The contribution of remittances as a percentage of the GDP is relatively high in countries like Nepal at 32%, the Philippines at 10%, Sri Lanka at 9% and Bangladesh at 8%. It is somewhat lower at 7% in the case of Pakistan and significantly smaller in the case of India at 3%.
Each recipient country has a special relationship with a particular source. This is the case of India and the Philippines with the USA, Bangladesh and Nepal with India and of South Asian countries with the Middle East. Remittances have provided a major cushion for financing the deficit in trade in goods and services of Pakistan. Over 93% of the deficit was covered by remittances in 2014-15. During the current financial year the contribution has fallen to 72%. This is due to a big increase in the trade deficit and a fall in remittances. Consequently, the current account deficit has increased by 90% in the first seven months of 2016-17.
Regarding the fall in remittances there are a number of questions. From which sources is the decline the largest? Is this the case with overall flow of remittances out of these countries? Are there any special factors affecting the flow of remittances by expatriate Pakistani workers?
There is, in fact, a big difference between the growth of remittances from major countries globally and the pattern of growth in the case of Pakistan. Since 2010, the fastest increase in remittances combined to all destinations has been from the Middle East of 15% in the case of the United Arab Emirates, followed by 11% from Kuwait and 8% from Saudi Arabia. Global remittances from the US, the UK, and the EU countries have generally shown only modest growth ranging from zero to 5%.
Contrary to the above pattern, the decline in remittances from the biggest source, Saudi Arabia, to Pakistan is relatively large at 15% in February 2017 and 7% for the first eight months of 2016-17. As opposed to this, remittances from the EU countries have shown an increase of 13% and from a collection of small sources of 35%. Remittances from the UK, the US and the UAE have declined by 10%, 8%, and 2% respectively.
The latest estimate of number of Pakistani expatriate workers is of 2013-14 by the Federal Ministry of Overseas Pakistanis. The largest number is in Saudi Arabia of almost 2 million, followed by 1.3 million in the UAE, 1.2 million in the UK, almost 1 million in the US and 2 million in a host of other countries. It is unlikely that the numbers have increased substantially since then.
The annual per capita remittance per worker was the highest from the UAE of $3400, followed by $3000 from Saudi Arabia. Remittance per worker is $2100 from the UK and $2500 from the US. The overall global average of remittance per worker to Pakistan is $2600.
The implication is that the most recent vintage of migrant workers, especially those who do not have dependents with them, are likely to have stronger links back home. Therefore, they are prone to send more to their respective families in Pakistan. Workers in the UK and the US are endowed with somewhat higher skills and education but with generally longer residence in these countries.
What is the economic impact of remittances beyond limiting the current account deficit in the balance of payments? They exert a significant multiplier effect, especially on recipient locations within Pakistan. They stimulate a stronger demand for housing and better social and economic services. Their contribution to national savings is over 44%.
However, they lead to greater inequality among households. Also, over 62% of the foreign remittances flow is to Punjab and 28% to Khyber-Pakhtunkhwa. There is evidence that remittances have contributed, in particular, to significantly faster growth of the latter Province. Remittances into Karachi are comparatively small because of migration by professionals and relatively skilled workers, a higher proportion with their families.
What is the outlook for remittances? During 2016, bigger declines have been observed in India and Bangladesh than Pakistan. The basic question relates to the future of remittances from the Middle East. Saudi Arabia has suffered a massive decline of 47% in its oil income since 2014 and its GDP growth rate has declined to only 1% in 2016. Therefore, the prospects for remittances from the largest source are not so favourable, despite some improvement in oil prices. Some Pakistani workers have even been compelled to return.
The outlook for remittances from the UAE is somewhat better, while there is considerable uncertainty about flows from the UK and the US. The depreciation of the pound sterling with respect to dollar has affected adversely the flow from the former country. There are a number of steps that will have to be taken to sustain and perhaps even increase the inflow of remittances. In the short run, the gap between the inter-bank and the open market exchange rate of the Rupee must be minimised, if official inflows are to be protected.
Banks may be encouraged to offer higher markup rates on non-resident foreign currency deposits, which currently stand at $478 million only. India has also launched recently a National Pension Scheme for expatriate workers. More real estate projects may be offered by reputable construction companies, with special tax concessions, to such workers.
Also, as a gesture of appreciation for the major contribution to the national economy by Pakistani workers abroad, they may be granted the right to vote in future general elections of the country. This will enhance their perception of continuing links with their home country.
(The writer is Professor Emeritus and former Federal Minister)
Copyright Business Recorder, 2017