CAN REMITTANCES INDEED HELP BOOST THE ECONOMY?

JAMSHAID UR REHMAN
Sep 03 - 09, 2007

Overseas Pakistani Workers (OPWs) are hailed as national heroes because of their role in helping the economy through their remittances. In recent years, the huge inflows of OPWs remittances are even larger than private capital flows and official development assistance and provide a stable source of foreign exchange that eased the payment of the higher cost of the country's oil imports and external debt. It has also boosted consumption that benefited our industries. While many are wary of the social effects of huge deployment of workers on Pakistani families, remittances have played a positive role in ensuring the education of children of poorer families. Likewise, incomes of families of migrant workers increased, allowing them to weather economic downturns and income losses due to natural calamities and other internal/external shocks. Increased incomes also imply that they are better able to cope with their health expenditures. Moreover, have direct impact on the human capital formation of the country.

Studies by the WB and International Monetary Fund (IMF) show that the inflow of remittances has great impact on the economy of a recipient country. At the macroeconomic level, remittances provide a significant source of foreign currency that help imports financing and contribute to the balance of payments (BOP). Furthermore, improvement in the BOP positions also helps to improve the country's credit worthiness and opened new channels to access international capital markets. Remittances are in this regard helpful to tide over huge trade deficit of $13.5 billion during FY2007 and also copes the current account deficit of around $8.0 billion. Without them, climbing overt trade and current account deficit would have been extremely difficult. They also help in building the forex reserve to more than $15 billion by the end of the last year.

Moreover, if inflows are remitted through the formal market channels, it opens up opportunities for greater savings mobilization. If invested on productive activities, this helps to improve the domestic economy. The rapid inflow of income from abroad has augmented the country's GNP and GDP in recent years. Net factor income from abroad grew by 462 percent in 2003, the biggest growth since independence. The share of net factor income abroad as GNP also increases from -1.4 to 1.7 percent in 2000 and 2006 respectively. The role of remittances in propping up GNP has always been substantial, the huge influx of remittances GNP grew from 2.1 percent to 6.9 percent from 2001 to 2007 respectively and the same is the case with from 3.1 percent to 7 percent GDP. Hence, this translated to the improvement in the domestic economy.

TABLE-1: RESENT HISTORICAL ABSOLUTE VALUES OF GDP, GNP AND NET FACTOR

Income from Abroad in (Rs. Millions)

Years

GNP (1)

GDP (2)

NFIA (1)-(2)

As % of GNP

2000

3514062

3592018

-47956

-1.4

2001

3584806

3632091

-47285

-1.3

2002

3767712

3745118

22594

0.6

2003

4049154

3922104

127050

3.1

2004

4306329

4215608

90721

2.1

2005

4681996

4593230

88766

1.9

2006

4982308

4896736

85572

1.7

2007

5326294

5240721

85573

1.6

Source: Economic Survey of Pakistan

DOMESTIC POSITION AT GLOBAL LEVEL

The World Bank (WB) estimates that remittance flows are set to increase 14.2 million additional migrants from developing countries, are expected to move into developed countries from 2001 to 2025. In year 2005 alone, USD260 billion has sent home by migrant workers to their home countries. Pakistan, in particular, is the fifteenth biggest recipient of remittances (See Figure 1), with USD4.3 billion remittances that is 1.65 percent of world share. The remittances are the 3.9 percent of GDP and make Pakistan at the 39th position in the world.

As a major exporter of labor, the Pakistan has stock of emigrants 3,415,952 in the whole world, comprising 2.2% percent of the domestic population of 2005. In 2000 the emigration rate of tertiary educated was 9.2 percent and physicians were 4359 in number which are 5 percent of physicians trained in the country. The growing number of overseas workers point to the fact that domestic employment has not kept pace with population growth. Given the wide wage differentials with advanced economies and the strong educational background of most Pakistani, the outward movement of the population to find better employment opportunities seems natural.

In recent years, it is notable that the proportion of higher skilled workers among migrants is increasing, that is a clear indication of the 'brain drain' phenomenon. The women ratio in migrant workers is also increasing, which have a social effect on the migrant families.

SOURCES OF REMITTANCES

Foreign remittances peaked (in US$ terms) in the early 1980s at just below US$3 billion, subsequently fell, and began to rise again from 2000. Since the year 2000 there has been a dramatic shift in the flow and sources of remittances arriving in Pakistan. The figure-2 demonstrates the different sources of remittances by country and region received by Pakistan from 1990 to 2005. The interesting feature of the diagram is the gradual decrease in share of remittances from 1990 to 1998. But situation become worse after the atomic explosion 1998, thereby freezing of foreign currency accounts in Pakistan. The most prevalent feature of graph is increase in remittances after the 2000, owes to 9/11 aftermath when Pakistani's sent their money home only due to the dubious situation in host countries owing to international environment. Thereon, sudden increase can be seen in remittances from other countries such as USA, UAE and UK. The US stood first with a share of $1242.49 million in 2005, later Saudi Arabia with $750.44 million and UAE by $716.3 million.

RELEVANCE WITH DIFFERENT INFLOWS

In most countries of the world, the level of remittances is very significant in proportion to the country's inflows. As table-1 shows, in Egypt, remittances were equivalent to about 20 per cent of total exports goods and services of in 2005; in India, about 16 per cent; in the Philippines about 30 per cent; and in Pakistan about 24 per cent. Moreover, after exports workers remittances are the second largest source of foreign exchange inflows in Pakistan. Thus has proved to be the most stable flow compared to other official development assistant and to private capital flows. There was a comprehensive record on private inward remittances through the banks and other finance companies which showed that such flows surged to $4280 million in 2005, which is 24 percent of export of good and services, 257 percent of worker ODA and 196 percent of FDI (see Table-1). In short remittances were amounted to more than twice the size of foreign direct investment, and official development aid received by Pakistan.

TABLE-2 : RELEVANCE OF REMITTANCES AS SHARE OF DIFFERENT FOREIGN INFLOW

COUNTRY

REMITTANCES MILLIONS USD

REMITTANCES AS % OF EXPORTS OF GOODS AND SERVICES

REMITTANCES AS % OF OFFICIAL DEVELOPMENT ASSISTANCE

REMITTANCES AS % OF FOREIGN DIRECT INVESTMENT

Egypt

5017

20%

542%

93%

Greece

1220

2%

..

191%

India

23725

16%

1376%

360%

Pakistan

4280

24%

257%

196%

Portugal

3017

6%

..

94%

Philippines

13566

30%

2414%

1198%

Turkey

851

1%

183%

9%

Romania

4733

14%

..

714%

Source: World Development Indicators, world bank, 2007

WELFARE ASPECTS

Remittances are also found to have positive impact on socio-economic welfare of the country. Majority of OPWs come from underprivileged families. Remittances increase both the income and consumption of their families and also help stimulating the domestic economy. Likewise, when remittances are spent on education and health expenditures, this develops the country's human capital, benefiting the economy in the long run. As a result, remittances improve per capita income levels and reduce poverty.

Moreover, it also revealed the fact that an economic downturn or natural disaster will lead to increases in remittances, just like what happened after 9/11 and 8th October earthquake. This implies that poor families are better able to cope during difficult times. The spillover effects of it on households without migrant members, increases in remittances driven economic activities. Furthermore, there is also evidence that remittances provide working capital for its recipients that lack access to credit market. The steady inflow of remittances makes them more credit worthy. These allow recipients to engage in entrepreneurial activities, hence, creating new jobs and boosting economic growth.

ADVERSE ASPECTS

On the other hand, the huge inflow of remittances has its downside as it may create adverse conditions that may be harmful to the economy. First, there is the problem of moral hazard on the recipient families and the government. Because of the expectation that their relatives abroad will continuously send money, the culture of dependence is developed. It also reduces their incentive to work.

On the part of the government, reliance on huge inflow of remittances may lead to complacency in instituting fiscal and trade policy reforms. This dependence on the inflow of foreign exchange strengthens the local currency, hence, making exports less competitive. This will result to associated contraction on tradable sectors.

Second, the brain drain phenomenon is also a great concern. Statistics show an increasing number of OPWs are high-skilled including professionals like doctors, engineers/IT engineers, and accountants. This depletes the country's pool of skilled labor force. One visible effect of this is the impact on the provision of health services as the government is having difficulty in hiring medical practitioners. In the long run, it discourages investments since the number and quality of the labor force is declining. Another related issue which still has to be investigated is whether the benefit deploying workers abroad is higher than the cost of education and training spent by the country.

CONCLUSION

While remittances benefit the economy, it should not be viewed as the solution to the country's economic ills. To make remittances really work for the country in the long run, measures to address above mentioned concerns must be pursued by government. Furthermore, there is need to increase the portion of remittances channeled into savings instruments which will help to develop our capital market and provide funds for productive endeavors. This should drive the financial sector and the Central Bank to make available financial instruments that are safe and offer better yields. This also provides an opportunity for rural banks and microfinance institutions to cater to the needs of the OPWs since majority of them come from the countryside. Channelling remittances to productive investments is another challenge for government. Families of OPWs need to be encouraged and trained to engage in small businesses. This will create jobs and help improve the domestic economy. In the long run, OPWs can return and be reintegrated in the country, bringing in better skills and technology.

Writer is Project Economist at Applied Economics Research Centre, University of Karachi, Karachi.

Email|: jamshaidrehman@hotmail.com