“Understanding the drivers of remittances to Pakistan”

 

“Understanding the drivers of remittances to Pakistan” 

By: Communicators - Business Team (July 11, 2024)

The latest report by Asian Development Bank (ADB) emphasizes the significant role of macroeconomic factors in influencing remittance flows to Pakistan. These factors include economic activity, inflation, equity markets, and interest rates in both Pakistan and the host countries of migrants. The key findings of the report include:

Importance of Remittances: Remittances are crucial to Pakistan’s economy, accounting for about 10% of GDP, higher than the average for South Asia. They have been a stable source of income, proving resilient during global economic crises such as the Global Financial Crisis (GFC) of 2007-2008 and the COVID-19 pandemic. In 2021, remittances amounted to $31.1 billion, a 19.8% increase from the previous year. Remittances are significant enough to match the value of net imports of goods and services, impacting the balance of payments and macroeconomic stability.

Inflation and Remittances: Domestic inflation in Pakistan has a persistent positive impact on remittances, suggesting that migrants send more money home to support their families when inflation erodes real household incomes. This aligns with the altruistic motive to remit, where migrants aim to compensate for the financial strain on their families caused by rising prices.

Interest Rates and Remittances: Higher domestic interest rates initially lead to lower remittances, but the effect turns positive and significant after a few months. This suggests that migrants may remit more money to take advantage of better investment opportunities at home. Conversely, interest rates abroad do not show a significant impact on remittance flows.

Exchange Rates and Remittances: The exchange rate impact is generally insignificant, except for a brief period six months after a depreciation, which is associated with increased remittances.

Impact of Economic Conditions: In 2023, Pakistan faced significant balance-of-payments challenges, with remittances declining by 15% from January to October compared to the previous year. The report indicates that accelerating inflation in Pakistan prompts migrants to send more money home, reinforcing the shock absorbing role of remittances.

Other Factors: Domestic equity markets show a negative relationship with remittances, while oil prices have a positive correlation, though these relationships are not always statistically significant.

Overall, the ADB report underscores the complex interplay of macroeconomic variables in shaping remittance flows to Pakistan and highlights the critical role remittances play in the country's economic stability.