Remittances in Pakistan; what is happening and what can be done

By: Atiq-ur-Rehman

For 2013-14, the total budget of federal government of Pakistan was about 34 billion US$. Out of this budget, about 4.7 billion $ is the share of debt servicing and about 12 billion US$ is the share of provincial governments. Therefore about 17 billion $ is available to the federal government for its expenditures.

From this US$ 17 billion, the government finances about 0.6 million active armed forces, 0.5 million reserved forces, 0.3 million paramilitary forces, 0.6 million civilian federal government employees millions of pensioners, members of senate and members of national assembly. In addition to that, government pays huge amount as subsidy to different public utility services, runs hundreds of hospitals, scientific centers and builds road and infrastructure throughout the country. Lot of military equipment and equipment for civilian institution is also purchased out of this budget.  Millions of dollars are also provided to universities through HEC.

Now look at the remittances received by Pakistan from the overseas working Pakistanis. Pakistan received about US$14 billion as remittances which is more than 80% of the federal government expenditures after debt servicing and payment to provincial governments. A huge amount of remittances also enters the country from informal channel which has no record. 20% of this amount is utilized for the consumption needs of 7 million families of the remitters. What about remaining 80% of these remittances? How much employment is generated by these remittances? How many mills and factories have been established by these remittances? How much amount is consumed for energy project which is the most urgent need of the country? How much remittances are used for charity organizations, for establishing the vocational training centers, educational institutes and for provision of microfinance loans to the extremely poor rural population of the country?  How these remittances contribute to national economy, nobody really bothers to look at.

The main benefit to Pakistan from the remittances is the help in management of foreign exchange reserves. Net external trade of Pakistan is negative and Pakistan faces a loss of about US$13 billion in the international trade. If there were no remittances, it would not be possible to finance this huge deficit. So hats off to overseas Pakistani that because of them Pakistan is able to manage the balance between supply and demand of foreign exchange reserves.

However, when the State Bank pays rupees in return of the dollars, the huge amount is again in the hands of families of remitters which is comparable with budget of federal government. This amount is capable of providing millions of jobs to the brothers of these remitters inside their homeland. But unfortunately this is not happening.

So where does this huge amount go? This is the amount that if government and public sincerely decide a suitable strategy, the unemployment problem from the country could be eliminated. I was surprised to see number of studies on the consumption of remittance and these studies agree that most of remittances are used for real estate and lavish consumption. However, no one cares that is this the optimal utilization of money?

The real estate business which attracts the largest share of remittances is perhaps most capital intensive business with no labor or entrepreneurial requirements. In addition to that, it is also risk free with heavy profit margin. Therefore this becomes ideal investment for remitters. The remitters residing outside their homeland are unable to look after a business in Pakistan, therefore want these features in an investment out of their earning.

However, this is the most non-productive business which just causes an accumulation of wealth without providing job opportunities. If you purchase a plot worth 1 million US$, how much jobs will you create by this investment?

Some of the readers will say, yes jobs are created for construction. I also agree but for how much time? And how much jobs? And how many plots are just left idle for future sale at higher price without any construction?

I will explain by examples that how much capital intensive this business is; the total worth of Bahria town as per statement of Malik Riaz in 2010 was US$ 2.5 billion (PKR  250 billion ) of which he was providing jobs to 15000 people. So, average capital for one job is about PKR 16 million. And in Pakistan, average cost of starting a business ranges between 20,000 to 1 million. This means the Bahria town project is providing one job from the amount sufficient for creating 16-800 jobs. In some businesses like sericulture (silk worm rearing) you can employee over 800 individuals with the average cost of one employee in Bahria Town. This estimation is based on what was admitted by the owner of Bahria town himself. My personal estimate about worth of Bahria Town exceeds US$ 40 billion. With these remittances, the Bahria town authorities are successful to create their own empire within state having control of all the services that are responsibility of governments in a modern society. There are dozens of other mega real estate absorbing billions of dollars and producing only few job opportunities.

Anyhow, I do not blame Bahria Town or the remitters for this non-productive business. It was the duty of economists to guide the government to create alternate investment opportunities, and to discuss the pros and cons of the business so that the public has some awareness about aftermath of the business. Based on my personal experience with the remitters, I have no hesitation to say that the remitters are patriot in the true sense. If they were being told about investment for sake of employment, they will be happy to do that.

It is the need of time to utilize these remittances so that for solving energy crisis and creation of job opportunities. I am mentioning here two options for utilization of these remittances:

  1. The easiest way of utilizing the remittances is to start the real estate project in public sector and utilize the earning for mega project. Suppose government wants to construct a solar park near Lahore. The government develops a new town near the city and the earning is used for financing the project. Developing one town with 5000 plots may give the government revenue of 25-50 billion which is sufficient for creation of a good solar park with reasonable capacity. By constructing the solar Park, thousands of jobs will also be created and the provision of energy to industry will further enhance the job opportunities.
  2. Government can motivate the remitters to create the energy parks by themselves under supervision of an administrative board comprising the representative of remitters and government. The government has to ensure purchase of products on completion of project.

There are dozens of other option in which using public private partnership approach, millions of jobs could be created and the problems of financing mega projects of national importance could be accomplished. However, this is the time to take steps in this direction.

 

Note: The remittances grew rapidly in last few years, in late ninties, the total volume of remittances was slightly over 1 billion dollar which is now grown above 14 billion dollars. Therefore the oppertunity to bring a change using remittances emerged recently. So this is appropriate time to think about utilization of these remittances. In future, many mega projects are going to be initiated in the destinations of Pakistani immigrants. For example the Expo 2020 in UAE will create million of jobs, therefore the immigrants to these destinations is expected to increase further. Therefore it is important to create awareness about the value of these remittances and planning to utilize this great oppertunity in a useful way.

Date posted: January 2, 2014
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5 Comments »
Categories: Blogs

Comments (5 responses)

  • Uzma says:

    Interesting Blog….. remittances are if used properly then it may lead to Employment generation. but unfortunately in Pakistan mostly people avoid risky business and try to make Rs.10,000,000 from Rs. 100 without making any effort. however if same money is invested in some business like SMEs then it can generate employment. unfortunately Government is also not focusing towards these issues…
    your suggestion regarding solar park is good, but for this i think govt should take initiative and then motivate remitters to invest in it… and it seems that it is not risky investment but it will increase energy supply, which in return attract new investment. Although Govt has started different solar power project with the help of international agencies, but i think after getting specific expertise government should start independent projects with the help of local investors.

    • atiqurrehman says:

      There is huge difference between ‘ getting funds from foreign sources’ and ‘getting funds from loccals’ for a project. If you get fund from external sources, the investment + profit must be returned. By using local sources, whatever earning is; will remain inside the economy. I appereciate the initiative of solar parks by punjab govt, but it would be extremely useful if we use our own sources for the purpose.

  • Uzma says:

    yes you are absolutely right and i think after getting specific expertise Government should focus on internal sources….

  • Ammar says:

    There is this concept of diaspora bonds. The government can simply issue diaspora bonds instead of tapping international debt markets, and raise money from overseas Pakistanis at a competitive yield. In this way, the overseas Pakistanis will be able to park their funds at a favorable yield (in USD), while the government can raise funds to bridge its external deficits. Most remittance goes into the real estate sector, for lack of better options — if a liquid instrument like bond is provided — there would be incentive for overseas Pakistanis to invest money in those bonds.

  • Muhammad says:

    A lot of people living outside are interested to start some business in Pakistan but due to lack of expertise and market knowledge they are unable to kick start.
    Some NGOs can come forward and create a pool of business ideas and clear business plan along with full support to make the business up and running.
    This will help create businesses and employment in the country and also bring back the talented Pakistanis working abroad.

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