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Proposals to promote remittances inflows through formal channels
By: Dr. Sajid Amin Javed
Amid the most recent balance of payment problems Pakistan has knocked on IMF’s door for a support program once again. Remittances seem to be another source which can help increase the supply of dollars. Pakistan witnessed a twenty fold growth in remittances inflows over last two decades and total inflows in FY2017-18 stood around US$ 20 bn compared to 1 bn in 2000. Nonetheless, an equal amount is estimated to be flowing through informal channels- like friends, relatives and other non-recorded sources known as hundi/hawala.
Evidence from Pakistan shows that size of unrecorded remittances, as ratio to formal flows, ranged between 50 to 100pc in 2012-13. Pakistan’s range for potential remittances pool, based on $20bn, therefore can be somewhere between 30bn and 40bn, suggesting 10bn to 20bn dollars to be tapped. However, adjusting for shift towards formal channels in last 5-7 years, one can expect approximately 10 billion dollars untapped. This is roughly 2 to 3 billion higher than size of foreign reserves with state bank of Pakistan in Nov 2018. Unfortunately, no recent study is available to assess the untapped pool.
The incumbent government has approved to take steps to promote remittances through legal channels. A well designed strategy to improve formal remittances must be built around some key measures. Firstly, engage migrants and diaspora to fill the trust gap. They must be made a part of policy design, particularly investment and development policy. This shall help reduce the trust gap. In addition, present public sector arrangements through OPF and other organizations, civil society organizations of home and destination country, honorary business councilors of destination countries must be involved to build effective and targeted lobbying and advocacy groups in this regard. Furthermore, contrary to centralized federal level initiatives, local governments must be involved for local sub-national level engagement.
Second, while SBP’s Pakistan Remittances Initiative [PRI] has done relatively well on minimizing transaction cost, timely delivery of remittances and mobile banking based financial inclusion, the difference in dollar rate remains a bigger challenge where banking sector on account of overvalued rupee offers lower rate of dollar compared to informal transfers. This discourages use of formal channels. The issue remains the least discussed, as it has been presumed to have no solution as SBP cannot allow registered private sector to offer a rate other than the official.
In this regard, we can look into some possible arrangements to lessen the control on private money exchange market. For example, SBP, through commercial and private banks, can involve private money exchange market. The bank and private money exchangers may agree on a range of dollar rate narrowing the gap offered by hawala brokers. This offer shall be exclusively available to remitters. Non-remitters must not be allowed. Additionally, remitters can be offered non-monetary incentives based on size of remittances. For instance, remitters sending remittances beyond certain limit can be allowed use VIP lounge. These limits can be agreed upon through a well-designed study.
Third, a tri-party team-the commercial banks, private money exchangers and the mobile technology apps like Easypaisa- can team up to increase coverage. These arrangements can be delegated to local level where local banks, microcredit financial institutions MFIs and cooperative societies engage with final money transfers organizations i.e. mobile company. Local government representative must be part of the arrangements to add credibility to acceptability of the system. The active involvement of mobile money not only has helped digitization of informal transfers but also cut the remittances cost by 50pc, confirms the research. For efficient disbursement, Pakistan can introduce services like Philippines’s, Mobile Commerce (MCom) through SMART Padala and global G-Cash.
Fourth, Pakistan needs to make targeted policies to design incentives. Remitters from North America are different from those in gulf region. Both the groups have different contractual arrangements, skills level and motives to remit. Migrants in gulf countries are mainly involved in low skilled elementary occupations and constitute poverty driven migration. This group primarily remits for day to day household consumption and requires immediate relieving incentives including fast transfer at lower cost and higher dollar rate. The evidence suggests that low skilled migrants are more likely to remit through informal channels. Furthermore, the incentive structure for diaspora may be totally different from migrants for some fixed period. Present policies assume all the remitters as a homogenous group and design similar incentive structure for each remitter.
Fifth, private sector-non-bank- must be allowed to open trade houses/outlets in destination countries. Presently, Pakistan is only focused on opening branches of commercial banks from private and public sector. Going beyond the bank-only approach, new institutional arrangements are needed. Remittance transfer services such as Western Union, Eurogiro and Moneygram need to be involved for cross-border transfers. To promote the competition, international organization providing remittances facility must be allowed to operate in Pakistan under control of SBP. The competition will lower the cost of remitting which directly translates into income of the recipient. Concurrence can be made with foreign banks and Western Union to smooth the exchange of remittances.
Pakistan’s range for potential remittances pool, based on $20bn, therefore can be somewhere in between 30bn and 40bn suggesting 10bn to 20bn dollars to be tapped. However adjusting for shift towards formal channels in last 5-7 years, one can expect approximately 10 billion dollars untapped
Sixth, Pakistani banking sector seems to be more focused on remittances disbursement ignoring capturing of remittances. Opening bank branches in some countries may not suffice. Pakistani banks must enter into operational arrangements with banks and other financial institutions of destination country to increase remittances collection. Private sector from home and destination country need to be involved, particularly to reach small remitters who are more vulnerable to informal channels.
Learning from Sri Lanka, Pakistan should introduce SMART Cards to connect remittance receivers and their bankers. Also, Government must approach international corporations and coordination to ensure that banks and formal financial institutions in the country of origin facilitate cross-border transfers of remittances. Efforts need to be put in place to avoid placing prohibitive rules and regulations and pricing on the remitter in country of origin. This is important at the point of capturing.
Seventh, Pakistan needs to work on macroeconomic reforms. SBP can learn from the central bank of Bangladesh which lost control of foreign money exchanges by enabling approved merchants to execute dollars with the Bangladesh Bank. In 2002, the Ministry of Finance changed the swapping scale strategy, influencing it to free coasting and enabling the market to choose the conversion standard, which has helped control hundi exchanges essentially. Pakistan needs to learn and plan. A hurried unplanned attempt based on the idea of pushing the remitters forcefully to use legal channels may not help. A better mix of incentives is also required.

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The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.