The Role Of Remittances In Pakistan Overall economy Economics Essay

South Asia is the foundation of cheap labour on earth because of growing population many developed countries target these countries in south Asia to get over labour lack as well as selecting skilled labour to work in their countries. So producing Economies of Asia specially India, Bangladesh and Pakistan also helps this labour exports to empower young ones and stabilize economic situation through higher remittances.

These Remittances save the overall economy from different financial shocks and in natural dangers as Remittances have a tendency to grow when home country's economy suffers from bad situation this upsurge in remittance is determined by intentions of remitter and his self-interest. Migrants send remittance to home country for intake purpose to aid their own families in bad time while on other palm these remittances shows negative style if migrants want to use these for investment purposes.

Workers remittances develops quickly in South Asia in the last ten years from 18 billion in 1980 to almost 328 billion in 2008 shows almost 18 fold increase in inward flows of remittances, Specifically Pakistan remittances depicts increasing development and increased from 136 million US$ in Fiscal time 1973 to 13186 US$ in fiscal yr 2012 shows 5% share in GDP significantly increases swiftly after 2001 when Pakistan becomes ally of USA in battle on terror after that foreign direct investment and favourable and steady economic policies brings about increasing rapid growth of remittances inflows.

Different factors decides the inflows of remittance which include Micro Factors(Demographic and Social factors) and Macro Economic factors such as quantity of workers, dark market Superior, inflation, host country income, GDP of coordinator and home country etc.

Micro-Economic Factors of Remittances (Community and Demographic Determinants)

Years since employee migration

Household income level of migrant

Ratio of females in the host country

Employment position of other participants of family

Professional level of migrant in the sponsor country

Matrimonial status of migrant

Above factors determine inflows of remittances other Altruistic factor is also important because mainly remitter self-interest determines the move of remittance largely money is dispatched for aiding family. This altruistic behaviour is more frequent when problems situation happens in the local country because an immigrant needs to help their family to make it through in crisis.

Macro-Economic Determinants of Remittances:

Mostly literature on remittances focus on social and demographic factors but this focus is shifting towards checking out macro-economic factors as well for building consensus on different determinants of foreign remittances. Different factors shows steady and significant leads to literature as number of workers, wage rates and income levels but most macro-economic factors still depicts contrasting views as home country income, inflation, exchange rate premium, Interest rate differential, GDP of local and sponsor country and most importantly Dark colored market premium etc. Below we will make clear further these determinants and model;




RM=Remittances inflows

GRO=Expansion of Domestic and variety countries in assessed by GDP

WKR=Quantity of workers

WGR=Income rates for employees earning in coordinator country

ER=Exchange Rate

INF=Inflation in domestic country

BMP=Dark colored Market Premium

YHOST=Per Capita income of host countries

PRK=Political Dangers in local country

IRD=Interest Rate Differential

MGOVDMY=Armed forces Govt Dummy

=Mistake Term

Explanation of Parameters and Hypothesized Romance:

Growth: This varying represents financial activity of domestic and web host country measured by gross local product. Countries with higher GDP accelerate the movement of remittances both inward and outward. The contrasting views regarding romantic relationship of GDP and Remittances shown in the literature. Relationship will depend on motives of remitter that either he is sending money for utilization goal or for investment purpose. Literature shows Positive romance among GDP and Remittances if the person mailing money for usage purpose while adversely related when mailing of money for investment goal.

Number of Staff: This represents the number of Individuals in the coordinator country and making profits from occupation. More amount of workers sends additional money to home country which significant positive relationship is also verified by literature on remittances.

Wage Rates: Wage rate is the remuneration paid to staff member in the sponsor country. That is displayed by Per Capita income and shows positive romance with remittances means more earnings brings about more remittances.

Exchange Rates: It is the rate against which on money is converted to another higher the exchange rate of 1 currency reduce the value of other money. Literature on exchange rate shows divergent results in literature it may affect economic growth positively or adversely depends on circumstances. If Exchange rate is higher for sponsor country than movement of remittances is increased towards home country but vice versa holds true in case of investment goal because investors will lose money in lasting.

Inflation: It is the rate on which prices of goods and services are growing and purchasing ability of persons falling. Different studies depicts different results on inflation and Remittances romance as this is determined by the altruistic behaviour of remitter if he send money for investment goal than it is adversely related and on other hands if he do this for supporting his family in use than remittances are favorably related to inflation.

Black Market Top quality: It is the exchange rate of money that differs from formal exchange rate. It can be used when recognized exchange rate bears less romantic relationship with real value of currency. This is prohibited for legal reasons in almost all of countries and absence of this exchange rate overvalues the currency this is favorably related to remittances.

Income of Host countries: This represents per capita income of income of web host countries. Books shows this is favorably related with the remittances stream because of higher income of immigrants they save more and send additional money to domestic country.

Political Dangers: Political risk is doubt of local countries this poses serious hazard to remittances. in unfavourable situation immigrants hesitate to sending remittances to home country because of uncertainty of regulations and lack of trust on ruling govt. So Political risks is negatively related with remittances more political risks contributes to lower remittances.

Interest Rate Differential: It is the differential which actions the gap between two currencies rates of interest it is used in forwards exchange traders arranged a rate for trading two currencies and packages discount and prime. it shows contrasting ends up with literature exhibiting positive marriage if used as motivation and negative in case of higher risks.

Military Govt Dummy: This presents dictatorship period in the home country indicated as dummy adjustable where (1) presents armed service Govt and (0) democratic govt. As military services Govt increase hazards and creates laws and order situation in domestic country so this is negatively related to the inward circulation of remittances.


Remittance play essential role in forex earnings for growing countries like Pakistan. Past three ten years demonstrates very successful for producing countries which show increasing pattern of remittance inflow. Remittance was $18 billion in 1980 which come up $328 billion in 2008 a rise of 18 folds. Worker's remittance for Pakistan increase over last one decade. United States, UAE, other GCC countries and Saudi Arabia accounted for over 79 % of total inflow of remittances in Pakistan.

Here it is important to comprehend the three important terms which frequently used further i. e. foreign exchange reserve, foreign remittance and GDP. Foreign exchange reserve is the first deposit of foreign currency held by the state bank, keeping foreign currency in hand as an asset allows administration to get steady the local currency. Overseas remittance inflow is the move of forex from variety country to the recipient country. GDP is a measure of the worthiness of the full total production in a country, usually in confirmed year. Gross home product is calculated by adding along total consumer spending, total government spending, total business spending, and the worthiness of online exports. GDP is considered one of the first choice indicators of the health of a nation's economy

A question comes in every head that why overseas remittance is so much important for expanding countries? It's important because it affects numerous sector of market, it assist in developing living standard, remittance inflow do not cause any debt obligations on the country which can help to develop financial sector of recipient country. Economical growth can be achieved by overseas remittance as it facilitates the individuals for his or her consumption costs. Role of remittance for economical development of Pakistan can never be disregarded as it provide occupation opportunity, poverty reduction, improve standard of living, prevent from the crises of balance of payment, increase forex reserve, less volatility on exchange rate and advanced credit rating of country.

In standard, when local currency appreciate then remittance expansion decline scheduled to negative romance between them but remittance raises with the increase of real GDP progress and lower unemployment in remitting country. House keep use remittance for consumption purpose rather than investment goal which in the end improve their health care and education but show less role in stabilizing the economy.

Foreign remittance can be done through formal and casual way (Hawala). Remittance through formal way play positive role in expanding the economy as these remittance are under the observation of status bank but Hawala is fast, safe and less expensive way to copy the funds. Therefore, it can be an informal fund copy system that works parallel but independently to the formal bank operating system. Such type of system was presented to help trade and aid the areas where normal bank systems were absent.

A customer usually a migrant worker approaches a Hawala broker and provides him a sum of money to be transferred to a beneficiary (usually a relative) in another city or country. The Hawala broker often operates the best business as well as the financial services he offers and has an enterprise contact, a friend or a relative in this city/country. The Hawala operator contacts their Hawala spouse usually a contact using their company personal or business network - in the receiver city/country by cellphone, fax or e-mail. The operator instructs the spouse to deliver the funds to the beneficiary, providing amount, name, address and phone number of the recipient and promises to stay the debt at a later level. The customer does not necessarily receive a receipt but is given an identification code for the exchange. The Hawala broker in the receiver city/country associates the beneficiary and delivers the cash. The recipient can receive the cash without producing personal information documents apart from the previously decided code. There is no recorded arrangement or written deal for the exchange. The deal is secured by the trust between your parties without legal method of reclamation.

Survey of Literature on Remittances Role in Economic Development

Most of the books on the determinants of remittances depict contrasting results so for quality of strategy we will give attention to review of literature of determinants of remittances specifically role of remittances on monetary development. We will conclude with summation findings by the end of this newspaper for generating consensus about the partnership of remittance on monetary development.

As we know from literature it is the proven fact that remittances inflow smooth out consumption habits and eliminate poverty by uplifting the households at micro level that plays a part in economical development at macro level but literature on remittances on economical development depicts contrasting results, results varied from country to country and use of different estimation techniques of monetary development yielded different results.

Remittances constitute large portion of remittances for just about any economy some time it is higher than foreign direct investment funds and other inflows of capital.

contributed to books by analyzing the remittances impact on economic growth over time. Authors claim that remittances contributes large portion of earnings of producing countries which is increasing at 1% yearly in over the time(1995-2004) authors argued impact of remittances on monetary growth is well known that means remittances inflows brings about higher utilization. And therefore GDP is increased so because of the, policy designers show fascination with the results of the research studies. Authors further analysed the impact of remittances effect on long term growth by taking sample of 84 countries using twelve-monthly observations data over the period(1970-2004) writers produced results by panel expansion regression method sadly results shows that remittances is not significantly related to long-term growth. These results might disappoint insurance policy makers possible reason behind this may be the under developed infrastructure of channelization of remittances. In the books endogenety problem also present in the relationship in case there is altruistic behavior of remitter for this reason lower monetary performance contributes to higher remittances other problem that could be dominant is the bad governance which causes higher outward migration and upsurge in remittances.

For generalization of results this endogenety problem poses a serious challenge to experts in this field without doing these results about marriage overstated that may not be practical and leads to wrong course of economic policies. So For mitigating this problem of endogenety many researchers used different techniques defined below;

First analysis of compare the ratios of number countries income to US$ and variety countries real interest rate to US$ by using -panel data regressions utilizing data over the period(1970-1998) for gross annual GDP per capita by regressing staff member remittances to GDP show and change in percentage and controlling other variable concluded that domestic assets and inflows of private capital is positively related to growth, gdp share depicts negative or insignificant romance that remittances were negatively related with progress also these results keeps by taking instrumental parameters as solution of endogenety.

In other research conducted by World Lender improves method for working with endogenety by causing the distant variable time variant by multiplying distance of sponsor and home country with respective country's gdp or unemployment rate. Migration share is also used as instrumental varying indicates migration to top 5 OECD countries shows that home country is main determinant of remittances. Above tools estimated from cross country data over period (1991-2005) other factors are controlled which include secondary institution enrolment percentage, log of gdp per capita, ratio of real imports and exports to gdp and political hazards are main variables and time dummies. This estimation yielded positive romantic relationship between remittance to gdp percentage with and without assets but without investments results becomes insignificant.

Other analysis by argued that solve for endogenety by presenting distance by migrant's home country to sponsor country publisher analysed by taking sample of 68 countries over the period(1980-2004). Further report that this research differs because he didn't controlled assets rates figured total remittances to Gdp show is significantly and positively related while incorporating instrumental variables makes the results insignificant but positive.

focus on estimation of impact of international remittances to financial development of Caribbean and Latin American countries by implementing panel unit main, co integration tests writers also used completely modified ols technique consisting sample of 23 countries over the period (1990-2005) results implies that remittance inflows favorably related to monetary development and this romantic relationship is more strong in economically developed economies.

conducted review on MENA countries by using data from (1975-2004) by regressing remittances on GDP implies positive and significant romance between remittances and output growth that indicates better channelization of remittances.

analysed remittances as stabilizer of end result by using sample of 70 countries over the time (1970-2004) by estimating results use of simple ols, instrumental parameters and GMM approach shows negative relationship between remittances and volatility of growth(S. D of Per capita progress) over five time period. Results implies remittances inflows stabilize gdp per capita volatility.

Other Author tried out to solve the endogenety problem using instrumental variables and generalized approach to moments method developed by in addition to simple ols and fixed results model also used threshold estimation for robustness. Creator, s main focus on link between remittances and development also considering financial development as well. by using new dataset of 73 countries for period(1975-2002) which is assessed in 5 years averages by regressing remittances to gdp per capita and gdp to expansion share controlling other variables. Concluded that remittances are significantly positively related in those countries where financial sector is under developed.

investigated the partnership of remittances and its role in monetary development by considering not earnings inflows of remittances for consumption purpose using sample of 113 countries and -panel dataset over the period(1970-1998) confirms significant negative romance among remittances and growth suggesting that does not serve as way to obtain uplifting current economic climate.

also analysed the immediate and indirect effects of remittances on long term growth using GMM approach utilizing unbalance data of 40 countries over the period(1965-2004) concludes that remittances shows insignificant influence on development but IRAT and M2RAT have immediate effect on growth but small. Suggest insurance plan makers to concentrate on short term development and be optimistic for enhancing financial growth.

also determine the impact of remittances and macro-economic impact in Indian market by analysing dataset over period(1971-2008) writer concluded that remittances significantly and positively affects GDP, foreign reserves and ventures so by channelizing remittances India can defeat the situation of scarce capital for investment.

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