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Home remittance: The role of exchange company in Pakistan’s economy

Pakistan is a fast-growing developing country and a member of the WTO, Organization of the Islamic Conference, Group of 77, Non-Aligned Movement, Shanghai Cooperation Organization and Commonwealth.

Pakistan’s economy is an emerging market in Asia. Agriculture is the pillar industry of Pakistan. Rice, wheat, sugar cane, cotton, sugar and other crops are the main income of the people. There are much natural resource such as natural gas, oil, ore, etc. However, compared with the dominant countries, Pakistan’s heavy industry development is weak. Then, what is the most reliable foreign exchange resource for Pakistan? The only one answer is home remittance.

What is the home remittance of Pakistan?

Home remittance is the transfer of money by a migrant worker to his/her family/loved ones back in Pakistan, through legal banking channels. Millions of people leave their original country to seek better life and larger economic opportunities. For many countries, transferred funds from citizens who work abroad is the lifeline of development. When immigrants send their income to support his or her family in the form of cash or goods, which is called home or immigrant remittance.

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For some countries, home remittance is the main content of the national economy. For example, data from the World Bank shows that 31.8% of Nepal’s GDP in 2015 came from home remittance. Some countries close to the United States also heavily rely on remittances from overseas workers. Remittances accounted for 25% of Haiti’s GDP in 2015, 18% of Honduras’ GDP, and nearly 17% of El Salvador’s GDP. Globally, remittances have soared since 2000, but they still account for less than 1% of global GDP. But for families who rely on these funds, remittances are indispensable.

Gilbert Hongbo, president of the International Fund for Agricultural Development, once said that “the purpose of home remittance is to send money to family but to affect people’s life. The $200 or $300 that each immigrant sends to his family accounts for about 60% of family’s income, which has a great influence on the life of his family and the community in which he or she lives.”

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https://zh.tradingeconomics.com/pakistan/remittances Remittance of Pakistan

Home remittance day

June 16th is the International Home Remittance Day, which aims to affirm migrant workers who make great contribution to the happiness of their domestic families and the sustainable development of their country.

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https://www.un.org/zh/events/family-remittances-day/index.shtml

The influence of home remittance
National level impact

Remittances can encourage developed countries to open bank, which will affect the country’s economic development in turn. Home remittance can affect domestic investment, domestic consumption, wages, and human resource development.

Second, home remittance inflows into country in the form of capital, but immigrants still hold ownership of these remittances. The recipients of remittance in Pakistan invest in the name of immigrants, especially in developing countries. This remittance helps local residents reduce borrowing costs and risks and attract more investment. Home remittance can affect domestic capital accumulation through the stability of macroeconomics. In general, immigrant remittances can reduce the volatility of the domestic economy. Domestic economic stability can reduce the risk premium that corporate investment must bear, attracting more investment. Home remittance can also be used directly for human capital investment, as well as reducing the need for adolescents out of school to work abroad, which will promote the accumulation of human capital and economic growth.

Home remittance affects economic growth through the influence on labor output that is generated through the channel of labor participation rate. However, the inflow of home remittance has a negative effect on labor force participation rate. On one hand, home remittance is used as the transfer of income, and domestic residents can use it as an alternative to labor income.

Family level impact

Recipient families can consume and learn knowledge by the home remittance, which will help people save money and invest. In turn, these mechanisms can create human capital for remittance families through better education, health care and housing, and this will improve their living standards.

The money that residents with home remittance earn from other countries can improve the overall economy financial resources. As long as the money is related to finance and entrepreneurship, then the benefit will be great. Besides, migrant workers have huge assets: knowledge, skills and networks, and this will be the big wealth. In terms of development, the investment from micro, small and medium-sized enterprises effectively supports employment and income for local communities.

What is the foreign exchange?

Foreign exchange refers to various means of payment that can be used for international settlement in foreign currency. Generally speaking, it is the foreign currency such as the British pound, US dollar, euro, Japanese yen, Canadian dollar, Australian dollar and Hong Kong dollar. From the literal point of view, exchanging currency between two different countries is the foreign exchange. Foreign exchange reserves can also prevent the impact of the financial crisis, but also the symbol of national wealth, the capital of foreign investment.

Pakistan’s “Dawn” reported on May 4, according to the latest data released by the Central Bank of Pakistan, as of April 27, Pakistan’s foreign exchange reserves increased to 17.71 billion dollars, of which Pakistan’s central bank’s foreign exchange reserves were 11.51 billion, commercial banks’ foreign exchange reserve is $6.202 billion.

Forex is a double-edged sword

Forex is a double-edged sword. To a certain extent, foreign exchange reserves can reflect the financial strength and economic strength of a country and play a vital role in the steady development of the national economy. Traditionally, reasonable and moderate foreign exchange reserves have played a positive role. On the contrary, if the foreign exchange reserves exceeds a moderate range, there will be negative to the economy.

 

Positive effects

Certain foreign exchange reserves are an important means for a country to adjust its economy and achieve internal and external balance. Intervening the foreign exchange market can enhance country’s ability to respond to global economic risks, and then maintain national economic security, promote economic development, enhance international credibility.

When the balance of payments has a deficit, using foreign exchange reserves can promote the balance of payments. When the domestic macro-economy is unbalanced and total demand is greater than the total supply, foreign exchange organizations can be used to import to adjust the relationship between total supply and total demand, and promote macroeconomic balance.

Generally speaking, the increase in foreign exchange reserves cannot only enhance the ability of macro-control, but also help maintain the international reputation between the country and enterprises, expand international trade, attract foreign investment, reduce domestic corporate financing costs, prevent and resolve international financial risks. Moderate foreign exchange reserves depend on a variety of factors, such as import and export status, external debt scale, actual use of foreign capital, etc. Foreign exchange reserves should be kept at a moderate level based on the income from holding foreign exchange reserves, cost comparisons and other conditions.

Negative effects

Impairing the potential for economic growth. The inflow of foreign exchange reserves represents the outflow of physical resources, which is not conducive to the growth of a country’s economy. If China’s extraordinary growth in foreign exchange reserves continues, it will undermine the potential of economic growth.

Bring interest loss. According to conservative estimates, with a difference of 2% between the investment profit rate and foreign exchange reserve rate, if you have 600 billion dollars in foreign exchange reserves, the annual loss will be more than 10 billion dollars. If taken into account the risk of exchange rate changes, this potential loss is greater. In addition, most of the foreign exchange reserves in many countries are mostly US dollar assets. If the US dollar depreciates, the country’s reserve assets will be seriously shrunk.

Accelerate hot money inflows, trigger or accelerate inflation in the country. Unbalanced dynamic structure leading to economic growth. The high foreign exchange reserves lead to an imbalanced dynamic structure of economic growth, which is not conducive to the transformation of economic growth into a domestic demand-led model.

China-Pakistan Economic Corridor (CPEC)

Pakistan had about $8 billion in mobile foreign exchange reserves last year, which is only enough to support imports of about seven to eight weeks. On November 2nd, 2018, according to Pakistani media reports, Pakistani Prime Minister Imran Khan visited China, and China agreed to provide Pakistan with 6 billion dollars which will can reduce Pakistan’s reliance on the IMF.

The report said that China will provide $1.5 billion in loans and an additional $3 billion in loans to the China-Pakistan Economic Corridor (CPEC). Loans and investments are parts of Package Plan.

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https://www.globalvillagespace.com/cpec-pakistans-economic-development-or-chinas-imperialism/

 

Except for China’s help to Pakistan, Pakistan also give favor of China a lot. After learning about the earthquake in China, a Pakistani netizen wrote a message like “What do Chinese brothers need and what we offer.” On the morning of May 16th, 2008, two C-130 transport aircraft were launched from Rawalpindi’s air base and were loaded with relief supplies that worth about $900,000 to fly to China. On the same day, the Pakistan Red Crescent Society donated US$50,000 to the Chinese Red Cross.

Pakistan and China are not only allies, but brothers. Hope we can develop and grow together.

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The Author is Ashley — FTM Machinery manager https://www.ftmsino.com/

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