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Channelling remittances flow key challenge for Pakistan

Thursday, 08 April 2010 14:44

Source: The News International

Channeling the flow of remittances towards the long-term investment remains a key challenge for Pakistan, which will contribute towards sustained growth in the real-sector and guide the economy away from the consumption-led growth, according to a recent report issued by the Asian Development Bank (ADB).

Several key measures that have been seen across the developing world have also been considered for the country.
First, it is suggested that the fiscal incentives may be provided to the returning migrants who wish to set up small- and medium-scale businesses. These may take the form of tax breaks or other related initial concessions.

The bank has also proposed that to ensure future remittance cash flows, a special exchange rate may be offered on remittances arriving in special savings accounts in the domestic financial institutions.

The banking sector should be more proactive to increase the speed and certainty of remittance transactions to encourage more migrants to send their money through official banking channels. This will help develop the financial sector of the economy and contribute to the stability of macroeconomic fundamentals, in particular, the balance of payments.

It is also a challenge for the government to make remittances more redistributive by making the tax system more progressive to help low-income households, the report said.

However, the tax structure related to remittances should provide incentives for migrants to send more through the formal channels.

The Asian Development Bank is of the view that reduction in the remittance flows by 50 per cent will help reduce domestic demand.

The bank said the total real investment is reduced by 7.7 per cent and total imports decline by 6.4 per cent.

The latter is due to reduced foreign exchange availability in the domestic economy.

Exports increase by 10 per cent to partly compensate for the reduction in the domestic demand of goods. As a result, the overall GDP declined by 0.7 per cent.

The impacts across various households show a significant decline in the overall consumption, with the largest reduction seen for rural non-farm poor households (3.5 per cent).

The least affected is the urban non-poor households whose consumption declines by only 1.1 per cent. In terms of poverty affect, the urban population seems to be less affected, while farmers, especially the landless, are badly hit by the drop in remittances. This shows the strong link between migrants and farmers, which is unique for Pakistan.

This further highlights the fact that many migrants are still non-skilled workers coming from agriculture backgrounds.

Looking at the impacts on poverty indicators, the report suggested 50 per cent reduction in remittance flows. The headcount ratio will increase by 6.4 per cent, while the poverty gap and severity of poverty index will go up by around 6 per cent, the report added.