Efforts needed to restore confidence, encourage legal remittance channels

Writing for Dawn, author Nasir Jamal explains that the potential for remittances sent by overseas Pakistani workers and the diaspora to increase to $50 billion exists if the illegal money transfer operations known as Hawala/Hundi are eliminated. 

Market operators estimate that the illicit global remittance trade could be as high as 80% of the legitimate transactions, which amount to $700 billion.

The actual size of the global remittance market is nearly double that of the legal trade, indicating the widespread nature of the illicit remittance trade, making it challenging for any single country to tackle comprehensively. Pakistan is no exception to this issue, as stated by Naqqash Hafiz, the executive head of Ace Money Transfer, a company based in England.

While remittances experienced a significant increase of over 35% from $23.1 billion in FY20 to a peak of $31.3 billion in FY22, the ongoing fiscal year has seen a substantial drop. In the first 11 months until May, the country has lost $3.7 billion in remittances, with inflows decreasing by almost 13% to $24.8 billion compared to $28.5 billion the previous year.

The amount lost in remittances over the past year is more than three times the size of the International Monetary Fund (IMF) tranche of $1.2 billion that the government has been struggling to secure for the last seven months. Remittances have played a crucial role in supporting Pakistan’s external account in the absence of sufficient foreign assistance.

To address the severe balance of payments crisis and the uncertainty surrounding the restoration of a suspended $6.7 billion funding program with the IMF, the government aims to achieve $33 billion in remittances in the next fiscal year, according to budget documents for FY24. However, many experts argue that this target is unrealistic given the economic and political turmoil, as well as the growth of the informal foreign exchange market.

Karachi, along with Cape Town and Dubai, is one of the four cities globally closely connected to the Hundi/Hawala trade networks. Extensive networks operate from Karachi, and in various places, including Europe, the majority of individuals associated with legal money transfer markets are Pakistanis, followed by Indians, Bangladeshis, and others.

One of the main reasons for the decline in remittances is the significant gap between the official interbank exchange rate and the grey market, where the exchange rate recently reached over Rs20 to a dollar. This gap has incentivized overseas Pakistanis to choose illegal channels to remit money for family support and investments.

The depreciation of the Pakistani rupee, consistent over time, is another crucial factor contributing to the drop in remittances. Many overseas Pakistanis send money for investment in property, stocks, etc., but they have incurred significant losses due to currency devaluation in the past year. This has undermined confidence and discouraged further investment.

Other factors affecting remittances include the poor financial conditions in the US and Europe, with rising living costs, inflation, rent, and job losses due to a weak economy. The disposable income of Pakistanis residing abroad has decreased, impacting their ability to send remittances. Furthermore, overall financial and political instability in Pakistan has discouraged overseas Pakistanis from sending their savings back home.

The change in government in the country has also played a role in the decline of remittances. Pakistani workers and the diaspora who supported a particular political party, especially its leader, were driven by their political views to contribute to Pakistan, which led to significant growth in remittances over the past two financial years. However, this drive has diminished with the political change.

To read the full article visit www.dawn.com