Role of Remittances and their Inflow In Pakistan from 1976-2008

Presented by:
Maliha Khan & Wahid Ali Shah Hashmi

Introduction
Over a period of 40 years, remittances have become a major part of the Pakistani economy. Starting from a bare minimum in 1970s, the country is now ranked the 7th largest emigrant country and has received remittances worth $1.2billion a month. Our paper analyzes the major trends in the inflow of remittances with the time period of 1976-2008. The paper also identifies the major impact of the remittances on the economy in general and investments in particular. Recommendations are provided in the end to eliminate the root cause and tackle the key issue.

Introduction
Remittances have played a significant role in the economy by not only increasing the household consumption but also increasing savings and investments in the country. Studies have proven that the impact of these remittances is much impressive on the microeconomic level rather than the macroeconomic level. However, fluctuations have also been observed in the inflow of remittances throughout these four decades.

Key Facts about Migration & Remittances

During the period of 1970 to 2008, approximately 5 million Pakistanis have migrated to different countries around the world. Out of these, majority has migrated to the Middle eastern countries such as Saudi Arabia (2.3 Million) and UAE (1.3 million) followed by Oman and Kuwait. (Javid, 2012, p. 432) Another research found that 62% of the total remittances have been spent on consumption while 35% has been either invested or saved.

Skill Composition of Migrant Workers

Unskilled, 45%

Skilled, 44%

Highly skilled, 7%

Highly Qualified, 2% Semi- Skilled, 2%

Geographical Distribution of Origin of Migrant Workers

Azad Kashmir 6% Sindh 9%

Baluchistan 6%

Punjab 49%

NWFP 25%

Tribal Areas 5%

Trend of Remittances from 1976-2008

Remittances during 1976-1980

Pakistan experienced a sharp increase in emigrations starting 1976 onwards. High unemployment, abject poverty, and expectations of higher earnings abroad are some of the fundamental causes of the emigration. Most of the emigrations between 1976 and 1980 were to the Middle-East, as those countries had liberalized their policies, because of the increased demand of labor and the inability of the local market to supply that. The Middle Eastern countries demanded higher labor because of their booming petroleum sectors, and this is one reason for the increasing remittances inflow to Pakistan. Hence, remittances experienced a sharp increase in between 1976 and 1980.

Remittances during 1981-1990

The decade of remittance reception (1981-1990) can be divided into the period 1981-83 and 1983-1990 respectively. In the first period the country experienced an upward trend in remittances growing to around 3000Million USD from almost half the figure three years ago. But in the second stage, a downward trend is observed with around a 17% decline from the first half decade. Also the coefficient of variation which related the responsiveness of changes in remittances to factors in the market was at 22 units which reflected high remittance responsiveness.

Remittances during 1991-2000

Remittances from expatriates experienced a downfall during the years 1991-2000. Average remittances in this decade fell to USD 1426.4 million as compared to USD 2323.6 million in the previous 1981-1990 period. Remittances gradually decreased from 1991 reaching an all-time low of $997.1 Million in 1999 before picking up again. The reasons for such drastic decrease in remittances can be attributed to various factors including but not limited to the political changes in the country affecting government economic policies and the Asian financial crisis in early 1993-97.

Remittances during 2001-2008

2001 was the year when there was a phenomenal shift in the remittances inflow. After 2001, the inflow of remittances showed a sharp increase and within a passage of 8 years, the remittances increased from $1.2 billion to 7.3 billion in just 7 years. Most of the remittances were generated from the Gulf States particularly UAE. 15% of the remittances can from Europe, 21% from North American and almost 47% from the Middle East. Although the number of migrants for UAE had declined from in the past decade, the new migrants are usually more skilled and educated and therefore they have higher pays. As a result, the remittance amount is much higher.

Remittances during 2001-2008

After reaching the level of 3.3 billion, the rate of increase of remittances slowed down because of the constrained economic conditions in UAE. From 2006 to 2008, the remittance saw a huge boost as the people started returning in the wake of the financial crisis and brought their savings with them. Studies also reveal that that the major part of the recorded remittances cover not just remittances from Pakistani workers abroad but in fact cover all remittances sent by the Pakistani Diaspora (many of whom have acquired nationality of their resident country).

Impact of Remittances on Pakistans Economy

Remittances have a positive impact on the economy in terms of aggregate consumption, investment, reduction in current account deficit, external debt burden and improved education/skills for the households. Furthermore, labor migration is considered to be a useful source of foreign exchange earnings. Consumption and savings also have a positive relation with remittances where in these variables have increased with increase in remittance inflows.

Impact of Remittances on Pakistans Economy

With an increase in remittance income, consumption has also increased which has also proved beneficial to the economy. These remittances also accelerate economic growth by enabling households to finance investments and reduce liquidity constraints. Real GDP growth is positively correlated to workers during 1972-73 to 2002-03 and workers remittances emerged to be the third important source of capital for economic growth in Pakistan.

Remittance as percentage of GDP

Impact of Remittances on Investment

Research reveals that 60% of the remittances are spent on the consumption of households while the remaining 40% is spent on investments and savings. People are keen on investing the remittances due to two major reasons. People invest their remittances because they believe that investment can lead to increased levels of consumption in future. The other reason is that they believe that investment can act as insurance against reduced consumptions in crunch financial times.

Impact of Remittances on Investment

Yet, these two reasons are disregarded when it comes to consumption. For most households, rate of time preference is greater than the rate of interest on investments or savings and therefore, the consumption level on remittances is so high. People are impatient and they consider the economic situation of the country unviable and so they are reluctant to invest or save. It is also observable that with every unit increase in remittances, consumption increases proportionally as well.

Factors Affecting Remittance Utilization

Conclusion and Recommendations

In order to tackle with the core issue identified through the analysis of remittances and their impact on investments, we need to target the root cause. The root cause is the vested interests of those in power and the comprador groups who want to retain their position, power and prestige.
This can only be done through land reforms and redefining of power structures. The governments need to take responsibility, and apply the concepts of distribution before growth.

Conclusion and Recommendations

When the land will be distributed equitably, the infrastructure will develop in the rural market too. The policies of the government will be no longer be stricken by urban bias. It will culminate into the elimination or a drastic reduction in congestion, and also remove the first-city bias from the minds of the general public as the policies will not be tilted towards the development of only first cities. The gap between the urban and rural sector will diminish and so, investment will flow in both sectors more equitably. The investment ratio will also increase because the people will be more inclined to invest.