REMITTANCES have emerged as a major source of foreign exchange. Global official remittances have increased from $2 billion in 1970 to the present level of over $80 billion. About sixty per cent of the global remittances’ flow towards developing countries. And these exceed the global official development assistance as well as capital market flows to the developing countries.

However, over the years, concerns have been expressed on the limited productive use of these remittances. It is estimated that 50-60 per cent of remittances are spent on current consumption and only about 10 per cent go into investment.

Much of the remittances are used for repayment of loans, in daily expenses such as food, clothing, child education and healthcare and basic subsistence needs. Funds are also spent on building or improving housing, buying land or cattle or durable ,consumer goods such as washing machines and televisions. Remittances are also utilised for financing migration of other family members on social ceremonies and community development activities.

Generally, only a small percentage of remittances is used for savings and what is termed ‘productive investment’ e.g. income and employment-generating activities such as buying land or tools, starting a business and other economic activities with multiplier effects.

Due to poor infrastructure, lack of access to credit, and limited opportunities for small-scale investment, the migrants are making rational decisions about the use of their remittances.

While Overseas Pakistanis Foundation (OPF), offers investment advisory services to returning migrants and assists them in obtaining services from relevant government departments in setting up business, much more effort is needed to influence the pattern of utilisation of remittances for productive purposes.

First, there is a need for policy change to promote remittances. For migrants, the desire to remit savings through official channels is a function of convenience, flexibility and profitability of their transaction. Convenience depends on the ready availability of financial intermediaries who can easily remit funds to their families. Flexibility affects deposits more than remittances and is related to the availability of facilities for migrants to keep their deposits in foreign exchange and make withdrawals when desired. Profitability is determined primarily by the gap between the official rate of exchange and the unofficial rate available to the migrants. Besides this gap other important factors relate to the ‘real’ interest rate, inflation rate and exchange rate, as well as expectations regarding changes in these rates.

In order to encourage migrants to hold their saving balances in financial assets at ‘home’ as opposed to the host country, the government has introduced foreign currency denominated bonds. A special package of foreign exchange remittance card (FERC) has been implemented and under these, five categories of remittance cards are offered to those overseas Pakistanis who remit $2,500 to $50,000 in a year. A wide range of incentives are also being offered to the foreign exchange remittance card holders.

To encourage savings, the government provides temporary and permanent migrant workers with the incentives to remit to foreign–currency accounts (RCFAs), which can be repatriated, by domestic banks by offering a premium over and above the interest rates available in the international financial market. However, Bangladesh offers additional incentives through a preferential exchange scheme applied to conversions of foreign exchange from the RCFAs to local currency. Its Wage Earners Scheme (WES) enables migrants to sell their foreign exchange to importers at daily auctions at a premium over the official exchange rate.

In India, non-resident Indians are allowed to open foreign currency non-resident accounts which can be denominated in dollars or pounds sterling. The balances on these accounts and interest earned are repatriable The deposits are also exempt from wealth tax.

In terms of productive investment of remittances, it is noted that the focus of the incentive policy regime is on the high skill/income migrants living abroad permanently, either in the industrialised or developing countries. There is very little effort that is addressed to low skill, low income, temporary migrants, mostly workers in the Middle East who provide a substantial amount of foreign exchange through transfers and re-enter the labour market in search of employment on their return. The prospective returnee should be provided an enabling environment to place her/his saving into ‘productive’ investment.

South Korea has launched an experimental training programme for returning migrants. It aims at training returning migrants in new skills so that they can move to other industries or establish their own businesses. In Thailand, banks offer an advisory service on investment opportunities to its migrant-worker customers. The workers who seek advice are also eligible to obtain supplementary loans from the bank if they have a good record of savings.

In the Philippines, the POEA (Philippines Overseas Employment Administration) in collaboration with the ILO has established training centres in various high-migration regions. These centres provide business consultancy, information services, training in small-scale business management and financial supports to returning migrants and their family members. In Sri Lanka, the Department of Labor initiated a counseling service for return migrant. A “Return Migration Branch” was established in the Research and Development Division of the Ministry of Labour, to identify the problems of returning migrants and provide counseling and advice.

Along this, Pakistan has a “Non-Repatriable Investment Scheme” under which overseas Pakistanis (including those returning permanently) are allowed to import machinery and equipment at concessionary rates of duty to establish manufacturing enterprises. Migrant workers are also encouraged to invest in export processing industrial zones. In India migrant workers are given preferential access to capital goods and raw materials. Even Bangladesh offers special incentives for domestic investment..

Sri Lanka was the first labour-exporting country in Asia to launch an entrepreneurship development programme for returning migrants. This programme, inaugurated in 1982 by the Sri Lankan Ministry of Labour in collaboration with the Merchant Bank of Sri Lanka (referred to as ‘ML-MB Programme’) aimed at guiding returning migrants in business creation. In Turkey and Yugoslavia, investment by migrants, is encouraged through workers’ companies and ‘village development cooperatives’.

Policy makers in Pakistan need to focus on diverting remittances into productive avenues.