Pakistan’s economy needs new direction

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The article is aimed at addressing serious economic problems of balance of payment deficit and depleting foreign exchange reserves by buying foreign exchange from overseas Pakistani workers rather than accumulating foreign loans on tough terms. Cost of this purchase is far less than the interest paid on foreign loans and involves no repayment of principal.


Overseas workers remittance in real terms is almost equal to entire exports of Pakistan. If re-routed from ‘hawala’ to banking channels, it has the potential to convert the balance of payments to surplus, increase our forex reserves, and avoid taking further foreign loans and payoff Pakistan’s foreign debt in real terms through our own sources.  

According to the bureau of emigration and overseas employment there are approximately 4.5 million registered overseas workers. This data does not include un-registered workers and other Pakistanis living abroad and sending remittances regularly. As per very conservative estimate, the unregistered overseas Pakistanis who are regularly remitting funds from abroad can safely assessed as 500,000. Therefore, the total number of overseas Pakistanis remitting regular funds can safely be put to five million. This includes labour and professionals serving in various sectors in many areas throughout the world, mainly Middle East, Far East, Europe, and the USA. The official remittances sent through banking channels have reached approximately USD 6.5 billion annually. There is no data available to ascertain the amount of remittances through hawala channels. It is estimated that if all the remittances come through proper/ legal channels, the total official figure will multiply into a sizeable amount.

This does not include funds remitted by oversees Pakistanis for investments in Pakistan, but rather simple household related remittances for families based in Pakistan. The total volume is sizable enough to solve Pakistan’s foreign exchange related problems.


What is hawala business?

It is important to view various aspects of hawala business. When overseas Pakistanis use banking channels for remittances, the foreign exchange actually adds up to forex reserves of the country. Instead, when overseas Pakistanis provides foreign currency to the foreign based office of a hawala business, the foreign currency remains in that particular country, mostly in the form of bank accounts. The corresponding office of the same hawala business delivers in Pakistan, the equivalent Pak rupees to the family of the remitter on hawala exchange rate.

Another aspect is the outward remittances for under invoiced import trade which are also routed the same way. Other unofficial outward remittances by individuals and businesses are routed the same way through hawala channel.


Overseas Pakistanis prefer hawala business over regular banking channels due to following factors:

(1) Better rate: the exchange rate offered by hawala businesses is normally better than the inter bank exchange rate. Hence, it means more money for the family back home.

(2) Convenience for the family members receiving the money. Family members based in Pakistan can receive this money from a hawala office located conveniently close to their homes or businesses. In some areas funds are delivered to homes. The entire procedure involves minimum documentation and identification process.

(3) Quick transaction: The turn around time of the transaction is minimum. Usually, the payment is made the same day.


Why banks could not effectively compete with hawala?

It is important to understand, why banks have not geared up to tap this huge business.

(a) Less cost and documentation involved in setting up the hawala offices abroad as compared to opening overseas bank branches for Pakistani banks. Therefore, it is easy for hawala businesses to have an office and several collection points in every important city abroad. Few Pakistani banks have international branches, the ones that do operate with foreign branch network, their number is far less to compete and provide equally convenient services to the wide spread overseas Pakistanis community.

(b) It normally takes more time and cost to make international remittances through banking channels than hawala channels.

(c) With low administrative costs of managing the overseas offices hawala businesses can afford to work on fine margins and offer better exchange rates. Furthermore, the unofficial outward remitters are willing to pay more than the official exchange rates to save customs duty on imports, which provides the hawala business with adequate margins to buy the foreign currency from overseas workers at higher rates.  

(d) Overall profit and deposit potential for banks is far less than the costs and services which are required to effectively tap this business.


Proposed strategy to re-route inward workers remittances from hawala to banking channels:

It is therefore, very crucial to develop a comprehensive strategy involving all concerned players from the government, State bank of Pakistan, commercial banks and overseas Pakistanis foundations to shift the entire hawala based remittances to banking channels.


What can banks do?

(i) Banks can improve the time and cost efficiency of remittance transactions. Pakistani and international banks with branches overseas can develop international on-line facilities, especially for in-ward remittances.

(ii) Banks can expand their overseas network. Nevertheless, setting up overseas branches is a very costly undertaking. Banks can therefore, open exchange companies or make arrangements with reputable international exchange companies in various countries as cost efficient option.

(iii) Banks shall expand their branch network in rural areas of Pakistan. Smart rural branches (on a very small scale) can be opened to keep such branches cost effective.


What can the government do?      

The government can offer incentives to remitters and banks. The government is the most concerned of all players, therefore, it is but pertinent that government shall take major steps in the direction of achieving this goal of regularizing the remittances channels through official channels. For instance:


Rate benefit to remitter

To make banking channel an attractive mode of remittance for overseas workers, government should offer let’s say rupee1 per US$ as rate benefit for all remittances by overseas workers as an incentive. This facility shall be provided to remitters on the basis of Overseas Pakistanis CNIC only. NADRA can keep record of remittances made by overseas Pakistanis.


Commission and reward

The government should offer 1 percent as commission to banks for routing workers remittances. This amount shall encourage banks to undertake international arrangements with exchange companies and banks operating in countries of major source of remittances. Some special (financial) reward to encourage highest remitter this would help remitters to official remittances.   


Total cost to government and benefits

Total cost to the government at present exchange rate shall amount to 2.25 percent in the form of incentives to banks and remitters. This shall be the cost of buying US$ from overseas workers. It still will be far less than interest paid on the IMF loans of around 4 percent repayable in US$. In addition, the obvious advantage is that there is no repayment of principal amount. Hence, no exchange rate risk involved at the time of repayment as well.

This cost will be almost half the amount of interest to be paid for the same amount of loans from IMF. The exiting practice of meeting the BoP deficit through foreign borrowings on yearly basis is causing foreign debt to increase.

The overall effect of growth and profitability of the local banks will lead to strengthening of our financial sector, increase in employment and improvement in revenue generation for national exchequer. This shall also help in curbing smuggling and under-invoicing, as cost of un-official outward remittances through hawala will go up.  

These steps should enable us, to convert our balance of payments to surplus, increase our forex reserves, avoid additional foreign loans and reduce our foreign debt in real terms though repayment from our own sources.



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