Nearly 10 million Pakistanis live abroad, and the money that they send home is a crucial pillar of the national economy. In 2020 alone, $23 billion USD poured into the country in remittances from this diaspora community, equivalent to around 8% of the country’s GDP.
This is a far cry from the pessimistic predictions of the World Bank in April 2020 that the COVID-19 pandemic would herald a 20% drop in global remittance volume.
Some nations did suffer a decline. Payments to India, for instance, fell by 9%. Yet in Pakistan, remittances grew by nearly 25%, prompting Prime Minister Imran Khan to tweet his gratitude to Pakistanis living overseas.
The Prime Minister’s appreciation is not surprising. That flow of capital helped stabilise Pakistan’s economy during a global crisis, creating a current account surplus and contributing to the country’s highest foreign exchange reserve levels in years.
Why did remittances to Pakistan boom in 2020?
When the boom began in April, policymakers were surprised to see remittance flows rise, and did not expect the trend to continue. The surge was attributed to Pakistani workers overseas losing their jobs, coming home and bringing their savings with them.
But against all expectations, the boom continued into summer. Lockdowns and a significant reduction in air travel stopped travellers from bringing cash into Pakistan by hand. Many of them turned to digital remittance providers instead, and this, coupled with new anti-money laundering efforts, brought large volumes of remittance payments into regulated, measurable channels for the first time.
When money can move this freely across borders, the effects are immediate and powerful. Rather than being locked up in a bank for days on end, that money can be used immediately to pay for goods and services
Growth was spurred even further by the so-called “Hajj effect”. Around 200,000 Pakistanis make the Hajj pilgrimage to Mecca each year. As a result of lockdown, a vastly reduced number of visas were granted to pilgrims in 2020. Many of those living outside Pakistan who could not travel chose to send the money they had saved for the pilgrimage to their family instead.
Digital remittances bring millions online
It’s no surprise that so many Pakistanis chose to bring money into the country by hand until it became impossible. For decades, remittance providers were slow, expensive and unreliable. Banks and money transfer shops had little competition, and could charge up to 10% of any transfer in fees.
But the fintech revolution has changed that. Digital technology has democratised financial services, bringing faster, cheaper players into the market. The average cost of remittances worldwide has been steadily falling and now stands at around 7%. Digital providers like Azimo, however, typically charge less than half that amount.
The breakneck growth enjoyed by digital remittance providers in 2020 is largely due to offline customers leaving their local bank or money transfer shop for the promise of better exchange rates and faster delivery online. Now that they have experienced the benefits of sending money online, they are unlikely to return to the slow, expensive methods of yesteryear.
The implications for the Pakistani economy are huge. Billions of dollars that once passed from hand to hand are now being paid into bank accounts. As a result, millions of remittance recipients are coming onto the financial ‘grid’ for the first time.
This creates new markets for other financial services and gives ever more Pakistanis access to life-changing tools: savings accounts, business loans, pensions and insurance against adverse events. This turns remittances into an investment in financial infrastructure at a crucial time of digitisation.
Pakistan: primed for the fintech revolution
Pakistan is poised to become a truly digital economy. Sixty percent of Pakistan’s 223 million population is under the age of 30. The country has over 80 million smartphone users, presenting a huge market for mobile payments and other e-commerce services.
The COVID-19 lockdowns of the last 12 months have accelerated Pakistan’s appetite for digital services, with internet traffic rising 15% as soon as the first lockdown was imposed. Ordinary consumers are becoming used to everyday conveniences like grocery deliveries, which until recently were considered a luxury available only to the rich.
Thanks to digital technology, it takes just a few minutes for a Pakistani living in the UK to send money to the bank account of a loved one back home. When money can move this freely across borders, the effects are immediate and powerful. Rather than being locked up in a bank for days on end, that money can be used immediately to pay for goods and services. Fewer cash transactions also means an increase in tax revenues. All of this economic activity creates jobs for the millions of young Pakistanis leaving universities and technical colleges across the nation.
Remittances have changed since the days of cash in a suitcase. What starts as a simple digital payment in London or Berlin rapidly becomes an integral part of the growth of South Asia’s most exciting economy.
The author is CEO of the digital money transfer service Azimo.