Remittances – History and Importance

Reading Time: 4 minutes Remittances are highly important to a lot of developing and third-world countries in the modern age. These provide an economic lifeline for those back home, provide an emergency fund for when disasters strike and local jobs are at risk, and serve as a sort of buffer in any kind of bad scenario back home. 

Reading Time: 4 minutes

One aspect of the current political situation is the looming threat of overseas Pakistanis withholding Remittances. Though it makes little sense for people to stop sending money back to their families, the underlying truth is that our country is significantly dependent on remittances for our economy. It is not just a simple thing of money being sent to someone from their family members abroad, there are other aspects of this phenomenon that effect the country as a whole. 

Though the literal meaning of a remittance is a payment that is sent back. Any kind of bill or invoice being fulfilled can be referred to as a remittance. This because the word comes from “remit” which means to pay back.

However, the popular meaning of the term is actually money being sent by someone working abroad back to their home country. Remittances are highly important to a lot of developing and third-world countries in the modern age. These provide an economic lifeline for those back home, provide an emergency fund for when disasters strike and local jobs are at risk, and serve as a sort of buffer in any kind of bad scenario back home. 

Importance of Remittances

Remittances often exceed the monetary relief offered by official development assistance or foreign aid. And it makes sense too. No matter how determined or charitable a foreign organization is, family members or people from the same neighborhoods, or country of origin are more likely to feel the pain of the local populace and send more monetary assistance for disaster relief back home. The late 1990s have seen development aid being exceeded by remittances for a majority of these kinds of developing countries like Pakistan and other South Asian countries in the vicinity. 

Apart from disaster relief, Remittances have played a pivotal role in the economies of various different developing countries around the globe. Mexico gets more money in remittances than from oil sales. Our own country Pakistan. The third quarter of 2021 alone accounted for more than 8035 USD Million. The Global amount of remittances being sent reached 702 Billion Dollars in 2020. 

Remittances are also the best kind of investment for raising quality of life and raising the poorest parts of the population out of poverty. In most cases the poorest of the population tends to leave their countries to brave the loneliness and foreign-ness of a country alien to themselves to work hard for their families. These families then spend money on themselves, to invest in businesses, invest in their children’s education, or spread it around in the impoverished community members around them. This then serves as an organic way for raising families out of poverty and breaking the cycle in the worst kinds of living conditions. 

Remittances in Pakistan

It is statistically proven that remittances for decades now have had a positive effect on the economy. Money coming in from migrant workers abroad has grown the economy in a very significant manner. 

For years, Khyber Pakhtunkhwa and AJK have had higher rates of dependence on remittances than average. For many households, remittances are the major, if not the primary source of income. When the 2008 earthquake hit, remittances were a large part of why rebuilding occurred faster than expected in the country’s northern regions. Thus it was established early that the remittances can play an important role as a buffer in these kinds of situations moving forward. These funds not only help the families directly receiving the money, but have a multiplier effect for the whole community. This is due to local expenditure and sharing of funds in the community and uplift the community as a whole. 

Remittances in times of COVID

As a result of the global lockdown starting in 2020, the World Bank predicted a whopping 20% drop in remittances worldwide. Remittances at that time had grown in importance across developing countries from decades past with communication increase and rising ease in travel. Around 2020, for about 70 counties, remittances accounted for almost 5% of their GDP. When the lockdowns hit and joblessness was on the rise on a global stage, along with a clamp down on air-travel, there was an increase in fear for the undoing of progress made in these countries in poverty reduction, food security, and education through remittances. Pakistan alone was at the time highly dependent on remittances, with 6% of the country’s GDP being accounted for by money sent home by migrant workers. 

However, surprisingly, a year later, these predictions were proven wrong. Even when other countries experienced a sharp decline in remittances during the pandemic, Pakistan seems to have bucked the trend with an increase instead. There was a 25% increase in remittances during the first seven months alone. Bangladesh was the other country to do likewise, with a 38% increase in remittances during that same time period. 

Remittances have served to prop up the country’s foreign currency reserve and helped mitigate the balance of interest as well.

What happens when Remittances stop?

Though the first impact of declining remittances will impact the families of the workers, there is a larger scope of impact too. The reason why the government has been encouraging remittances and asking for investment in the country’s projects is that remittances have proven pivotal in the economic growth of the country outside of just poverty alleviation. Wealthy workers abroad have bought land and businesses in the country and provided a means for infrastructure development and local growth that has not been seen through any other means in the country. 

Thus it is clear that it is in the favor of the whole country and government rather than just the families of those working abroad. The threat of stopping remittances, at least through official channels, is bad news for any sitting government. Whether or not the threat is all bark and no bite is something that has to still be determined, but it is clear that no government wants the popular and economic flak that comes from a withholding of the cash by foreign Pakistanis. 

Saad Rashid

This is Saad Rashid, Finance major, runner, swimmer, history nerd, and a fan of FC Barcelona. With interests ranging from Psychedelics in History to sports science, there is nothing that he will not get stuck into.

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