Family or workers’ remittances have been a key source of foreign exchange for Pakistan for the last several decades. These inflows have significantly financed the nation’s burgeoning trade and primary income deficit for years.

A State Bank of Pakistan (SBP) research paper published last year points out that Pakistan received $258.3 billion in remittances between 1977 and 2019. Only exports, with $480.1bn, have exceeded the cash transfers by migrant Pakistani workers living abroad during this period. Even the inflow of foreign direct investment (FDI) is only $47.4bn, a small number compared to workers’ remittances.

In the last fiscal year ending on June 30, remittances surged to $31.2bn to closely match the country’s export earnings of $31.7bn. Many believe that a big chunk of cash sent home by Pakistanis living in the Gulf countries, the UK, North America, Europe, Australia and elsewhere still flows through the informal channels. That underscores the opportunity to grow remittances further to harness this potential for economic growth at a time when Pakistan is facing one of the worst payments crises in its history.

As statistics show, family remittances have become a crucial component of the economy for Pakistan. With insignificant FDI flows, and abysmally low export earnings, these sources of foreign exchange have always remained insufficient to pay spiking import bills and cover the massive current account deficit year after year.

Workers’ remittances make up nearly 8.5pc of Pakistan’s overall GDP

Thus, the nation’s reliance on cash transfers from overseas Pakistanis and foreign loans to meet its need for foreign payments and shore up its reserves is increasing. In short, remittances remain a vital straw for Pakistan’s economy to hang on.

Fortunately, remittances have been growing significantly for the last two decades, surging to $31.2bn last fiscal from just $1bn in 2000. The growth has, however, been phenomenal in recent years. In FY21, migrant Pakistanis transferred more than $29bn, showing an increase of over 27pc. In FY22, the growth slowed down to 6pc to $31.2bn owing to its higher base effect.

There are several reasons for the increase in cash transfers by migrant Pakistani workers to their families through legal channels. These reasons include international curbs on informal money transfer channels like hundi and hawala after the fateful 9/11 attacks on US soil, the crackdown against terror financing and money laundering, as well as the strengthening of the domestic legal framework by Islamabad to check illegal movement of cash.

The most important contribution to remittance growth was seen after the launch of the Pakistan Remittance Initiative (PRI), a joint initiative of the SBP, the Ministry of Overseas Pakistanis and the Ministry of Finance in 2009. The objective was to foster economic, fast, efficient, secure and convenient remittance inflows through the legal channels into the country.

Before the inception of PRI, only a few banks and exchange companies were mobilising home remittances without any centralised ownership structure with inefficient payment mechanisms.

PRI has enhanced domestic outreach by including new financial institutions — commercial banks, microfinance banks, exchange companies and Islamic banks — in the home remittance business. Branchless Banking Operators (BBOs) have been allowed to disburse remittance payments through mobile wallets to further enhance outreach.

Presently, 12 BBOs are operating in the country with over 400,000 branchless banking agents. Likewise, global outreach is increasing through new home remittance-related agency arrangements of domestic financial institutions with overseas entities.

Many feel that a lot can still be done to achieve further growth in the volume of remittances sent home through legal routes. “Pakistan has a very large number of migrant workers around the world,” Naqqash Hafiz, executive head of ACE Money Transfer, a UK-based firm with its office in Kharian, told this correspondent.

“Expats sending remittances back home consider many factors like the transfer costs, exchange rate, speed and security. There are still a large number of overseas Pakistanis who do not use legal cash transfer channels, thinking they are time-consuming and would cost them much more than the informal ways of sending money home.

“We need to educate our expat community that it is secure and cost-effective to use legal channels for cash transfers,” he says. His firm has collaborated with Bank Al Habib (BAHL) to educate the Pakistani diaspora in England through a massive campaign and offer free, easy and secure money transfers in line with PRI vision, he added.

People typically turn toward the kerb (hawala/hundi) market, considering that the regulated channels would involve high taxes and unusual costs, losing hefty amounts due to hidden charges, low exchange rates and other fees.

International transactions typically take three to five business days to complete using a bank transfer. Some methods, like a wire transfer, offer quicker processing of transactions within one to two business days, but these transactions prove costly.

Likewise, charges would typically be of two types: one is the fee that the money transfer operator would charge as a transfer fee, while the other would be the forex margin that would be charged by applying a margin on the currency conversion rate.

Considering all legal money transfer options, including banks, the average cost of sending money to Pakistan is estimated to be around 3 to 4 per cent.

There are three types of money transfer providers. First, some offer a hybrid model like Western Union with a combination of conventional agency-based models, giving customers digital remittance options to send money.

Others offer services on the conventional model via agents and branches, and others like ACE Money Transfer, which are digital-only providers, offer online-only transfers.

“We need digital-only, PRI-based free remittance services like the one offered by ACE. It allows the sender to transfer cash free of cost (it is possible because PRI gives 20 Saudi Riyals on every transaction of $100 or above) to Pakistan in just seven seconds as a bank deposit or cash pickup from BAHL pickup points. Their recipients can withdraw funds around the clock, over the weekend and even on public holidays,” Mr Hafiz says.

According to data from the World Bank, workers’ remittances make up nearly 8.5pc of Pakistan’s overall GDP, providing them with a lifeline for the country’s moribund economy. This can be increased by encouraging digital-only, PRI-model based money transfer providers for free and instant transfers as required by overseas Pakistani workers.

The government has taken significant measures to increase remittances via legal channels. But it also needs to launch awareness campaigns to educate overseas Pakistanis on the use of legal channels and spread awareness on the devastating impacts of using illegal channels like hundi and hawala.

Published in Dawn, The Business and Finance Weekly, October 31st, 2022