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January 18, 2008

Pakistan’s growing reliance on remittances amid political instability

Analyst Insight by Media Eghbal.

Remittances to Pakistan rose by 24.0% year-on-year in July-November 2007, demonstrating the importance of the emigrant community.

Remittances in fiscal year 2006/07 reached 4.3% of GDP. This has helped Pakistan's economy to remain relatively resilient to political turbulence.

Since a growing amount of remittances come from the Middle East rather than the USA, this should provide some insulation in the event of a slowdown in the US economy.

Issue

Remittances to Pakistan rose by 24.0% year-on-year in July-November 2007, the first five months of Pakistan's fiscal year:

  • Remittances during this period totalled US$2.6 billion, up from US$2.1 billion in the same period the previous year;
  • The main sources of remittances were the USA and the Middle East. Pakistanis living in the USA sent back US$733 million during this period, up from US$533 million the previous year;
  • Pakistanis living in United Arab Emirates sent back US$334 million, up from US$251 million the previous year, while those in Saudi Arabia transferred US$482 million, up from US$399 million.

Strong remittances will boost income for residents in Pakistan, supporting consumer spending growth. Approximately 130,000 people emigrate from Pakistan each year, with remittances in 2006/07 representing 4.3% of GDP.

Importance

Ongoing political uncertainty may act as a disincentive for foreign and domestic investment going forward. Remittances are hence increasing in importance:

  • In fiscal year 2006/07 (July 2006 to June 2007), remittances totalled US$5.5 billion. This represented 4.3% of GDP;
  • The growing remittances reflect strong economic performance by the origin economies, particularly in the Middle East. This is due to the high price of oil, which has encouraged economic growth;
  • In the first five months of FY2007/08 net foreign direct investment fell by 19.0% year-on-year, to US$1.8 billion. This reflected growing political tensions surrounding the potential reelection of President Pervez Musharraf.
Foreign direct investment inflows (PKR billion): 2001-2007

Source: Euromonitor International from UNCTAD. Note: 2007 figures are for July-November 2007.

Remittances totalled more than foreign investment in July-November 2007. They are hence an increasingly important driver behind consumer spending trends.

Implications

Growing reliance on remittances will have both positive and negative implications for consumer spending:

  • In the short term, remittances will help to compensate for a potential decline in wage and job growth, caused by a lack of foreign investment as investors are deterred by the growing political unrest;
  • In 2006, private final consumption expenditure totalled 81.4% of GDP. Maintaining these levels of consumer spending will encourage ongoing economic activity, providing some insulation against the potential negative economic impact of the volatile political situation;
  • However, in the medium term dependence on remittances could discourage domestically-led economic growth, as consumers are supported more by remittances than their own earnings. This could leave them vulnerable to a downturn in the economies from which the remittances are sent, such as the USA, whose economy is forecast to slow in 2008;
  • A lack of jobs within Pakistan combined with the visible impact of high remittances could encourage more people to emigrate. This would reduce the economy both in terms of the immediate loss of workers and long-term human capital. In December 2007 the unemployment rate was running at 7.0%, slightly down from 7.7% at end-2006.

In the short term growing reliance on remittances will help to sustain consumer spending. However, in the longer term it could increase consumer spending vulnerability to external events. Pakistan receives a medium amount of remittances on a regional basis, with India and Bangladesh receiving 2.8% of GDP and 8.8% of GDP in remittances in 2006 respectively.

Future scenarios

Growing remittances will help to insulate the economy against a heightened period of political turbulence going into 2008:

  • The assassination of former prime minister Benazir Bhutto on 27th December 2007 will act as a clear negative signal to potential investors, who will fear sustained social unrest and potential military intervention;
  • Given this scenario, remittances will continue to increase in importance to the economy. Remittances are estimated by the central bank to reach US$6 billion in FY 2007/08, up from US$5.5 billion in FY 2006/2007;
  • Pakistan's economy is forecast to have grown by 6.4% year-on-year in 2007, down from 6.9% year-on-year in 2006, before expanding by 6.5% year-on-year in 2008. However, risks to this forecast are to the downside following Bhutto's assassination;
  • Continued high oil prices will maintain economic growth in Saudi Arabia and the UAE, maintaining high levels of remittances;
  • This should compensate for slower growth in the USA, with the economy forecast to grow by 1.9% year-on-year in both 2007 and 2008, down from 2.9% growth in 2006.
Real GDP growth in Pakistan and the USA: 2001-2008

Source: Euromonitor International from International Monetary Fund (IMF), International Financial Statistics and World Economic Outlook/UN/national statistics. Note: 2007 and 2008 figures are estimates.

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