Foreign remittance service providers in Pakistan are optimistic about the country’s remittance potential, projecting that it can surpass $50 billion per annum. However, to achieve this ambitious goal, it is crucial for authorities to address the prevalence of the black market, which currently dominates approximately 80% of the remittance market. This article explores the impact of illegal remittance channels, such as Hundi and Hawala, and emphasizes the need for intervention to stimulate legal remittance inflows.
The Global Phenomenon of Illegal Remittance Channels
Illegal remittance channels, commonly known as Hundi and Hawala, are not unique to Pakistan but are a global phenomenon. According to a report by the World Bank, an astounding $624 billion is remitted annually worldwide, with approximately 80% of this amount flowing through illegal channels. Pakistan, unfortunately, is not exempt from this issue, as a significant portion of its remittances currently pass through Hundi and Hawala networks.
The Role of Exchange Rate Disparity in Encouraging Illegal Networks
A significant factor contributing to the prevalence of illegal remittance channels in Pakistan is the substantial gap between open market and inter-bank exchange rates. Currently, the difference stands at more than Rs20 per dollar, creating a substantial incentive for individuals to engage in illegal networks. Naqqash Hafiz, the Executive Head of Finance at ACE Money Transfer, highlights this gap as a primary reason for the prominence of illegal remittances.
Current Remittance Outlook and Challenges
In the current fiscal year, it is estimated that remittances to Pakistan will remain around $26 billion to $27 billion. The wide disparity between rupee-dollar exchange rates in the inter-bank and open markets has played a significant role in the decline of annual remittances. In fiscal year 2021-22, Pakistan received $31.2 billion in remittances, a figure expected to increase steadily due to the presence of over 10 million Pakistanis living overseas, with 65% regularly sending money back home.
However, global inflation, coupled with local political and economic conditions, has dampened the pace of remittances. Many expatriates who would traditionally invest their remittances have opted to hold back, awaiting more favorable conditions. Additionally, some have shifted their investment preferences away from assets like real estate, instead choosing foreign currencies that offer approximately 33% profit in a year.
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These trends have resulted in a decline in average remittances coming from the UK, European Union, and Australia. Hafiz notes that, six months ago, an expatriate would typically send between $400 and $450, whereas the average now hovers between $325 and $350. However, due to the sharp increase in dollar rates, recipients in Pakistan still receive the same amount of money.
The Vital Role of Remittances and the Need for Government Intervention
Remittances are a significant pillar supporting Pakistan’s economy, making it imperative to retain and increase these inflows. The Pakistan Remittance Initiative (PRI), which previously aided the flow of remittances, is now losing momentum. Therefore, it is crucial for government authorities to intervene and minimize the exchange rate gap, encouraging individuals to once again send money through legal channels.
Hafiz highlights that when the difference between the open market and inter-bank rates was only around Re1, their company witnessed a 25% increase in business. Furthermore, expatriates tended to send an additional $100 on average. These observations underscore the importance of minimizing the disparity and provide a compelling reason for individuals to opt for legal remittance channels.
In conclusion, unlocking Pakistan’s remittance potential requires a concerted effort to address the dominance of illegal remittance networks. By streamlining processes and offering incentives through the PRI, Pakistan has the potential to increase remittances up to $50 billion annually. However, it is crucial for government authorities to prioritize intervention, minimize exchange rate disparities, and create an environment that encourages individuals to utilize legal remittance channels. Doing so will contribute to the country’s economic growth and stability while ensuring a robust and sustainable flow of remittances.
