In response to declining remittances, the State Bank of Pakistan (SBP) has introduced a series of measures aimed at encouraging the inflow of remittances into the country.
These measures come as Pakistan faces economic challenges related to a 14 percent decrease in home remittances from $31.278 billion in FY22 to $27.027 billion in FY23, and a significant 21.6 percent decline to $4.12 billion during the initial two months of FY24, which has contributed to the ongoing foreign exchange crisis.
The SBP’s initiatives include both performance-based incentives and the reimbursement of transaction charges and are applicable to banks, microfinance banks, and exchange companies.
Performance-Based Cash Incentives
Under the new guidelines, financial institutions (FIs) will receive performance-based cash incentives based on the growth in home remittances during FY24. The incentive structure is as follows:
- Up to 5 percent growth: Rs 1 per USD.
- Between 5 and 10 percent growth: Rs 2 per USD.
- Over 10-15 percent growth: Rs 3 per USD.
The objective of these incentives is to encourage FIs to increase their efforts in mobilizing home remittances through formal channels. This scheme will be in effect from FY24 onwards on a perpetual basis.
Previously, during FY22, FIs were receiving Rs 0.5 per USD for incremental growth over 5 percent compared to FY21 levels. The revised incentives represent an increase in the support provided to FIs for their home remittance efforts.
Reimbursement of Transaction Charges
In a separate circular, the SBP has raised the reimbursement of telegraphic transfer (TT) charges against each $100 transaction for home remittances. All authorized dealers in foreign exchange and microfinance banks will receive SAR 30 as reimbursement of TT charges for home remittance transactions of $100 and above or equivalent in other currencies.
Previously, banks were reimbursed SAR 10 for transactions equal to and above $100 but less than $200. For transactions equal to and above $200, SAR 20 was reimbursed.
To be eligible for this reimbursement, banks and their overseas correspondent entities must not charge customers any fees, commissions, or charges at any stage of sending or receiving home remittance transactions.
Furthermore, transactions sent from the same remitter to the same beneficiary on the same day will be treated as a single transaction, regardless of the number of transactions. Accurate identification of both the remitter and beneficiary is required for eligibility.
These measures aim to incentivize the use of formal channels for home remittances and reduce the flow of remittances into the informal or “grey” market, where higher exchange rates had been prevalent. Recent efforts to curb illegal currency trading and smuggling have led to more stability in exchange rates, resulting in the depreciation of the US dollar in both interbank and open markets.
It is anticipated that these measures may lead to an increase in remittance inflows, potentially reaching around $2.5 billion in September, according to experts in the banking industry.
