by national governments, relative tranquility and effective contract enforcement are important in building investor confidence in a given country. While not a pre-requisite, presence of national banks and other institutions in destination countries facilitates the marketing of bonds to the diaspora.
The case studies of Bangladesh and the Philippines, where the share of informal remittances has gone down, suggest that their banking systems have focused on speed, transfer cost reduction, and income tax relief for nonresident foreign currency account holders. In addition, they appear to have undertaken measures to facilitate investment by their diaspora in real estate and industrial enterprises through the provision of tax holidays and without any requirement for a national tax number. The passage of the dual nationality law in Bangladesh, for instance, has helped in that direction. Both countries have engaged nontraditional actors, such as MFIs, to operate in the remittances market, while Bangladesh also introduced a premium bond.
One suggestion is that having a bank account be made mandatory for all migrant workers. Keeping in view the recent success of the Benazir Income Support Program in beneficiary women’s use of the banking system, this recommendation is implementable. It will help to break down psychological barriers and attract more remittances through the formal channel.
Moreover, Pakistani banks need to be proactive and develop closer links with migrant communities abroad, particularly in the Middle East. Finally, addressing global factors that permit and facilitate capital flight could have a positive and significant impact on the official inflow of remittances. Improving governance and curtailing corruption within the country will downsize the demand for foreign currency abroad.