Pakistan stands as the sixth-largest recipient of global remittances, with a remittances-to-GDP ratio of over 7 per cent. This translates to approximately $30.3 billion, making remittances the country’s second-largest source of income, trailing only exports, which contribute about 9pc to GDP.

Notably, Pakistan’s remittance-to-GDP ratio surpasses that of neighbouring countries like Bangladesh and India, where it stands at 5.3pc and 3.5pc, respectively.

This substantial inflow is crucial in supporting Pakistan’s balance of payments and providing essential financial support to millions of households, playing a pivotal role in maintaining living standards and facilitating access to education and healthcare.

As remittances consistently outpace other foreign investments, optimising this channel is essential to maintaining economic stability in the country.

The majority of Pakistan’s remittances come from the Arab region, with Saudi Arabia and the United Arab Emirates (UAE) being the largest contributors. In FY24, approximately 58.5pc of total inward remittances came from Saudi Arabia, the UAE, and other Gulf Cooperation Council countries, making the Arab-Pakistan corridor the largest for remittances into Pakistan.

However, a significant volume of remittances — estimated at over $6bn — flow through informal channels, often due to a more favourable exchange rate and simpler processes in the hawala-hundi system.

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Formalising these remittances can play a crucial role in stimulating economic growth and resilience, as well as strengthening the financial sector and providing better protection for both senders and recipients. It will also help to prevent money laundering and increase regulatory oversight, which is critical for economic integrity.

Discussions are underway about leveraging Pakistan’s Instant Payment System, Raast, to bridge this gap and realise the potential benefits of formalising remittances.

The integration will spur innovation in the financial sector, paving the way for numerous new payment use cases

Raast has already made significant strides in transforming domestic payments, processing over 750 million transactions worth approximately Rs17 trillion within its first two years. This system facilitates real-time transfers between accounts, reducing transaction time to under two seconds.

The integration of Raast with Buna, an Arab Monetary Fund-owned network connecting central banks and over 125 financial institutions across 22 Arab countries, promises substantial benefits.

This connectivity will enable real-time payment processing, significant cost reductions, enhanced security, and greater convenience through mobile-based fund transfers. The direct connection between Buna and Raast will streamline cross-border transactions and address some of the most pressing challenges in remittance processing.

The Buna-Raast connectivity is a groundbreaking achievement, as it is the first cross-border instant payment system integration between Pakistan and the Arab region. It draws insights from models like SEPA (Single Euro Payments Area), FPS (Faster Payments Service), Zelle, CIPS (Cross-Border Interbank Payment System), Swift, and Ripple Net.

These systems exemplify the trend towards faster, more efficient cross-border payments and offer valuable lessons for optimising Buna-Raast connectivity. By adopting similar principles, the project can enhance transaction speed and reliability, benefiting both senders and beneficiaries.

For financial institutions, this integration offers several advantages, including reduced processing time, lower internal costs, improved cash flow management, and enhanced operational efficiency.

By aligning with international standards, this initiative will improve transparency and scalability and will also potentially boost financial inclusion in Pakistan by making remittances more affordable and accessible.

In addition to bolstering Pakistan’s foreign exchange reserves, this connectivity is expected to support local businesses and entrepreneurs by providing timely financial support. It will ease the flow of funds and enhance trade and investment opportunities.

We anticipate that the integration will spur innovation in the financial sector, paving the way for numerous new payment use cases and enhanced financial services.

For example, it can streamline billing processes, transfer funds for education or healthcare, and make cross-border trade payments more efficient. It can also potentially facilitate outward remittance flows, allowing Pakistani tourists in the Middle East to make seamless payments using their Raast IDs.

It can also enable BNPL (Buy Now, Pay Later) products in the Middle East, expanding access to flexible payment solutions across the region.

Additionally, the Buna-Raast integration can create opportunities for Arab financial institutions to participate in Pakistan’s credit markets through data partnerships.

Furthermore, expanding the network to include other countries can enable future opportunities for overseas Pakistanis to make direct payments for services in Pakistan, as well as extend local schemes, like PayPak, to the Arab region. This expansion could also open up new avenues for financial inclusion and economic growth.

While this connectivity offers significant advantages, its implementation will involve overcoming challenges such as technical integration, ensuring interoperability between systems managed by different regulators, establishing coordinated dispute resolution mechanisms, adhering to regulatory compliance, and maintaining a consistent user experience.

Addressing these challenges will require a comprehensive strategy involving technological innovation, regulatory alignment, and stakeholder collaboration.

The Buna-Raast integration represents a pivotal step in formalising and streamlining remittance flows between the Arab region and Pakistan. By reducing costs and offering enhanced efficiency, this connectivity could encourage approximately $2bn to switch to formal channels, positioning Pakistan as a hub for regional financial transactions and contributing to broader economic stability and growth.

The success of this initiative could serve as a model for future cross-border payment systems, highlighting the potential of technological advancements to transform the global financial landscape.

Faisal Mahmood heads the Digital Public Infrastructure in Karandaaz’s Digital Financial Services team, and Fatima Tu Zahrais an executive in the Research & Insights team at Karandaaz

Published in Dawn, The Business and Finance Weekly, August 26th, 2024