Making remittances more productive

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Remittances coming from skilled and semi-skilled workers are generally utilised for setting up micro and home based businesses, which have boosted the informal sector of the economy but still remains inaccessible to the tax net. However, these small businesses play an important role in facilitating growth of large scale industries.

According to a World Bank survey, remittances have contributed 5.48 per cent of Pakistan’s GDP, their inflows are stable and depicted incremental trend over the last decade. These foreign exchange inflows facilitate economic development both directly and indirectly, and are an indirect source of revenue as these funds are spent on both imported and indigenously produced goods and services, subject to sales tax, import duty and value added tax.

In a scenario of very low tax- to -GDP ratio, increasing remittances also provide some relief to the government from mounting current account and fiscal deficits. The incremental trend in remittances has facilitated repayment of external loans, growth of foreign exchange reserves and financed outflow of dividend income/profits by foreign portfolio investors/multinational companies. In a way, according to World Bank and IMF, stable remittance inflows are a counter cyclical source of external financing.

In view of the complexity of the issue relating to assessment of effectiveness of remittances for overall economic growth, an IMF study titled as ‘Macro economic consequences of remittances’ suggests that the ‘Total Factors of Production (TFP) /productivity needs to be examined both, in totality and individually. Total factors productivity in this context refers to growth outcomes of enhanced use of technology and finance rather than enhanced utilisation of traditional factors of production like labour and capital.

The inflow of remittances enables countries to make use of latest technology through youth of migrant’s families acquiring higher education and technical skills and also helps government’s capacity building programmes to acquire and make use of latest technology to speed up economic development.

Secondly, an effective financial system, which ensures maximum outreach of financial services to even remotest places of the country, facilitates rapid economic growth. Advancement in use of e-banking in majority of developing countries particularly of South Asian and African countries has greatly boosted up economic growth rate in these countries.

Total Factors Productivity (TFP) is boosted up through migrants’ remittances due to positive impact on exchange rate. Generally it results in appreciation of real exchange rate, which, on the other hand, makes remittances receiving countries’ exports less competitive. But, at the same time, industries producing exportable goods in fact may transfer technological know-how to other local companies to enable them to boost production and climb up value chains. Thus adverse effect of reduced export volume is mitigated by rise in demand and supply of domestically produced goods.

Various policy papers of World Bank on use of remittances by migrants’ families have pointed out the need of extensive study by recipient country to find out how families use the funds and what are the factors preventing remittances going towards capital formation needed for economic growth and fast development of social sector through diversion of funds for promoting education and health care.

Countries receiving bulk of migrants’ remittances need to ensure that a major part of funds is invested in social institutions and public infrastructure. In this context countries need to strengthen and reform banking system to ensure availability of upgraded and effective financial services particularly payment system and promoting financial literacy among the general public.

Further incentives like the floating of credit schemes for families receiving remittances against expected funds as collateral need to be put in place and such loans be offered at a subsidised rate.

Accordingly, developing countries need to find ways and means to promote remittances and increase their beneficial and growth-oriented use while at the same time eliminating any counterproductive side effects.

For families of migrants, remittances are the main source of increasing their disposable income and are generally utilised for consumption purposes, ranging from necessities of life to adopting luxurious living through spending on palatial houses and expensive cars etc. However, the overall impact of remittances at family level has resulted in substantial rise in spending on education and health care, which is a prerequisite for an effective human capital development for the nation as a whole.

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