Banking Payments

Declining remittances into Pakistan

Declining remittances into Pakistan. Main image: Crystal Eye Studio,
Written by Faisal Khan

Faisal Khan outlines the steps the State Bank of Pakistan can take to mitigate the slowdown of remittances to Pakistan.

Newspapers in Pakistan have recently started carrying news about the state of declining remittances to Pakistan. This shouldn’t be a surprise. For years, Pakistan’s inward remittances have been climbing steadily, ever since the Ministry of Finance decided to set up the Pakistan Remittance Initiative (or PRI for short). The goal of this semi-autonomous body was to increase the inflow of remittances into Pakistan, while at the same time advocating policies that would enable a frictionless environment for the diaspora to send money back home.

There is zero doubt that PRI has been successful; the results were quite apparent. However, after an internal fight (read: power struggle), the founding team of PRI was chucked out and a new team set in. In both instances, PRI succumbed to the same issue: personal opinions of the head of PRI as to what’s right or wrong.

A very small team with extremely limited elbow room dictates the policies and mandates for remittances. This often creates an environment where justifiable steps that can increase remittances into Pakistan are ignored, and silly steps are taken. More on that later.

Turning black into white

Coming back to the remittances. Pakistan’s exemplary remittance growth in the past 4-5 years hasn’t been a result of a very large swathe of Pakistanis moving abroad and sending money back home. This is clearly not the case. I’ve personally been to construction labour camps or staff housing and asked around about the number of Pakistanis there. In many camps, the Pakistani population is almost equivalent to the Nepalese population, while India and Bangladesh dominate. Visit enough camps, talk to a few construction companies, and you start seeing a trend: the labour from Pakistan hasn’t increased, but has actually decreased in the past 3-4 years.

What had caused the number of remittances to be increased from the Middle East? The answer might shock an outsider: “black money” (or undeclared money). The Government of Pakistan has an incentive scheme: if you bring foreign exchange into the country and surrender it for local rupees, your money is now deemed official (read: white) and it will be exempt from any/all taxes (i.e., there is no deduction once the money is converted to white).

Individuals and businesses, both seeing the fine writing on the wall that the tax man cometh, have been sending money to Dubai and other Middle Eastern cities by the millions, and buying local currency, and sending this money back home as remittances to be turned white.

I’ve personally seen how money goes from here, let’s say US $500,000 in undeclared income, reaches a money exchange company in Dubai, how it’s divided, how tens of dozens of labourers are hired to divvy up the money and send the money back home as remittances, all the while using multiple money exchanges, multiple beneficiaries and multiple beneficiary banks spread out over a period of anywhere from 1-3 weeks. The net result is that because there is no correlation of data on the receiving end, the broken down transactions pass through very easily, as well as lull us into the false belief that remittances are increasing (which technically they are, but not for the reasons we might think).

In the past 2-3 years, the central bank has clamped down hard on a lot of these remittance-mule operations, specifically clamping down on large swathes of money leaving the country to Dubai only to be turned around and come back in as remittances.

Exchange companies that used to partake in this practice have been visited by officials, and the activities are in decline. What has further exacerbated the situation is that now in the UAE and other GCC countries, cash transactions in large sums are being avoided (source of funds is being questioned), and some money exchange companies that used to specialise in such transactions have been fined or have lost access to banking and are essentially out of business.

Decline in labour

Net outflow of labour has declined from Pakistan. In a particular construction camp I visited five years ago the Pakistani population on a per-thousand-person basis was about 23% on average. Today, it’s less than 7%. In some large construction camps, the number is much lower (between 3-5%). Dubai Municipality Workers, especially Dubai’s transit authority (which runs the taxi service), has a huge camp in the outskirts of Dubai for all the taxi drivers, 20,000-30,000 drivers live there. Ask around and you’ll find that the number of taxi drivers from Pakistan has been declining.

Staffing agencies will confirm the same. After the 2008 financial crisis, construction companies have laid off many workers, and those who are in business today prefer to obtain cheaper labour from Africa (countries such as Kenya, Ghana, Tanzania, Rwanda, Ethiopia, to name just a few).

The low oil factor

Add to this mix the lower price of oil. When the financial crisis struck, oil was at its peak at about US $140+ per barrel. It crashed down to almost US $30 per barrel and rebounded to US $80 by January 2010. It continued to hover at US $100 or above from 2011 onwards.

Price of oil

The good times were back for the oil-producing nations, or so it seemed. By August 2014, prices of oil breached the floor value of US $100 a barrel. By January 2015, they had breached the US $50 a barrel and continued to sink. By January 2016, they were under US $30.

With more than two billion barrels of excess oil in the market, there was an oil glut. Ships full of oil are literally anchored everywhere in the world, while fund managers anxiously wait for days when oil might prop up so they can cut their losses. How does one cut their losses when you’ve bought hundreds of thousands of oil barrels at prices that average above US $80 a barrel?

The sinking oil prices have created an earnings vacuum for the GCC nations. What was once a spending spree has become a desperate race for income and the days of partying on black gold have come to an end. Furthermore, there is the huge threat of alternative energy that’s shaping up that’s threatening the very existence of fossil fuels.

Iran post sanctions

Last but not least, there is Iran. Iran’s recent entry back into the market after many of the sanctions against it were lifted, has created a political, economical and military rivalry with the Saudis. The Iranians are hell-bent on getting back to pre-sanctions oil production levels of almost 3.5 million barrels a day. To put it bluntly, the Iranians don’t give two hoots about what the Saudis think, or that they, the Iranians, are flooding an already saturated oil market.

Iranian crude oil production. Source: EIA

In an effort to recover from the brutal financial sanctions they were subjected to, the Iranians will not cut back on production (neither will equally obstinate Saudi Arabia). The Iranians have plans to rejuvenate their economy and oil is one of the primary methods of achieving this goal. The idea of cutting back on production is something the republic isn’t willing to consider.

Shedding dependency on oil-based revenue

Whichever way you look at it, for most of the GCC nations, this has been an awakening call: to reduce public spending, cut down on government subsidies (especially on petrol and electricity prices), increase taxation (a touchy subject in the Middle East), and find alternative sources of income other than oil. Easier said than done. For most oil-producing nations, the only income they know of is oil. Dubai (part of UAE) has significantly reduced its dependence on oil, but the same cannot be said of other countries – Saudis being the biggest of the lot.

Frugality, meet the Middle East

The Saudis have led the pack when it comes to waves of construction companies laying off workers. Workers haven’t been paid in months, yet are unable to go back home. Saudi Arabia has a high unemployment rate, may be inching closer to 12%. One must be careful when citing this figure, as Saudis have a weird definition of how the rate is calculated. Read this article for more information.

“Saudisation” is in full swing, and contracts for expats are not being renewed. However, for “menial” jobs, the Saudis still consider it beneath themselves to take on these positions. This mentality will only last a few more years. When push comes to shove, Saudi will find that this belt-tightening isn’t some temporary exercise, but reality for the new Saudi: a frugal Saudi Arabia.

All this means that the GCC will do its utmost to reduce the number of foreign employed workers who collectively send more than US $100bn in remittances from the Middle East. While the number is not expected to go down to zero, we should expect a noticeable decrease in the number in the coming months.

To put it bluntly, countries that are dependent on remittances need to let the reality sink in. The party’s over!

Back to PRI and Pakistan. We need to realise that remittances from GCC, while contributing to the largest percentage of remittances, we need to move up the value chain for remittances and tap other countries as well.

In the UK, for example, many money transfer operators have lost access to UK banking. A few have shut down, while many have moved their bank accounts to continental Europe. European banks are catering to UK MTOs, all this with the blessing of the FCA. However, for internal policy reasons, the State Bank of Pakistan doesn’t recognise these bank accounts in Europe by UK licensees as valid, hence wouldn’t approve their tie-up contracts in Pakistan.

This needs to change. With the recent decline in remittances from the UK (blame it on Brexit?), SBP’s PRI is being forced to rethink its strategy and allow MTOs seeking approval from UK (having EU-based bank accounts).

Every penny counts

In addition, there’s a huge freelancer market that’s facing enormous difficulty in bringing their money back home, for fear that it will be taxed. SBP needs to put in place a policy that qualified marketplaces (like Fiverr, Etsy, and so on) shall be treated as remittances, and money coming in from these sources will not be subject to taxes. Doing so will bring in literally hundreds of millions of dollars back into Pakistan rather than it being kept overseas (as is the case now).

The process for correspondent tie-up is an old template. SBP needs to recognise that a money transmitter in 2016 takes various shapes and forms. We need to ensure that we are catering to these MTOs and enabling them to connect with our banking system at the earliest, without hurdles. This means revising the core set of requirements that enable them to become a bona fide tie-up. The current prerequisites disqualify many MTOs.

SBP isn’t alone in this. Nepal, India, Bangladesh, Sri Lanka, Indonesia and Jordan are some of the countries experiencing remittance declines from the Middle East. However, if we look at other countries, their inflows from developed nations such as the US, Canada, the UK, Ireland, the EU, Nordic regions and ANZ have increased substantially. Ours haven’t, at least not substantially. What’s needed is a policy play of promoting value-led remittances that hinges on more than just sending money back home for family maintenance.

Investments and savings incentives for the Pakistani diaspora

Mobile money value payment stack. Source: Faisal Khan

Every market opportunity has a finite time. It is time we, the remittance-dependent countries, realise that the time has come for us to look at alternative methods for increasing direct foreign exchange coming in from the Pakistani diaspora.

If intelligent steps (i.e., strategy) are put into play today, we would easily be able to counter this decline and make up for it – much more than we had envisioned.

READ NEXT: Indonesia bitcoin and the unbundling of the remittances market

– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Main image: Crystal Eye Studio,

About the author

Faisal Khan

Faisal Khan specialises in cross-border money transfer and payment systems as a payments consultant and evangelist for digital money. He is a regular contributor to the Around the Coin podcast.

Leave a Comment