Investing remittances more productively
By Mohiuddin Aazim
OVERSEAS Pakistanis continue to send larger amounts of foreign exchange back home.. And this, coupled with greater inflows of foreign direct investment, strengthens the balance of payments. That, in turn, keeps the rupee and foreign exchange reserves stable.
But when larger inflows of foreign exchange sent back home by expatriates are converted into rupees, it raises money supply. That often fuels inflation because so far Pakistan has not been able to fully absorb these inflows in productive sectors. And a number of recipients of the money at home, indulge in a spending spree.
When this money is used in buying of imported goods like mobile phones and plush cars—the end result is worse. It causes imported inflation and widens the trade deficit. So, there is a strong case for Pakistan not only to maximise the inflow of these remittances but also to use them efficiently for production, development, job creation and poverty reduction.
The government is expecting $5.5 billion remittances in the current fiscal year—an increase of about 20 per cent over the last fiscal. But many reckon that Pakistan can attract up to $10-12 billion through remittances every year.
There are some four million Pakistanis living abroad and if, on average, each one of them sends home $2500-$3000 dollars per year, the country should get $10-12 billion..
The government is holding a two-day Overseas Pakistanis Investment Conference at Islamabad next month where top overseas businessmen/ professionals will interact with officials of the federal and provincial governments to identify potential areas for forming trade and joint venture partnerships.
Major topics for the conference include investment policy for small and medium investors; financing for small and medium enterprises ( SMEs) , investment in export-oriented industries, in capital markets and mutual funds.
The government has already identified agri-business sector, IT and telecommunications, housing and commercial properties and health and education sector as potential areas for such investment. If the government and the private sector can engage overseas Pakistanis in big housing/town-building and commercial property development, it would attract additional foreign exchange and keep the balance of payments in shape. On the other, hand it would give a real boost to industrial production.
Construction provides business to 40 odd supporting industries like cement, iron/steel, paints, glass, sanitary and hardware etc. Besides, it creates a lot of jobs directly and indirectly for skilled, semi- skilled and non-skilled workers. Construction industry employs some six per cent of workforce comprising 44 million people.
Once the country absorbs the inflows of remittances in a productive manner, the rise in rupee liquidity due to additional inflows would be less inflationary.
Late last year, the Reserve Bank of India allowed non-resident Indians (NRIs) to repatriate up to $1 million a year from the sale of properties in India. Earlier, they were supposed to keep these proceeds within the country for 10 years.
This is one of the several things India is doing to seek enhanced investment from NRIs. Overseas Pakistanis are already allowed to repatriate the sale proceeds of the real estate in Pakistan to the host countries. “But there is a need to make repatriation of the profit a bit easier,” says Hafeezur Rehman Butt, chairman of the Association of Builders & Developers.
Overseas Pakistanis need prior permission from the State Bank to repatriate the profits earned on the sale of real estate, he said.
Mr Rehman is due to present a detailed paper on the scope of investment in real estate by overseas Pakistanis at the proposed investment conference. He told Dawn that he would raise this issue in the conference.
“In any housing project an average 30-35 per cent investment is made directly or indirectly by overseas Pakistanis,” says Mr. Rehman adding the percentage varies depending upon the nature and the locality of the project.
“Perhaps we need to involve overseas comptriots in development of new exclusive housing schemes in areas like Defence,” says Zubair Shaheen, an official of Defence Clifton Real Estate Agents Association. “We also need to involve groups in construction of commercial plazas across Pakistan,”
Broadly speaking, there is need to devise a comprehensive strategy to maximise the inflow of remittances and to use it efficiently in as many sectors of the economy as possible. The government, the State Bank, the private sector and overseas Pakistanis—all must evaluate who can do what to attain this objective.
The State Bank should find a way to reward the banks that handle more of remittances and are known for taking lesser time than others in collecting the remittances from abroad and releasing them to the beneficiaries. This would encourage other banks to follow suit and ensure larger inflows of such remittances through the official channel.
“Besides, the Central Board of Revenue must allow similar tax exemption on workers’ remittances sent home through foreign exchange companies like it does on remittances routed through banks,” says an official of Exchange Companies Association of Pakistan. This would help these companies handle more of these remittances, thus curbing transfer of foreign exchange through hundi/hawala.
Association officials estimate that exchange companies handle 10 per cent of the total amount of remittances. They say the percentage would rise once the CBR provides incentives.
Meanwhile, the government may add a new product to National Saving Scheme exclusively designed for the beneficiaries of remittances and offer a better rate of return on it. This would discourage consumer spending. And any sizable investment in this instrument would also reduce the government’s borrowing from the central bank or from the banking system—both of which are regarded as more inflationary than its borrowing from the non-bank sources.
One major issue in ensuring a sustained high growth in remittances is simultaneous export of manpower. In 2006 more than 183,000 people proceeded for overseas jobs. The number shows a handsome increase of 41,000 or 29 per cent over 2005 when 142,000 Pakistanis had left home to get a job abroad. The number must grow on sustainable basis if a better share in the global job market is to be secured.
The country, however, must ensure to export the right mix of manpower. The government may draw up an incentive plan to retain highly skilled people having expertise in the areas where finding their substitutes is difficult. A large number of semi-skilled and non-skilled people need to be trained in the disciplines where there is a demand in global job market. Then, the export of such manpower must be given top priority.
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What do you guys think?
1. Where is money being spent you guys send back home?
2. Is it contributing towards productivity or adding inflations?
3. What would be the best use your money back at home and how would you plan it?