ISLAMABAD, 25 July 2005 — United States, Saudi Arabia and United Arab Emirates have emerged as the top contributors of home remittances sent by overseas Pakistanis, as the overall inflows rise to $4.169 billion. Overseas Pakistanis in United States alone sent home $1.294 billion, while those in Saudi Arabia and UAE, together, remitted $1.339 billion during fiscal 2005 that ended June 30, says State Bank of Pakistan, the central bank.
The two Muslim countries — Saudi Arabia and UAE — together provided 32.11 percent of the overall inflow of home remittances, while money sent from US, the single largest source, contributed 31 percent of the overall home-bound inflow. Pakistanis in Saudi Arabia sent home $ 712 million, and those in UAE $627 million during the year. Pakistanis are employed in a wide range of fields, from banking to construction and telecom to engineering and health to transport services, in the Gulf and Saudi Arabia.
Pakistanis in US are working in most fields covering IT to medicine, and teaching to aerospace. Pakistanis in United Kingdom were the fourth with $ 372 million remitted in 2005. In 2004, the remittances were $3.868 billion, rising 7.7 percent in 2005. The amount was a record $4.23 billion in 2003. The annual average for 2001 to 2005 period was $3.625 billion. The government’s expects $4.020 billion in 2006, rising to $4.160 billion in 2010.
One of the reasons for the strong inflow from abroad was what Prime Minister Shaukat Aziz calls “reverse flight of the capital.” This was due to increasing uncertainties to their living, savings and capital, faced by Muslims, and Arabs in US and elsewhere following 9/11. These included not only just transferring savings, but also to undertake investment in the home country. This was the time when profit and interest rates on savings and other instruments were comparatively low in US and Europe, while deposit rates and yields in Pakistan were still higher than abroad. The exchange rate and the dollar-rupee parity was also generally favorable to savers and investors in Pakistan.
Islamabad has welcomed larger inflows on account of home remittances, but also FDI in order to meet its growing need to pay for expanding imports, fueled by faster GDP growth rates. The GDP, over there years, has gone up from 5.1 to 8.4 percent in 2005. That growth trend Aziz considers, will “most like to continue, and fact reach a 9.0 percent level in two to three years. “Pakistan is set on a high growth trajectory, with all micro and macro factors are highly pro-growth, and are supported by a helpful monetary policy,” says Ishrat Husain, governor, SBP.
The increased flow of remittances is helping Pakistan partly overcome its growing balance of payments deficit, caused by the rapidly widening trade deficit that reached a record $6.2 billion in 2005. It was double the $3.2 billion deficit in 2004. Rising prices of imported oil, a growing domestic demand for oil and petroleum products, and soaring import of capital goods, and industrial inputs have widened the trade deficit.
Pakistan is expecting a still larger inflow of remittances — a view that is subscribed by the government, the central bankers, commercial bankers and the foreign exchange companies. One of the key reasons, they say is the fact that Pakistani economy is moving ahead at a fast pace. It now offers greater opportunities to invest back home than elsewhere. The government, keeping in view the investment preferences and requirements of overseas Pakistanis, has provided special tax breaks and incentives in the National Budget for 2006, to establish small and medium industries (SMEs). It also has reduced corporate taxes by 5 to 10 percent, and slashed the burden of taxes and customs and other duties on several industries, including textiles.
London bombing and 7/7 also prominently figures in expectations of larger inflows of home remittances and transfer of capital from UK and elsewhere, because of considerable uncertainty among more than 650,000 Pakistani Muslims living in UK. Bankers are of the view that Britain and Western countries may further tighten the banking laws and harsher monitoring of money transfers. It will push overseas Pakistanis to transfer their savings and assets back to the safety of their home country.
There is already considerable criticism of Islamabad’s inability to productively use the funds, transferred by overseas Pakistanis in the past. Billions of dollars were sent home by them following the “petro-dollar boom” in the Middle East in the 1970s. Most of these went into direct consumption, barring minor investment in small-scale businesses or building homes. Virtually history is now being repeated, following 9/11 more remittances since 2001. The government has formed hardly any worthwhile plan to encourage overseas Pakistani to invest in industry or business. Remittances have greatly enlarged commercial banks’ liquidity, bringing down the lending rates. Cheaper credit, in turn, helped the economy to grow faster, but without commensurate benefits to the remitters. In fact, the bank reduced the profit rates for deposits to as low as 1.5 to 2.0 percent. This liquidity is also fueling inflation-now in digits, and food inflation ranging between 11 to 14 percent.