An Analysis of the Remittances Market in Pakistan
January 06, 2014
1.
Introduction
Remittances to
developing countries sent through official channels were estimated at USD 406
billion in 2012 (World Bank, 2012). This represents a growth of 6.5 percent
over 2011, and is projected to rise by 8 percent in 2013 and 10 percent in
2014. Current remittance flows are over three times the amount of official
development assistance (World Bank, 2012). In Pakistan, remittances through
official channels have grown from just around USD 1.5 billion in 1997/98 to
slightly over USD 13 billion in 2011/12 (State Bank of Pakistan, n.d.; see also
Table 12.1). In the first six months (July–December 2012), they were slightly
over USD 7 billion—an increase of 12 percent over the corresponding period in
the previous year (July–December 2011).
An earlier
study (Amjad, Arif, & Irfan, 2012) analyzes the possible reasons for this
manifold increase and in its preliminary findings suggests that the increase is
primarily due to (i) a shift from unofficial (and unrecorded) channels (hawala) to official channels; (ii) an increase
in the number of migrants abroad; and (iii) a rise in migrants’ skill levels,
resulting in higher wages and incomes abroad. The study also makes the
important observation that the inflow of remittances is not just from Pakistani
workers abroad but from the larger Pakistani diaspora, many of whom may have
acquired nationality of their country of residence.[1] The study also infers that official remittance flows
also reflect shifts in the diaspora’s savings and assets to their home country.
Amjad et al. (2012)
also attempt a rough estimate of the volume of remittances coming through both
official and unofficial channels. This is based on estimates of the size of the
Pakistani diaspora, as reported by different sources, as well as the average
volume of remittances sent, based on recent survey data. The range of these
estimates suggests that total remittances could be as high as 180 percent of
official recorded remittances. Using an alternative methodology based on a
range of estimates of the size to unofficial remittances and household survey
data on amounts received through unofficial channels (Pakistan Social and
Living Standards Measurement Survey for 2007/08), Amjad et al. (2012)
guestimate that total remittances could be even higher than the 180 percent
suggested by the “high-scenario” estimate of total remittances.
The importance
of remittances to the Pakistan economy needs to be put into perspective. At
around 55 percent of the total export of goods and services (around USD 26
billion in 2011/12) and corresponding imports (USD 40 billion), official
remittance flows provide critically needed support to the country’s precarious
current account balance. These flows also inject additional aggregate demand
into the economy (at around 5.5 percent of GDP), which not only spurs economic
growth but, based on earlier evidence, favorably impacts employment and poverty
(see Amjad, 2012). In addition, Amjad (2010) argues that remittances that come
through official channels have a much greater multiplier income impact on the
economy than those through hawala or unofficial channels because the latter in
most cases represent transactions within the sending and receiving countries
with little ‘real’ additional income and foreign exchange accruing to the labor
sending country.[2]
For these
important reasons, there is a pressing need to put in place policies that would
facilitate the maximum possible amount out of total remittances to flow through
official channels. Identifying the key factors and policies that could help
realize this objective is the study’s main purpose. The analytical framework
adopted builds on the one developed in the earlier study (Amjad et al., 2012)
and also draws on a more recent study that analyzes the remittance market in
India (Afram, 2012).
2.
The Remittance
Market in Pakistan[3]
The remittance
market for sending foreign exchange into Pakistan using remittance transfers
both by overseas workers and the rest of the Pakistani diaspora, as well as by
other agents for both legal and illegal transfers, can be broken down into the
following:
1.
Remitters from
overseas who demand Pakistani rupees in exchange for a foreign currency to be
paid in Pakistan through official or unofficial channels.
2.
The remittance
market within Pakistan that transfers both officially recorded remittances
through banking and other recognized channels under an overall regulatory
framework supervised by the State Bank of Pakistan (SBP), as well as unofficial
remittances through domestic networks linked with foreign networks abroad.
3.
Receivers of
remittances—mainly households and families—that are sent through official or
unofficial channels, who use these remittances for their own needs or to upkeep
or purchase new assets for the remitter.
Any attempt to
divert the flow of remittances from unofficial to official channels requires an
analysis of each of the above three segments of the remittance market to
determine why remitters prefer one channel to the other. Clearly, given
information and data constraints, it is only possible to analyze the proximate
causes of these choices. We attempt this as follows:
-
We identify and
analyze the factors responsible for the very large increase in official
remittances from 1997/98 to 2011/12 by enlarging the scope of Amjad et al.
(2012) and examining in more detail inflows from individual countries and
regions.
-
We examine recent
household survey data to identity the extent to which remittance transfers are
made through official rather than unofficial sources, identify the
characteristics of households that prefer one channel to the other and their
reasons for this, and use these findings to understand better the working of
the informal hawala/hundi remittance market.
Based on the
analysis above, we suggest practical measures that could lead to a more efficient
and better functioning remittance market in Pakistan that also encourages the
flow of remittances through official rather than unofficial channels.
3.
Explaining the
Increase in Flow of Official Remittances: 1997/98 to 2011/12
Kock and Sun
(2011) analyze the factors responsible for the rapid increase in official
remittances to Pakistan over the period 1997–2008. Their methodology departs
from most previous studies that have used aggregate data, in that they model
remittance behavior at a more micro-level and focus on per capita remittances
instead of aggregated remittances or the growth of remittances. Their argument
is that remittances need to be explained essentially by individual behavior
since the amount remitted is “determined by the economic fortunes of the
remitter and the recipient, among other variables” (p. 13).
Kock and Sun’s
(2011) model uses average remittances per worker and four sets of explanatory
variable: (i) job skill index, (ii) investment return, (iii) a proxy for
recipients’ economic conditions in Pakistan, and (iv) a proxy for the real
value of remittances. The regression estimation is based on a panel of 15
countries with bilateral remittance flows to Pakistan, using data from 1997 to
2008. Their results show that, besides the rapid increase in the out-migration
of workers, immigrants’ skill level, investment return in the host country and
in Pakistan, exchange rates (real and nominal), and Pakistan’s economic
conditions all play a strong role in explaining remittances. Somewhat surprisingly,
they find that changes in domestic economic fortunes (represented by the output
of major agricultural crops as a proxy) were pro-cyclical although they do not
detail the reasons for this.
A major
weakness of Kock and Sun’s (2011) study is that their model does not take into
account increases or decreases in official remittance flows caused by shocks or
interventions that lead overseas workers and the broader Pakistani diaspora to
shift their mode of sending remittances from one channel to another. These
shocks or interventions can result in (i) a temporary increase or decrease in
official flows, and (ii) a shift in the trend level of remittance flows. These
shifts in the level or growth of remittances cannot, therefore, be explained
solely by the factors that Kock and Sun (2011) identify.
We identify
six major shocks or interventions that could explain both significant
fluctuations and an upward shift in the official remittances flow during
1997/98 to 2011/12. These are:
1.
The freezing of
foreign exchange accounts following the nuclear test carried out by Pakistan in
May 1998, which was a major blow to the confidence of nonresident Pakistanis.
2.
The 9/11 attacks
on the US caused anxiety among the Pakistani diaspora leading them to transfer
part of their savings/assets to Pakistan especially from the US, as a fallback
in case living in the US or other Western countries became unbearable or
unsafe.
3.
Following 9/11,
the US authorities’ and other financial institutions and countries increased
surveillance of the Pakistani diaspora’s incomes and transfer of money abroad,
especially through nonofficial channels.
4.
Anti-money
laundering measures adopted by Pakistan in 2002 post-9/11, which included the
registration of money exchange companies for a considerable fee (between PRs
100 million and PRs 200 million), forcing smaller companies to merge with
larger companies to be able to pay the registration fee.
5.
The collapse of
the real estate boom in Dubai in 2009, in which both Pakistanis living there
and in Pakistan had heavily invested, which led to a large number of Pakistani
professionals and workers returning to their home country.
6.
The Pakistan Remittances Initiative (PRI) launched jointly by the
Ministry of Finance, the SBP, and the Ministry of Overseas Pakistanis in early
2009 to encourage remittances through formal channels, including incentives for
Pakistani banks to increase such flows.
3.1.
The Impact of
Shocks and Interventions on the Flow of Official Remittances
Let us now
examine the evidence based on Table 12.1.
Following the
nuclear test in May 1998 and subsequent freezing of foreign currency accounts
in Pakistan, we see an immediate decline in total official remittances from
almost USD 1.5 billion in 1997/98 to USD 1.06 billion in 1999/2000, which
continues till 2001/02. The decline occurs across all countries, and we can
assume that a large part of it was then remitted through unofficial channels.
Following 9/11
in September 2001, total official remittance flows double from USD 1.09 billion
in 2000/01 to USD 2.4 billion in 2001/02, especially in the case of flows from
the US—from USD 134.8 million to USD 779 million. This amount from the US rises
further to USD 1.2 billion in 2002/03, after which it remains around the same
till 2005/06. The jump in official remittances from Dubai and Abu Dhabi follows
broadly a similar pattern.
This increase
in remittances in the case of the US appears strongly to represent a shift in
the transfer of remittances from unofficial to official channels as well as the
transfer of savings and assets by the Pakistani diaspora in the US back to
Pakistan. As confidence among the Pakistani diaspora in the US is gradually
restored, these official remittance flows begin to even out.
There is an
initial fall in official remittances from Dubai following the crash of the
building boom and financial crisis in 2008/09—from USD 970 million in 2008/09
to USD 851 million in 2009/10. This is, however, followed by a sharp increase
the next year to USD 1.2 billion and a further increase to USD 1.4 billion in
2011/12. In the case of Abu Dhabi, there is no initial fall but a sharp
continuous increase from 2009/10.
After the
initial decline, the subsequent increase in remittances from Dubai reflected to
some extent returning migrants’ accumulated savings. The large increase,
especially in subsequent years, however, was most probably due to panic selling
of real estate by Pakistanis living in Pakistan who had invested in Dubai and
were now bringing back into Pakistan what was left of their investments.
To what extent
has the PRI increased flows since its launch in early 2009? A careful look at
flows from individual countries shows that the increase in official remittances
was most marked in the UK’s case, where it increased from USD 605 million in
2008/09 to USD 1.5 billion in 2001/12. Following this initiative, there is also
a significant increase in Saudi Arabia and the United Arab Emirates (UAE),
where aggressive marketing by Pakistani banks taking advantage of the PRI’s
financial incentives helped to divert remittances toward official channels.
More specifically the PRI initiated the following steps to increase the
flow of remittances through official channels (“Pakistan remittances”, 2013):
-
Preparing and
implementing a national strategy on remittances.
-
Playing a
catalytical role in mobilizing and energizing the financial sector in Pakistan
resulting in its playing a major role in attracting remittances through formal
channels. The initiatives taken by the PRI included bringing in new players
(commercial banks, microfinance banks, exchange companies, the Pakistan Post)
and increasing competition between them to provide more efficient services and
introducing new innovative products and services to facilitate transfers at
lower costs and in minimal time.
-
Creating separate
efficient remittance payment highways with a manifold increase in developing
formal links with financial institutions abroad (from less than 20 to over 400)
and adding as many as 10,000 physical locations in Pakistan for receiving
remittances through banks, exchange companies and post offices since the
establishment of the PRI.
-
Establishing
formal links with the increased number of financial institutions abroad allowed
these institutions to offer Pakistanis the initiatives being offered by the State
Bank of Pakistan to encourage transfers through formal channels mainly the
reimbursement of the cost of transfers (6 Saudi riyals on a transfer of 100
Saudi riyals), which was not possible earlier.
-
Reducing the
remittance delivery time with remittances being received instantly or at least
very quickly in contrast to a lag of many days earlier. The beneficiaries can
also claim compensation (65 paisa per PRs 1,000 daily) for the delayed period
from the concerned bank.
-
Serving as a focal
point for overseas Pakistanis through round-the-clock call centers with
toll-free lines.
Table 12.1: Official remittances from
countries of origin
Country/region
|
FY 1998
|
FY 1999
|
FY 2000
|
FY 2001
|
FY 2002
|
TOTAL
|
1,489.55
|
1,060.19
|
983.73
|
1,086.57
|
2,389.05
|
Saudi Arabia
|
474.76
|
318.49
|
309.85
|
304.43
|
376.34
|
UAE
|
207.70
|
125.09
|
147.75
|
190.04
|
469.41
|
Dubai
|
(101.01)
|
(70.57)
|
(87.04)
|
(129.69)
|
(331.47)
|
Abu Dhabi
|
(75.53)
|
(38.07)
|
(47.30)
|
(48.11)
|
(103.72)
|
Other GCC countries
|
160.85
|
197.28
|
224.32
|
198.75
|
224.29
|
US
|
166.29
|
81.95
|
79.96
|
134.81
|
778.98
|
UK
|
98.83
|
73.59
|
73.27
|
81.39
|
151.93
|
Other EU countries
|
35.87
|
26.48
|
24.06
|
21.50
|
28.80
|
Other countries
|
66.38
|
34.03
|
35.28
|
67.71
|
256.24
|
Encashment FEBCs
|
251.87
|
184.64
|
70.24
|
64.98
|
48.26
|
FY 2003
|
FY 2004
|
FY 2005
|
FY 2006
|
FY 2007
|
|
TOTAL
|
4,236.85
|
3,871.58
|
4,168.79
|
4,600.12
|
5,493.65
|
Saudi Arabia
|
580.76
|
565.29
|
627.19
|
750.44
|
1,023.56
|
UAE
|
837.87
|
597.48
|
712.61
|
716.30
|
866.49
|
Dubai
|
(581.09)
|
(447.49)
|
(532.93)
|
(540.24)
|
(635.60)
|
Abu Dhabi
|
(212.37)
|
(114.92)
|
(152.51)
|
(147.89)
|
(200.40)
|
Other GCC countries
|
474.02
|
451.54
|
512.14
|
596.46
|
757.33
|
US
|
1,237.52
|
1,225.09
|
1,294.08
|
1,242.49
|
1,459.64
|
UK
|
273.83
|
333.94
|
371.86
|
438.65
|
430.04
|
Other EU countries
|
53.53
|
74.51
|
101.51
|
119.62
|
149.00
|
Other countries
|
658.05
|
497.14
|
417.25
|
573.31
|
642.11
|
Encashment FEBCs
|
46.12
|
45.42
|
16.25
|
12.09
|
2.68
|
FY 2008
|
FY 2009
|
FY 2010
|
FY 2011
|
FY 2012
|
|
TOTAL
|
6,451.24
|
7,810.95
|
8,905.90
|
11,200.97
|
13,186.58
|
Saudi Arabia
|
1,251.32
|
1,559.56
|
1,917.66
|
2,670.07
|
3,687.00
|
UAE
|
1,090.30
|
1,688.59
|
2,038.52
|
2,597.74
|
2,848.86
|
Dubai
|
(761.24)
|
(970.42)
|
(851.54)
|
(1,201.15)
|
(1,411.26)
|
Abu Dhabi
|
(298.80)
|
(669.40)
|
(1,130.33)
|
(1,328.82)
|
(1,367.62)
|
Other
GCC countries
|
983.39
|
1,202.65
|
1,237.86
|
1,306.18
|
1,495.00
|
US
|
1,762.03
|
1,735.87
|
1,771.19
|
2,068.67
|
2,334.47
|
UK
|
458.87
|
605.59
|
876.38
|
1,199.67
|
1,521.10
|
Other EU countries
|
176.64
|
247.66
|
252.21
|
354.76
|
364.79
|
Other countries
|
530.39
|
609.00
|
577.37
|
653.26
|
562.14
|
Encashment FEBCs
|
2.40
|
0.48
|
1.02
|
0.07
|
13,186.58
|
Note: EU = European Union, FEBC =
foreign exchange bearer certificates, FY = financial year, GCC = Gulf
Cooperation Council.
Source: State Bank of Pakistan (n.d.).
3.2. The Impact of an Increase in Pakistani
Emigrants and Rise in Skill Levels on Official Remittance Flows
While the preceding analysis helps establish that the flows in
remittances post-9/11 have clearly been impacted by shifts in remittances from
unofficial to official channels, we need to separate this impact from the rise
in remittances resulting from an increase in the number of Pakistanis working
abroad and, as Kock and Sun (2011) argue, an increase in their skill levels.
Kock and Sun (2011) use official data on
Pakistanis workers leaving for abroad for employment by their country of
destination and then aggregate these figures to estimate the total numbers
working abroad. They use the same data to classify these workers by their level
of skill. It should be pointed out that these flows do not take into account
the number of returning migrants from these countries and, therefore, do not
reflect net migration to these countries. To overcome this problem, we use
estimates of the stock of Pakistanis abroad, as given by official sources, but
it is important to keep in mind that these estimates also include students from
Pakistan as well as family members who may not be working.
Table 12.2 provides estimates of the Pakistani diaspora
abroad, which gives us an approximate idea of the recent increase in stock.
These estimates are for all countries as well as for Saudi Arabia, the UAE, the
US, and the UK, which together account for almost three fourths of all
Pakistanis abroad and for the same share of total remittances.
If we examine the data in Tables 12.2 and 12.3, it is clear
that, for the years post-2004, there has been a significant increase in the
numbers of Pakistani diaspora; when these figures are adjusted for the number
among them working, the number of workers abroad also rises. These figures are
in line with the very significant increase in flow of overseas migrants between
2007 and 2012 (see Table A12.1 in the appendix). Remittances per head have also
increased sharply since 2004 (Table 12.3).
Table 12.2: Stock of overseas
Pakistanis/Pakistani diaspora (millions)
Country
|
2004a
|
2010b
|
2012c
|
All countries
|
4.0
|
6.3
|
6.7
|
Saudi Arabia
|
1.1
|
1.5
|
1.7
|
UAE
|
0.5
|
1.0
|
1.2
|
US
|
0.6
|
0.9
|
0.9
|
UK
|
0.8
|
1.2
|
1.2
|
Sources: (a) Pakistan, Planning Commission (2005). (b) Data supplied by the
Ministry of Foreign Affairs, Islamabad, at the authors’ request. (c) Khan
(2012, February 15).
Table
12.3: Official remittances per Pakistani diaspora/per
working Pakistani (USD)
Country
|
2004
|
2010
|
2012
|
All
countries
|
1,049
|
1,777
|
1,968
|
Adjusted
|
(1,614)
|
(2,733)
|
(3,027)
|
Saudi
Arabia
|
570
|
1,780
|
2,168
|
Adjusted
|
(713)
|
(2,225)
|
(2,710)
|
UAE
|
1,425
|
2,038
|
2,374
|
Adjusted
|
(1,781)
|
(2,547)
|
(2,967)
|
US
|
1,425
|
2,038
|
2,374
|
Adjusted
|
(2,850)
|
(4,076)
|
(4,748)
|
UK
|
465
|
1,188
|
1,267
|
Adjusted
|
(930)
|
(2,376)
|
(2,534)
|
Note: Adjusted for number working
out of total stock: 0.65 for all countries, 0.8 for Saudi Arabia and the UAE,
and 0.5 for the US and UK.
Source: Tables 12.1 and 12.2.
Kock and Sun
(2011) point out that there has been an increase in the number of skilled as compared
to unskilled workers going abroad. As Figure 12.1 shows, the share of
skilled/semi-skilled increased from around 40 percent in 2007 to just over 55
percent in 2011/12. However, the official figures do not show an increase in
the number of highly qualified and highly skilled emigrants (Figure 12.1).
Indeed, there is a sharp fall in 2009, which, after a recovery in 2010, falls
again in 2011/12 and rises in 2012. Contrary to this, the press has frequently
reported that a large number of professionals (doctors, engineers, scientists,
bankers, IT experts, chartered accountants, teachers, etc.) have been going
abroad in recent years to work in the US and EU, but also in Saudi Arabia, the
UAE, Qatar, Bahrain, Kuwait, the UK, Canada, Australia, Malaysia, South Africa,
and Japan.
Countries in
the EU include Germany, France, Spain, Italy, Ireland, and Norway (“Changing profile of
overseas Pakistanis”, 2011). Clearly, the
official figures fail to capture these outflows, perhaps because such
categories of workers might not have officially registered themselves as going
abroad to work.
Figure
12.1: Percentage distribution of overseas Pakistanis by
occupation, 2001–12
Note: The highly qualified and
highly skilled are grouped together, and the skilled and semi skilled are
grouped together.
Source: Bureau of Emigration and
Overseas Employment, Pakistan.
The figures in
Table 12.4 are, however, revealing as they clearly show that the increase in
remittances between 2004 and 2012 cannot be explained solely by the increase in
number of workers abroad or by an increase in their skill level because the
differences between their growths are just too wide to support such a
contention. For example, for all countries of the 230 percent increase in remittances,
only 70 percent can be explained by the increase in number of workers. Even if
we take into account a significant increase in the share of professionals and
higher skills by 2012 and the corresponding increase in their share of
remittances—even to the extent of it doubling—this would still leave a large
unexplained gap.
Table
12.4: Percentage increase in number of workers/remittances,
2004–12
Country
|
Increase in number of workers
|
Increase in amount of remittances
|
All countries
|
70
|
230
|
Saudi Arabia
|
55
|
487
|
UAE
|
140
|
300
|
US
|
50
|
80
|
UK
|
50
|
308
|
Source: Tables 12.1 and 12.2 (the
latter adjusted for labor force participation rate: 0.65 for all countries, 0.8
for Saudi Arabia and the UAE, and 0.5 for the US and UK.
As Table 12.4
also shows, this difference is especially pronounced for Saudi Arabia and the
UK and to a slightly lesser extent for the UAE. For the US, this shift caused
by 9/11 may have worked itself through by 2004 but probably brings out the
continuing transfer of assets and savings to Pakistan. These finding reinforce
our earlier finding that the increase in remittances is not just for the
reasons pointed by Kock and Sun (2011); rather, it also represents a
significant shift from informal to formal channels for sending remittances.
3.3.
Factors
Responsible for the Higher Number of Professionals and Better-Skilled Workers
Going Abroad: Reaping the Demographic Dividend?
Pakistan is
currently passing through a demographic transition (Nayab, 2006), which has
resulted in a “youth bulge” and an increase in the working-age population as a
share of the total population. To reap the “demographic dividend” of this
change, the economy needs to create productive and remunerative employment for
young workforce entrants.
Unfortunately,
after a short-lived growth spurt during 2002/03 to 2005/06, the economy has
been mired in stagflation, growing at around 3 percent while it would require a
growth rate of between 7 to 8 percent to productively employ new entrants into
the labor market. Inflation has remained in double digits and only started to
come down during the second half of 2012. It must also be kept in mind that
Pakistan has increased substantially its investment in higher education over
the last ten years, increasing enrollment almost fourfold to about 1.2 million
in 2011/12 (Pakistan, Ministry of Finance, 2012).
With the
economy slowing down, there is increasing evidence that young professionals and
skilled workers are leaving for employment abroad. Three factors have spurred
this demand: (i) increased demand for labor in Saudi Arabia, Abu Dhabi, and the
Gulf Cooperation Council (GCC) countries, which were not affected by the
financial collapse in Dubai; (ii) new job opportunities in Europe (especially
in Italy, Spain, and Norway), possibly due to its fast-aging population; (iii)
job opportunities in the US and UK which, despite the economic slowdown, remain
attractive job markets for professionals and higher-skilled workers, for whom
demand has continued to grow at the expense of unskilled workers; and (iv) the
emergence of Australia as an attractive job marker for Pakistani professionals.
Is Pakistan,
therefore, reaping the demographic dividend through the migration of
professionals and higher-skilled workers? Amjad (in press) draws attention to
this possibility, but it is clearly an area that needs further investigation.
3.4.
Illegal Transfers
and Remittances
Official
remittance flows are also associated in the public perception with the transfer
of illegally gotten gains, which are transferred back to Pakistan through
remittances and thus legalized since the latter’s sources are not questioned.
These flows include:
-
The so-called
‘whitening’ of ‘black’ money[4] generated in Pakistan, which is then converted into US
dollars or other foreign currency through domestic moneychangers, sent abroad,
and then sent back as remittances through existing or fictitious Pakistanis
living abroad.
-
The receipt of
kickbacks and commissions on deals with international companies in contracts
awarded to them in Pakistan, which are then transferred back in part or whole
as remittances.
-
The
under-invoicing of imports of machinery and goods and services to avoid full
payment of import duties, after which the nonpaid amount of the cost of the
import is sent back through a domestic moneychanger in foreign currency leading
to an outflow of resources from Pakistan.
-
Illegal earnings
through the drug trade (or other related activities) that are transferred back
to Pakistan in the form of official remittances and thus legalized.
Amjad et al.
(2012) rightly argue that, as far as the ‘whitening’ of ‘black’ money is
concerned, such transactions would not result in a net addition to the total
size of official remittance flows. This is because converting domestic currency
into a foreign currency would need buyers of the local currency. These
transactions, if made through remittances, would require a Pakistani working
abroad or a member of the larger Pakistani diaspora to ‘demand’ these rupees
and then send them back as remittances. Since he or she would only do so if
already planning to transfer money to Pakistan, when such a remittance is sent
it does not add to the total amount of remittances flowing into Pakistan.
On the other
hand, the transfer of part of or all illegal foreign exchange earnings—from
kickbacks, the drug trade, and other sources—as remittances does lead to an
increase in official remittances. However, the transfer of such illegal
earnings, including non-taxed earnings by Pakistanis abroad, might not occur
through the official remittance channel for fear of being detected; hence,
those making such transfers prefer the use of the unofficial hawala route.
Has the amount of illegal transfers increased in recent years?
One example is the real estate collapse in Dubai in 2009, in which many
Pakistanis had invested both their legal and illegal earnings. It would appear
that a part of these assets, or what was left of them after the crash, was
transferred back to Pakistan as official remittances. This would explain the
increase in 2009 and 2010 of official remittances into Pakistan at the time
when the number of migrants working in Dubai was falling. Clearly, however, a
significant part of this amount may also have come through illegal channels.
Similarly, anecdotal evidence suggests that some of the
illegally gotten wealth in Afghanistan by the Afghan political elite is
transferred into Pakistan through the channel of official remittances, mainly
to buy businesses, real estate, and property in Pakistan. It is difficult,
however, to gauge the amount of these flows, which again appears to be mainly
channeled through Dubai.
How large, then, are these illegal flows being remitted
through official channels and how much through illegal channels? While it is
extremely difficult, if not impossible, to quantify them, one needs to be
somewhat cautious in inferring that illegal flows account for a significant
part of the rapid growth in official remittances in the past decade. For one,
official remittance flows have increased not only in Pakistan but also
Bangladesh, the Philippines, and India (see Figure A12.1 in the appendix).
Indeed, it would be a strange coincidence that the worldwide growth in official
remittances has been due substantially to increases in the transfer of
illegally earned funds abroad. Again, we therefore caution against a generally
held view that official remittance increases are in any way significantly
related to an increase in illegal flows, though clearly a part of these flows
represents such activities.
An important conclusion that we would like to draw from our
analysis in this part of the study is that the remittance market is complex and
highly segmented by region and by countries. Therefore, policy measures and
direct initiatives and interventions should, in large measure, target countries
and regions if the flow of official remittances is to be encouraged and
increased.
4.
Households
Receiving Remittances: Why do They Prefer Official or Unofficial Channels of
Transfer?
What factors underlie the demand for unofficial or hundi
transactions and how can these be influenced? Understanding the practices,
procedures, and regulatory structures of the international value transfer
system with particular focus on third-party settlement is, therefore, immensely
important. Similarly, understanding the behavior of overseas migrants and their
families toward the use of banking or nonbanking channels to transfer money
home is important to attract more money through official channels. So, an
important question is whether migrants, who send remittances home through
hundi, are socioeconomically different from those who use the banking channel
to transfer money.
Investigating
the behavior of migrants and their families in using unofficial or official
channels to transfer money requires a dataset that has some basic information
about migrants using one channel or the other for these transfers. For this
purpose, we use micro-data from two household surveys carried out in 2009 and
2010. The first, the Household Survey of Overseas Migrants and Remittances
(HSOMR) carried out in 2009, comprises a small sample of 548
households—randomly selected from nine districts of the country—each of which
had a member employed in Saudi Arabia at the time of the survey. The second is
the Pakistan Institute of Development Economics’ (PIDE) panel survey conducted
in 2010 in 16 districts—the Pakistan Panel Household Survey (PPHS), with a
sample size of more than 4,000 households. Both surveys collected information
on overseas migrants’ personal characteristics, their earnings while abroad,
remittances transferred home, channels used to transfer money, and their
reasons for using these channels, particularly for not using the banking
channel.
To supplement
the PIDE household survey-based information, some in-depth interviews were also
carried out in the district of Gujrat among families that had a member working
abroad at the time. The aim of these interviews was to identify the factors
that underlie the use of hundi to transfer money. Thus, the study uses both
qualitative and quantitative information to understand whether users of hundi
are different from users of the banking channel.
Based on the
literature on overseas migrants’ remittance-sending behavior, we attempt to
examine the relationship between the methods used to transfer money and four
characteristics of migrants and their families: (i) migrants’ place of origin
or their families’ place of residence in Pakistan (urban or rural), (ii)
migrants’ education level, (iii) their skill level, and (iv) the duration of
their stay abroad.
The basic
hypotheses tested are whether:
-
urban migrants use
the banking channel to transfer money more than their rural counterparts;
-
migrants’
education level has a positive association with the use of the banking channel;
-
because of its
strong correlation with education, skilled and professional workers use the
formal channel to transfer remittances more than unskilled workers; and
-
the longer the
duration of their stay abroad, workers are likely to be positively associated
with the use of the formal or banking channel for money transfer because of
increased awareness about the benefits of using it.
We apply bivariate and multivariate techniques to analyze the datasets
mentioned above. Take first the case of overseas migrants’ rural-urban origin.
The majority of Pakistani migrants came from a rural background and their
families live in these areas, thus money is transferred there on a large scale.
Using data from the Household Income Expenditure Survey, Irfan (2011) finds
that “the distribution of remittances underwent a shift wherein the share of
rural areas in total remittances increased from 49 percent in 1996–97 to 72.4
percent in 2007–08.” So, the question is whether the practice of rural migrants
in terms of using channels to transfer money from abroad is different from that
of their urban counterparts. Banking facilities in Pakistan are better in urban
centers than in rural communities, and urban migrants are also likely to be
more educated than rural migrants, making it more possible that urban-origin
workers will remit money home through the banking channel.
Figure 12.2
does indicate that urban families have received more money from abroad through
banking sources (43 percent) than rural families (33 percent). This difference
may be statistically significant,[5] but more importantly, the use of the banking channel
in urban areas to transfer money is very low (43 percent), let alone in rural
areas.
Figure
12.2: Methods used to transfer money from abroad by rural
and urban origin of migrants (percent)
Source: Arif (2009).
In the PPHS
2010, migrant families were asked why they did not use the banking channel.
Table 12.5 shows the responses of urban and rural migrant families, and helps
us better understand migrants’ remittance-sending behavior. In the survey’s
questionnaire, some of the possible reasons suggested for not using the banking
channel included the high transaction cost involved, the nonavailability of a
bank, the long distance to the nearest bank, the long waiting times involved,
and uncooperative behavior of bank staff.
However, as Table 12.5 shows, neither rural nor urban respondents cited
the nonavailability of a bank or/and the distance to the nearest bank as reasons
for not using the banking channel. In fact, approximately two thirds of the
rural families surveyed could not give reasons for not using the banking
channel. However, about a quarter of the rural sample said that it took a long
time to withdraw money from the nearest bank. The situation of urban households
is not much different: the high transaction cost involved is given as the main
reason (Table 12.5). Nonetheless, according to the survey data, there is no
major difference in transaction costs between banking and hundi channels (see
Table A12.2 in the appendix). The reported distance to nearby banks in Table
A12.2 also cannot be considered for long, given the availability of better
transport sources.
Based on the
qualitative work carried out in Gujrat and the survey data used (PPHS 2010 and
HSOMR 2009), we find that migrants and their families appear hesitant to use
the banking channel. Migrants account for this hesitation, saying that “the
banking procedure is difficult for us. We get money through hundi at our
doorstep.” There seems to be a strong perception barrier to using the banking
channel.
The in-depth
interviews also reveal that migrants abroad with households, particularly in
the Middle East, live in groups and usually have an informal group leader who
manages the transfer of money through informal sources. Further, this type of
common living arrangement creates a network among the migrants, which enables
them to send money home through a mutual friend visiting Pakistan. Thus,
opening new bank branches in high-migration rural or urban areas, as is
generally believed, may not be the only solution to channeling more remittances
through banks.
Table
12.5: Percentage distribution of households who received
remittances through hundi and reasons for not using a bank
Reasons
|
Overall
|
Urban
|
Rural
|
High transaction cost
|
9.78
|
40.00
|
3.90
|
Long time required
|
20.65
|
-
|
24.68
|
Security
|
1.09
|
-
|
1.30
|
Family finds it
difficult
|
7.61
|
13.33
|
6.49
|
No bank available
|
-
|
-
|
-
|
Bank too far away
|
-
|
-
|
-
|
Bank staff does not
cooperate
|
3.26
|
13.33
|
1.30
|
Others
|
57.61
|
33.33
|
62.34
|
Total
|
100.00
|
100.00
|
100.00
|
N
|
92.00
|
15.00
|
77.00
|
Source: Pakistan Panel Household
Survey (2010).
Table 12.6 presents data on migrants’ education levels and the methods
used to transfer money during the year preceding the PPHS 2010. The table also
categorizes the use of formal or informal sources of money transfer by
migrants’ skill levels, i.e., as skilled workers and unskilled workers. The
skilled category includes professionals and clerical workers. There is no
linear relationship between migrants’ level of educational attainment and their
use of the banking channel to transfer money, although migrants with a college
or higher level of education are more likely than other categories to use this
source. Despite this difference, it is important to note that about a third of
migrants with a college or higher level of education did not report using the
banking channel. There is no marked difference between skilled and unskilled workers
in their use of hundi, although it is modestly higher in the latter’s case.
Table
12.6: Migrants’ level of educational attainment and the
methods used for money transfer
Education/occupation
|
Bank
|
Hundi
|
Others
|
Up to 5
|
45.28
|
47.17
|
7.55
|
6–10
|
28.57
|
63.27
|
8.16
|
10 or above
|
68.75
|
25.00
|
6.25
|
Skilled workers
|
34.72
|
58.33
|
6.94
|
Unskilled workers
|
42.27
|
50.52
|
7.22
|
Source: Pakistan Panel Household
Survey (2010).
The relationship between the methods used to transfer money
and migrant workers’ duration of stay abroad is also not as expected. Table
12.7 indicates a negative association between migrants’ period of stay abroad
and their use of the banking channel. Longer stays abroad appear to enable
workers to find informal ways of sending money home. It is not easy to explain
why, but there could be several reasons. For example, long-stay migrants’
preference for informal channels may be associated with their legal status
abroad. Illegal workers are more likely to use the nonbanking channel than
legal workers. It can also be argued, however, that illegal workers are likely
to be new migrants rather long-stay workers. Nonetheless, studies carried out
in the 1980s tend to characterize illegal workers as ‘over-stayers’—those who
stayed abroad without following the legal procedure.
Table 12.7: Migrants’ duration of stay abroad and
methods used to transfer money (percent)
Duration of stay abroad
|
Bank
|
Hundi
|
Others
|
Up to 3 years
|
63.38
|
22.54
|
14.08
|
4–6 years
|
12.90
|
83.87
|
3.23
|
7–10 years
|
22.22
|
77.78
|
0.00
|
11 years or more
|
30.23
|
65.12
|
4.65
|
Source: Pakistan
Panel Household Survey (2010).
4.1. Estimating Effects of Socio-Economic
Factors on Means of Money Transfer
To determine the independent effect of
the socioeconomic factors given above on methods used to transfer money, we
also carry out a multivariate analysis, applying a logistic regression to the
PPHS 2010 micro-data. The unit of analysis is a household with a member working
abroad. If the household received money during the last year through a banking
source, it is assigned a value of 1 and 0 otherwise. The dependent variables
include migrants’ age, household size, duration of stay abroad, migrants’
education level, skill level, land ownership, and region (rural or urban).
The results of this analysis are presented in Table 12.8, and
our findings are not very different from what has already been discussed.
Rather, they give a better message. For example, while a college or higher
level of education does not emerge as statistically significant, migrants with
a middle or matriculate level of education are even less likely than those with
a lower level of education to use the banking channel to transfer money. Skill
level does not show a significant correlation with the use of formal sources,
while the duration of stay abroad has a negative association with the use of
the banking channel. Two demographic variables, household size and migrants’
age, have a significant association with the use of formal sources of money
transfer. The larger a household, the less likely it is to receive remittances
through the banking channel. Age also has a negative association with its use,
but the positive and significant association of the age term with the use of
formal sources indicates a curvilinear relationship.
Table 12.8: Effects of demographic and
socioeconomic factors on methods used to transfer money transfer from abroad
(logistic regression model)
Correlates
|
Coefficient
|
Standard error
|
Age of migrant (years)
|
-0.214*
|
0.100
|
Age-squared of migrant
|
0.002*
|
0.001
|
Years spent abroad (of migrant)
|
-0.059**
|
0.031
|
Education level of migrant (up to primary as ref.)
|
||
6–10
|
-0.894*
|
0.449
|
Intermediate or above
|
0.120
|
0.770
|
Skilled worker (yes = 1)
|
-0.408
|
0.447
|
Household size (number of members)
|
-0.114**
|
0.059
|
Region (urban = 1)
|
1.603*
|
0.552
|
Land (acres)
|
0.310*
|
0.109
|
Constant
|
7.304*
|
2.931
|
LR chi2
|
47.76
|
|
Log likelihood
|
-73.806
|
|
Pseudo-R2
|
0.2445
|
|
N
|
147
|
|
Note: * denotes
significance at 5 percent, ** denotes significance at 10 percent.
Source: Authors’
estimates based on Pakistan Panel Household Survey (2010) micro-data.
Finally, what are the policy implications? These are outlined
in the last part of this chapter but a major finding of this analysis is that
migrants who use hundi to send home remittances are not systematically
different in socioeconomic terms from those who use the banking channel for
this purpose. It is thus difficult to identify the migrants with certain
characteristics who might be identified as a target group for using the banking
channel.
In interpreting these results, however, two important caveats
should be kept in mind, The analysis presented in this section is based on a
relatively small household survey and that a deeper investigation requires a
relatively larger survey which the study recommends.
The second is
that the survey was conducted just a year after the launch of the PRI and that
the extent to which the increased services offered in subsequent years (i.e.,
post-2010) by the PRI had on emigrants’ behavior needs further investigation.
Our view is that it should have led to an increase in the perception and
practice of overseas Pakistanis in sending their remittances through official
channels.
5.
Conclusions and Policy recommendations: Setting up an Efficient,
Transparent, and Well-Functioning Remittances Market in Pakistan
The Pakistan economy and a significant proportion of its population
depend on the flows of remittances from overseas workers and the broader
Pakistani diaspora. At over USD 14 billion in official remittances expected in
2012/13—which is just over half the projected total export value of goods and
services and corresponding imports of around USD 40 billion—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 5.5 percent of GDP, remittances inject much needed
additional aggregate demand into an economy that has been mired in stagflation
over the last five years.
Given the
important role that remittances play, a major objective of policymaking is to
ensure that remittances flow through official channels since this would maximize
the development benefits to the economy. The main purpose of this study was to
identify factors that would facilitate the transfer of remittances through
official channels. To do so, we have analyzed the remittances market and its
major players both outside and within Pakistan to identify factors that drive
remittances to be sent through official or unofficial channels.
An important
contribution of this study is its analysis of remittances within an overall
framework of a remittances market that encompasses both formal and informal
players. This helps us better understand its functioning dynamics and identify
factors that might explain the growth of remittances as well as forces that
influence its flows through official and unofficial channels.
We build on
the earlier study by Amjad et al. (2012) and critically examine the results of
Kock and Sun (2011) who attempt to explain the growth of remittances during the
period 1997–2008. Our study covers the period between 1997/98 and 2011/12.
The main
conclusions of the study are as follows:
In explaining the manifold increase in official remittances since 2001/02,
it is just as important to examine the economic shocks and policy interventions
that may have impacted these flows as it is to look at the increase in number
of overseas workers leaving Pakistan in this period, their skill composition,
and economic conditions within and outside Pakistan.
The major shocks and policy interventions that we have identified are:
-
The freezing of
foreign exchange accounts in the aftermath of Pakistan’s nuclear test in May
1998.
-
The 9/11 attacks
on the US, which created a sense of insecurity among the Pakistani diaspora and
caused US authorities and banking and other financial institutions to
scrutinize the flow of remittances far more closely.
-
The collapse of
the real estate boom in 2009 in Dubai and the accompanying financial crisis,
which led to a number of Pakistani professionals and workers leaving Dubai,
while Pakistanis who had invested in Dubai pulled out their investments or what
was left of them back into Pakistan.
-
The PRI, launched
jointly by the Ministry of Finance, State Bank of Pakistan, and the Ministry of
Overseas Pakistanis, and the initiatives taken and incentives offered to
Pakistani banks to increase the official flow of remittances, which has clearly
contributed to its growth since 2009.
An important
finding of this study is that the remittances market is complex and
geographically segmented; identifying the major factors that resulted in
increases in official remittances requires examining each segment of this
market to draw appropriate conclusions and policy measures and initiatives,
rather than studying them at the aggregate level. The segments identified are:
-
The remittances
market originating from (i) Saudi Arabia, (ii) Abu Dhabi, and (iii) Dubai.
-
The remittances
market originating from the US.
-
The remittances
market originating from the UK.
Since these
three segments and subsegments account for over 70 percent of official
remittances, analyzing each in depth provides important insights into their
functioning and contribution to the large increase in official remittances.
These main findings are:
-
The remittances
market originating from Dubai is the most complex as it serves as a major
global hub of the hundi network and is closely integrated with remittance
inflows from the US and the UK. The official flows of remittances from Dubai
mask investments by Pakistanis living in Pakistan as well as illegal earnings
channeled back into Pakistan. The real net extent of these two flows is
difficult to gauge but in examining movements and increases in flows, they
appear to be significant.
-
The remittances
market in Saudi Arabia and Abu Dhabi, once the post-9/11 impact on the flow of
official remittances works through, reflects both an increase in the number of
migrant workers from Pakistan as development activities financed by rising oil
prices were expanded, as well as aggressive marketing by Pakistani banks with
PRI support.
-
The US remittances
market is where, besides Pakistani overseas professional workers, a significant
part of the Pakistani diaspora resides, and its movements reflects both income
transfers as well as the transfer of savings and assets to Pakistan. Since
different factors influence the two flows, these need to be analyzed
separately.
-
The PRI’s
initiatives launched since early 2009 appears to have yielded sound results
especially in tapping remittances flowing earlier through unofficial channels
from the UK and Saudi Arabia as well as in identifying new countries as sources
of remittances. In the case of the UK market, this was done by diverting flows
from UK financial institutions to Pakistani banks since the former appeared to
transfer funds that were not reflected in official flows.
A striking and important finding of the study, based on recent
household surveys for 2009 and 2010, is that households receive almost 40
percent of their remittances through unofficial channels. Even more striking is
the finding that, whether migrants are better educated or the receiving
households live in rural or urban areas, makes no great difference to which
channel they use. In interpreting these results, however, two caveats must be
kept in mind: first, that the results are based on a relatively small household
survey; and second, that it is very possible that these results may change as
the PRI became more effective post-2010.
Based on its analysis of the factors that have led to an increase in
remittances—as well as diversion from unofficial to official channels—including
as a result of very recent PRI incentives, the study concludes the following:
-
At less than USD 1
billion, the official flow of remittances in 1999–2000, following the freezing
of foreign currency accounts in Pakistan after the nuclear tests, can be taken
as its lowest point in terms of the share of flows through official channels.
Based on estimates by earlier studies, these could be taken to constitute
around 20 percent of total flows.
-
Post 9/11, given the heightened scrutiny and continuing economic boom in
the West as well as increased economic activity in the Middle East, official
remittances increased sharply. The combined effect of these factors was that,
by 2005/06, the share of flows through official channels could have gone up to
60 percent of total remittances.
-
The continuing
increase in remittances after 2005/06, despite the global financial meltdown
and real estate collapse in Dubai in 2009, can be explained by (i) the
increased activity in Saudi Arabia and Abu Dhabi; (ii) the significant increase
in outflow of Pakistan professionals to the US, UK, and Europe; and (iii) the
PRI. These factors, we believe, could have increased further official
remittances to around 70 percent or at least maintained them at around 60
percent of the total.
-
Our tentative
conclusion is, therefore, to scale down our estimates of the flow of
remittances through unofficial channels to nearer 30–35 percent compared to the
much higher estimate (up to 80 percent) in Amjad et al. (2012). It must be
emphasized again that these estimates are inferred from global, regional, and
national developments and interaction with “knowledgeable sources” rather than
hard evidence and should be treated accordingly.
Finally, the
study suggests two further areas of research. The first concerns the role of
foreign exchange companies in the remittances market in Pakistan. The second
entails undertaking a more comprehensive survey of families receiving
remittances in Pakistan. Both these studies would not only assist in
identifying measures needed to increase remittances through formal channels but
as in better documentation of the Pakistan economy.
Appendix
Table
A12.1: Outflow of overseas Pakistanis by occupational category (numbers)
Year
|
Highly qualified
|
Highly
skilled
|
Skilled
|
Semi-skilled
|
Unskilled
|
Total
|
2001
|
3,155
|
10,846
|
64,098
|
2,768
|
47,062
|
127,929
|
2002
|
2,618
|
14,778
|
74,968
|
3,236
|
51,822
|
147,422
|
2003
|
2,719
|
22,152
|
101,713
|
4,601
|
82,854
|
214,039
|
2004
|
3,291
|
15,557
|
77,033
|
3,840
|
74,103
|
173,824
|
2005
|
3,737
|
15,467
|
57,793
|
2,675
|
62,463
|
142,135
|
2006
|
5,708
|
16,332
|
71,898
|
3,375
|
85,878
|
183,191
|
2007
|
8,178
|
20,975
|
110,938
|
3,243
|
143,699
|
287,033
|
2008
|
9,713
|
33,173
|
177,791
|
4,209
|
205,428
|
430,314
|
2009
|
4,954
|
3,260
|
182,657
|
2,465
|
210,192
|
403,528
|
2010
|
7,081
|
31,650
|
165,726
|
5,181
|
153,266
|
362,904
|
2011
|
6,974
|
3,018
|
171,672
|
73,247
|
201,982
|
456,893
|
2012
|
6,861
|
3,035
|
191,354
|
74,071
|
195,011
|
470,332
|
Source: Bureau of Emigration and
Overseas Employment, Pakistan.
Table A12.2: Percentage distribution of overseas
Pakistanis by occupational category, 2001–12
Year
|
Highly qualified/skilled
|
Skilled and semi-skilled
|
Unskilled
|
2001
|
10.94
|
52.27
|
36.79
|
2002
|
11.80
|
53.05
|
35.15
|
2003
|
11.62
|
49.67
|
38.71
|
2004
|
10.84
|
46.53
|
42.63
|
2005
|
13.51
|
42.54
|
43.95
|
2006
|
12.03
|
41.09
|
46.88
|
2007
|
10.16
|
39.78
|
50.06
|
2008
|
9.97
|
42.29
|
47.74
|
2009
|
2.04
|
45.88
|
52.09
|
2010
|
10.67
|
47.09
|
42.23
|
2011
|
2.19
|
53.61
|
44.21
|
2012
|
2.10
|
56.43
|
41.46
|
Note: The highly qualified and
highly skilled were grouped together, and the skilled and semi-skilled were
grouped together.
Source: Bureau of Emigration and Overseas Employment,
Pakistan.
Figure A12.1: Trends in remittances in four selected
countries
(USD
million)
Source: Remittances data, Development
Prospects Group, World Bank (2011).
Table A12.3: Cost, distance, and time spent on
dealing with banks and hundi system
Total sample
|
Province
|
Region
|
|||||||
Punjab
|
Sindh
|
KPK
|
Balochistan
|
AJK
|
Urban
|
Rural
|
|||
Bank
|
|||||||||
Time involved in each
transaction (days)
|
4.44
|
4.16
|
5.68
|
2.80
|
2.00
|
8.38
|
4.64
|
4.19
|
|
Average cost of each
transaction (PRs)
|
696.85
|
1,049.02
|
533.18
|
30.61
|
325.3
|
183.33
|
690.38
|
704.72
|
|
Distance to bank from
home (km)
|
5.22
|
5.47
|
2.91
|
8.54
|
3.06
|
7.82
|
3.20
|
7.71
|
|
Average time spent
drawing money from bank (hours)
|
4.20
|
3.19
|
3.07
|
10.98
|
2.05
|
2.00
|
5.79
|
2.30
|
|
Friendly behavior of
bank staff (yes = 1)
|
92.80
|
99.50
|
90.10
|
100.00
|
60.00
|
62.50
|
93.80
|
91.60
|
|
Hundi
|
|||||||||
Time involved in
collecting money (days)
|
1.76
|
2.56
|
1.15
|
1.34
|
1.67
|
1.29
|
1.91
|
1.69
|
|
Average cost of each
transaction (PRs)
|
702.48
|
1,927.85
|
396.5
|
10.89
|
767.33
|
17.00
|
582.17
|
769.32
|
|
Source: Household Survey of Overseas
Migrants and Remittances (2009).
* The author is director of the
Graduate Institute of Development Studies at the Lahore School of Economics,
and former vice-chancellor of the Pakistan Institute of Development Economics.
** The author is joint director of
the Pakistan Institute of Development Economics in Islamabad.
*** The author is a former joint
director of the Pakistan Institute of Development Economics in Islamabad.
The authors
would like to thanks the International Growth Centre for its support for the
study and Naved Hamid for his valuable technical input.
[1] The US State Department defines
diasporas as migrant groups that share the following features: (i) dispersion,
whether voluntary or involuntary, across sociocultural boundaries and at least
one political border; (ii) a collective memory and myth about their homeland;
(iii) a commitment to keeping the homeland alive through symbolic and direct
action; (iv) the presence of the issue of return, although not necessarily a
commitment to do so; and (v) a consciousness and associated identity expressed
through diaspora community media, the creation of diaspora associations or
organizations, and online participation (International Monetary Fund, 2011).
[2] Afram (2012, p. 43) provide a
useful description of how this informal hawala or hundi market works: “A
typical hawala transaction consists of a remitter, a recipient, and two
intermediaries, that is, hawaladars. When transferring the funds to the home
country, the migrant-remitter makes payment to an intermediary hawaladar in the
remitting country. The hawaladar then contacts their partner service provider
in the recipient country who then arranges for the payment in local currency to
the beneficiary. The beneficiary is required to present a pre-agreed
identification document or code. When this transaction is conducted, the agent
in the remitting country is indebted to the agent in the recipient country.
Their transactions are settled through similar transactions going in the
opposite direction, cash payments, or bank account transfers. In some cases,
their positions also can be transferred to other intermediaries.”
[3] We use a broader framework to
define the remittance market in Pakistan than that used by Afram (2012) in that
he defines it as representing the formal financial institution and regulatory
framework for the transfer of remittances while we examine the entire
remittances process and cover both the official and unofficial or unrecorded
flow of remittances.
[4] This covers all kinds of bribes and undeclared income
for avoiding taxes.
[5] In fact, it is significant and we examine this later
in this section.
Labels: Pakistan, Pakistan Economy, Pakistan: Moving the Economy Forward, Publications
posted by S A J Shirazi @ 1/06/2014 10:19:00 AM,
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