Money Matters

The State Bank of Pakistan (SBP) recently increased the financial incentives for banks, microfinance banks, and exchange companies to attract additional home remittances to the country. With reference to the EPD Circular No. 8 of 2021, dated July 2, 2021, the SBP has increased the performance-based cash incentive up to Rs. 3 per USD on 15% growth in home remittances during this fiscal year under these incentives. Besides, to encourage domestic financial institutions to boost their marketing efforts to mobilize home remittances by formal channel, reimbursement of TT charge against $100 transaction has been increased to 30 Saudi Riyal (SAR).

Before the decision, banks were getting SAR 10 against home remittance transactions equivalent to more than $100 but less than $ 200. Besides, SAR 20 was also paid as reimbursement of TT charges against the home remittance transaction equivalent to and above $200.

The State Bank of Pakistan has also announced enhancing the cash incentive for increasing home remittances during the current fiscal year. This strategic move by the SBP will help to tackle the declining trend in home remittances. However, this measure depends upon various factors to produce effective results.

If the stakeholders, such as banks and exchange companies’ sense that the incentives are significant and attractive, they will likely promote and facilitate remittance flows more actively. Global economic conditions are also crucial in determining the remittances inflow in host and recipient countries. Suppose the economic conditions are feasible and factors such as employment prospects, economic growth, and currency exchange rates in countries remain stable. In that case, the remittance inflow is expected to tend to increase.

After COVID-19, remittance flows were affected worldwide due to economic disruption, increase in unemployment, and travel restrictions. Remittances inflows in FY 2022 were $2,607 million, which decreased to $2,278 million in FY 2023. The top three countries where Pakistan received remittance inflow include the US, the UK, and Saudi Arabia. The decreasing trend in remittance inflow occurred for various reasons, including the dollar rate and the currency markets. Remittances from the Middle East decreased considerably when Pakistani workers living in Saudi Arabia and the UAE recently sent fewer remittances.

People use informal channels to avoid additional charges, and large traders and commercial importers also use these channels to purchase currency from non-resident Pakistanis at rates higher than the interbank to pay for their imports.

The Pakistan government must encourage and promote trust in the banking and exchange system security, transparency, and reliability to attract individuals to use formal channels.

Government policies are essential as effective rules and regulations help attract remittance inflows. Favorable public sector policies, ease of transferring remittances, and supporting regulations are helpful in this regard. An essential factor is advancements in financial technology and digital platforms. The availability and adoption of digital technology tools help lower transaction costs and ease of use.

The government must encourage and promote trust in the banking and exchange system security, transparency, and reliability to attract individuals to use formal channels. The competitiveness of banking and exchange companies also plays a vital part in attracting remittance inflows. The incentives for these stakeholders can help to improve their services, which in turn will promote the remittance inflows.

Enhancing incentives for banks and exchange companies may not be the only possible solution. The government should ensure that the global economic conditions, technology, and consumer behavior towards remittance transfers are considered while devising policy measures. Besides, there is a need to ensure that the difference between interbank and open market rates is not too vast, so people prefer to use informal channels to send remittances in Pakistan.

A robust monitoring and evaluation mechanism to examine the impact of policy interventions on remittance inflows is required, allowing for timely adjustments and improvements. Besides, skill development programs and initiatives help develop skills among the workforce. This will help them to be able to seek employment prospects abroad, which in turn will help in increasing the remittance inflows.