How Remittances Can Aid Development

$8.9 billion in remittances by 7 million Pakistani’s living abroad is a figure; a figure that has always played a vital role in the development of economy. ‘Hawala’, which is the unaccounted part, is also estimated to be not less than $5 billion while remittances grew at a CAGR of 15.23 during fiscal 1997-2010.Remittance expectations are as high as $10.5 billion this fiscal year but whether this money can be used for more productive purposes or not stays a question.

In the absence of established capital markets and investment incentives almost 90 percent of the money is disappearing into consumption and land property holdings fuelling inflation as a consequence. Depreciation in rupee and high interest rates being offered in the banking coupled with operational problems in KSE explains why people want to hold their money in fixed-income securities as NSS attracted Rs267 billion in fiscal 2009.

Pakistan’s capital markets were able to get FPI but not the expatriate’s investment reason of which could be the trust deficit or the lack of options. UBL is the only local banking company which is floating investment products for expatriates. Same is the case with companies coming to capital market for IPO where share for overseas Pakistani is kept very low. The need of the hour is to grow specialized products for them which was taken up by government. NS bonds for expatriates holding CDC accounts were floated in the market but the response was halfhearted as it managed to raise only Rs3.5 billion against total of Rs224 billion raised that fiscal year. The need of a functioning capital market is imminent for the purpose valuing investments. Government can formalize development schemes and finance them with money from overseas Pakistani’s but for that they have to come clean.

Pakistan can easily raise investment from abroad by keeping the yield on securities a bit higher than LIBOR which through careful planning can both fulfill the capital requirement for growth and investor satisfaction. Government should benefit from the trust people have in NSS and strengthen capital markets to improve banking practices and capital availability situation. That way everybody would be better off.

Click for the Original article