How Pakistan's foreign remittances are being wasted

How Pakistan's foreign remittances are being wasted
Foreign laborers working on the construction site of the al-Wakrah football stadium

We know them as migrant workers; they live and earn in foreign lands to sustain livelihoods back home.

They are essentially incarnations of Jackson Height's Bhatti sahab.

Due to the funds remitted by migrant workers, parents receive medical treatment, nephews and nieces receive education, and sisters find marital bliss.

For hundreds of millions back home, migrant workers transform into ATM cards that never stop spitting out money.

Over the past few decades, the scale and scope of remittances have evolved tremendously.

Yet, the logistics of such transactions have remained archaic.

The intermediaries take a large cut to transmit money - on average 8 per cent of the remitted amount - and in return, offer not much in service.

In 2014 alone, migrant workers from developing countries remitted $436 billion to their loved-ones back home.

This amount is larger than the GDP of several countries. Still, the process is fatigued by unhelpful regulations and lack of a sophisticated global exchange to process the global flow of funds that could be leveraged for greater prosperity in developing countries.

This week, Milan is hosting the fifth Global Forum on Remittances and Development, which has attracted a large number of policymakers, and representatives from the private sector and civil society organisations.

The Forum wants to celebrate the migrant workers of the world who often endure separation and hardships to shelter their loved ones from the same.

Speaking at the event, Kanayo F. Nawanze, president of the International Fund for Agricultural Development, celebrated migrant workers and recognised "their vital contributions to their families at home and to the development of their nations."

Nawanze identified the shortcomings in the logistics of remittances that have prevented the efficient investment of these funds to achieve greater prosperity.

He mentioned that 40 per cent of the remittances were destined to rural areas in developing countries where a lack of opportunities to invest funds in businesses and employment generation were undermining the potential of these funds to transform societies.

What can the economics of global remittances do for Pakistan?

In addition to being the missing social safety net for millions of families, remittances are a huge source of foreign exchange for Pakistan.

The migration and remittance statistics maintained by the World Bank report over $17 billion in remittances to Pakistan in 2014.

The largest amounts being remitted originate in Saudi Arabia, UAE, and other Middle Eastern states.

With remittances being significantly higher than the total development aid received by the development agencies, the potential to leverage remittances to generate even more value for the rural communities is tremendous.

The remitted amount in rural areas is largely spent on immediate needs.

Even when surplus amounts exist, the lack of investment opportunities to create new businesses result in the remittances being misspent on consumer durables and non-essential spending, e.g., extensive dowries and expensive wedding gifts.

The challenge, therefore, is to lower the transmission costs and provide opportunities for the recipients to invest the surplus funds in value-added activities.

Assume a village where many youth went abroad and have been remitting funds to their respective families.

Using formal and informal remittance channels, the migrant workers sent the funds directly to the family members.

Over time, the welfare of individual recipient households improves, resulting in some positive spillovers, such as higher school enrolments and improved quality of consumer durables.

Yet, the village still lacked a healthcare facility and a formal sanitation system.

Over the years, the families used the surplus remittances for discretionary spending.

If the village had access to banking services from a regular bank, a credit union or even a telecom firm, the remittance-induced savings could have been pooled to finance a healthcare facility or a sanitation system.

Similarly, pooled savings could be used to rent more efficient and large capacity farm equipment to be shared among farmers during harvesting.

Experts in finance have suggested even more sophisticated instruments, such as the Diaspora Bonds, to leverage remittances.

Such productive application of remittances beyond their essential spend to sustain the livelihoods will create new avenues to support development and prosperity.

It will also provide the opportunity for self-sustenance for the families back home so that they may eventually end their reliance on migrant workers, thus allowing the Bhatti sahabs of the world to have lives of their own too.

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