Daily Times

The household welfare-enhancing feature of migrant remittances to Pakistan is well known, however, it is the macroeconomic role that has increasingly gained prominence at the policy level of the country. The amount of over $20 billion that overseas Pakistanis from around the world send back each year covers more than half of the country’s annual current account deficit. Besides, these inflows have proven to be stable over time and had thereby helped smoothen the country’s business cycle.

Realizing their potential, the government of Pakistan is strongly focusing on increasing remittances sent through formal channels. For this purpose; efforts are underway to decrease the cost of remitting to Pakistan.

According to the World Bank Remittance Prices Worldwide Database, the average transaction cost of remitting to Pakistan dropped from 6.59 percent in 2011, to 4.76 percent in 2017. This cost is much lower than the 7.1 percent cost reported in the first quarter of 2018, for the group of Low Middle-Income Countries (LMICs) as a whole and even the 5.2 percent cost reported for South Asia. The cost of remitting through formal channels such as banks and Money Transfer Operators (MTOs) nevertheless remains high compared to that charged by various Hundi operators. Bringing down the cost of remitting is part of the government’s policy objectives.

The average transaction cost of remitting to Pakistan dropped from 6.59 percent in 2011, to 4.76 percent in 2017. This cost is much lower than the 7.1 percent cost reported in the first quarter of 2018, for the group of Low Middle-Income Countries (LMICs) as a whole and even the 5.2 percent cost reported for South Asia

One key ingredient in this regard could be greater reliance on digital technology. Only 10 percent Pakistanis own active bank accounts. In contrast, 60 percent people own a mobile phone, and 78 percent have access to it one way or another.

This suggests a huge untapped potential for digital accounts. By decreasing the need for physical touch points to carry out payment transactions, mobile wallets can reduce the cost of money transfer and financial transactions in the country. The State Bank of Pakistan’s M-Wallet scheme can be useful for this purpose. This technology can help open the unbanked rural parts of the country and provide the users of those areas with much-needed financial services besides reducing the cost of remitting from overseas.

A related development that can bear fruits is to better focus on the provision of financial services through post offices. Banks generally concentrate on cities. This gives postal networks ample space to acquire substantial proportions of international and domestic remittance inflows.

However, post offices often lack access to information technology. Even internet availability is not always guaranteed. Besides, the staff lacks adequate training to deal with online transactions. Post offices can be equipped to provide banking services by improving their technology and staff training.

In addition, promoting competition among MTOs which provide transfer services through post offices by eliminating exclusivity contracts can further help lower the cost of remitting to rural areas. Postal banks function in a number of developed and developing countries, and can play a useful role in enhancing access to financial services for rural areas especially.

One final means of reducing the cost of remitting could be through greater transparency. Online comparison tools can allow migrants and overseas workers to compare existing transfer services thereby reducing information asymmetry. An example of one such initiative is that of United Nations Migration Agency IOM which is partnering with FX compared, a money transfer comparison website, to build its money transfer comparison tool. This partnership aims at comparing the fees and foreign exchange rates charged for money transfer services, and publish this data for free to help migrants get the best deal possible when transferring money home.

Caution Note: By lowering the cost of remitting and facilitating overseas Pakistanis, the government expects to increase international remittances sent through formal means from around $20 billion to $30 billion or more. This expected improvement is based on previous estimates that half of the remittances to the country are sent through informal channels. Our analysis of data and research papers indicates that this share is probably in the 20 to 30 percent range. Furthermore, informal channels include remittances brought home via hand-carry.

This means of transferring money is common among Pakistani workers residing in the Gulf states. These workers often live in close communities and frequently send small amounts of money to the families back home through fellow workers returning to Pakistan. Such flows are unlikely to be affected by lowering the cost of remitting. In light of the above discussion and the fact that the cost of remitting to Pakistan is already relatively low, the increase in remittances through further lowering transaction costs may indeed turn out to be below expectations.

Dr Junaid Ahmed is working as a Senior Research Economist at Pakistan Institute of Development Economics, Islamabad. He can be reached at E-mail: junaid.ahmed@pide.org.pk
Dr Mazhar Mughal is working as Associate Professor in Economics at Pau Business School, France

Published in Daily Times, December 6^th 2018.