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An Analysis of the Remittances Market in Pakistan


Rashid Amjad
*, M. Irfan**, and G. M. Arif***

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
12-1.wmf

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)
12-2.wmf
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)

12-2a.wmf
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.

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posted by S A J Shirazi @ 1/06/2014 10:19:00 AM,

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