History Before independence on 14 August 1947, during British colonial regime the Reserve Bank of India was the

central bank for both India and Pakistan. On 30 December 1948 the British Government's commission distributed the Reserve Bank of India's reserves between Pakistan and India -30 percent (750 M gold) for Pakistan and 70 percent for India. The losses incurred in the transition to independence were taken from Pakistan's share (a total of 230 million). In May, 1948 Muhammad Ali Jinnah (Founder of Pakistan) took steps to establish the State Bank of Pakistan immediately. These were implemented in June 1948, and the State Bank of Pakistan commenced operation on July 1, 1948 Muhammad Ali Jinnah, the founder of Pakistan, making a speech at the opening of the State Bank of Pakistan. Under the State Bank of Pakistan Order 1948, the state bank of Pakistan was charged with the duty to "regulate the issue of bank notes and keeping of reserves with a view to securing monetary stability in Pakistan and generally to operate the currency and credit system of the country to its advantage". A large section of the state bank's duties were widened when the State Bank of Pakistan Act 1956 was introduced. It required the state bank to "regulate the monetary and credit system of Pakistan and to foster its growth in the best national interest with a view to securing monetary stability and fuller utilization of the countrys productive resources". In February 1994, the State Bank was given full autonomy, during the financial sector reforms. On January 21, 1997, this autonomy was further strengthened when the government issued three Amendment Ordinances (which were approved by the Parliament in May 1997). Those included were the State Bank of Pakistan Act, 1956, Banking Companies Ordinance, 1962 and Banks Nationalization Act,

1974. These changes gave full and exclusive authority to the State Bank to regulate the banking sector, to conduct an independent monetary policy and to set limit on government borrowings from the State Bank of Pakistan. The amendments to the Banks Nationalization Act brought the end of the Pakistan Banking Council (an institution established to look after the affairs of NCBs) and allowed the jobs of the council to be appointed to the Chief Executives, Boards of the Nationalized Commercial Banks (NCBs) and Development Finance Institutions (DFIs). The State Bank having a role in their appointment and removal. The amendments also increased the autonomy and accountability of the chief executives, the Boards of Directors of banks and DFIs. The State Bank of Pakistan also performs both the traditional and developmental functions to achieve macroeconomic goals. The traditional functions, may be classified into two groups: 1. The primary functions including issue of notes, regulation and supervision of the financial system, bankers bank, lender of the last resort, banker to Government, and conduct of monetary policy. 2. The secondary functions including the agency functions like management of public debt, management of foreign exchange, etc., and other functions like advising the government on policy matters and maintaining close relationships with international financial institutions. The non-traditional or promotional functions, performed by the State Bank include development of financial framework, institutionalization of savings and investment, provision of training facilities to bankers, and provision of credit to priority sectors. The State Bank also has been playing an active part in the process of islamisation of the banking system.

Vision Our vision is to develop the SBP into a strong and dynamic institution, equipped with an efficient and professional human resource base , having the requisite technology and fully capable of providing quality services to stakeholders, while complementing the Government of Pakistan in achieving its objectives. Mission To provide reliable banking services to Government, financial institution, public and to act as an operational arm of Government of Pakistan. Core function of SBP State Bank of Pakistan is the Central Bank of the country. While its constitution, as originally laid down in the State Bank of Pakistan Order 1948, remained basically unchanged until 1st January 1974 when the Bank was nationalised, the scope of its functions was considerably enlarged. The State Bank of Pakistan Act 1956, with subsequent amendments, forms the basis of its operations today. Under the State Bank of Pakistan Order 1948, the Bank was charged with the duty to "regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in Pakistan and generally to operate the currency and credit system of the country to its advantage". The scope of the Banks operations was considerably widened in the State Bank of Pakistan Act 1956, which required the Bank to "regulate the monetary and credit system of Pakistan and to foster its growth in the best national interest with a view to securing monetary stability and fuller utilisation of the countrys productive resources". Under financial sector reforms, the State Bank of Pakistan was granted autonomy in February 1994. On 21st January, 1997, this autonomy was further strengthened by issuing three Amendment Ordinances (which were approved by the Parliament in May, 1997) namely, State Bank of Pakistan Act, 1956, Banking Companies Ordinance, 1962 and Banks Nationalisation Act, 1974. The changes in the State Bank Act gave full and exclusive authority to the State Bank to regulate the banking sector, to conduct an independent monetary policy and to

set limit on government borrowings from the State Bank of Pakistan. The amendments in Banks Nationalisation Act abolished the Pakistan Banking Council (an institution established to look after the affairs of NCBs) and institutionalised the process of appointment of the Chief Executives and Boards of the nationalised commercial banks (NCBs) and development finance institutions (DFIs), with the Sate Bank having a role in their appointment and removal. The amendments also increased the autonomy and accountability of the Chief Executives and the Boards of Directors of banks and DFIs. Like a Central Bank in any developing country, State Bank of Pakistan performs both the traditional and developmental functions to achieve macro-economic goals. The traditional functions, which are generally performed by central banks almost all over the world, may be classified into two groups: (a) the primary functions including issue of notes, regulation and supervision of the financial system, bankers bank, lender of the last resort, banker to Government, and conduct of monetary policy, and (b) the secondary functions including the agency functions like management of public debt, management of foreign exchange, etc., and other functions like advising the government on policy matters and maintaining close relationships with international financial institutions. The nontraditional or promotional functions, performed by the State Bank include development of financial framework, institutionalisation of savings and investment, provision of training facilities to bankers, and provision of credit to priority sectors. The State Bank also has been playing an active part in the process of islamization of the banking system. The main functions and responsibilities of the State Bank can be broadly categorised as under. Regulation of liquidity Being the Central Bank of the country, State Bank of Pakistan has been entrusted with the responsibility to formulate and conduct monetary and credit policy in a manner consistent with the Governments targets for growth and inflation and the recommendations of the Monetary and Fiscal Policies Co-

ordination Board with respect to macro-economic policy objectives. The basic objective underlying its functions is two-fold i.e. the maintenance of monetary stability, thereby leading towards the stability in the domestic prices, as well as the promotion of economic growth. To regulate the volume and the direction of flow of credit to different uses and sectors, the Bank makes use of both direct and indirect instruments of monetary management. Until recently, the monetary and credit scenario was characterised by acute segmentation of credit markets with all the attendant distortions. Pakistan embarked upon a program of financial sector reforms in the late 1980s. A number of fundamental changes have since been made in the conduct of monetary management which essentially marked a departure from administrative controls and quantitative restrictions to market-based monetary management. A reserve money management programme has been developed. In terms of the programme, the intermediate target of M2 would be achieved by observing the desired path of reserve money - the operating target. While use in now being made of such indirect instruments of control as cash reserve ratio and liquidity ratio, the programs reliance is mainly on open market operations. Ensuring the soundness of financial system Regulation and supervision One of the fundamental responsibilities of the State Bank is regulation and supervision of the financial system to ensure its soundness and stability as well as to protect the interests of depositors. The rapid advancement in information technology, together with growing complexities of modern banking operations, has made the supervisory role more difficult and challenging. The institutional complexity is increasing, technical sophistication is improving and technical base of banking activities is expanding. All this requires the State Bank for endeavoring hard to keep pace with the fast-changing financial landscape of the country. Accordingly, the out dated inspection techniques have been replaced

with the new ones to have better inspection and supervision of the financial institutions. The banking activities are now being monitored through a system of off-site surveillance and on-site inspection and supervision. Off-site surveillance is conducted by the State Bank through regular checking of various returns regularly received from the different banks. On other hand, on-site inspection is undertaken by the State Bank in the premises of the concerned banks when required. To deepen and broaden financial markets as also to diversify the sources of credit, a number of non-bank financial institutions (NBFIs) were allowed to increase substantially. The State Bank has also been charged with the responsibilities of regulating and supervising of such institutions. To regulate and supervise the activities of these institutions, a new Department namely, NBFIs Regulation and Supervision Department was set up. Moreover, in order to safeguard the interest of ultimate users of the financial services, and to ensure the viability of institutions providing these services, the State Bank has issued a comprehensive set of Prudential Regulations (for commercial banks) and Rules of Business (for NBFIs). The "Prudential Regulations" for banks, besides providing for credit and risk exposure limits, prescribe guide lines relating to classification of short-term and long-term loan facilities, set criteria for management, prohibit criminal use of banking channels for the purpose of money laundering and other unlawful activities, lay down rules for the payment of dividends, direct banks to refrain from window dressing and prohibit them to extend fresh laon to defaulters of old loans. The existing format of balance sheet and profit-and-loss account has been changed to conform to international standards, ensuring adequate transparency of operations. Revised capital requirements, envisaging minimum paid up capital of Rs.500 million have been enforced. Effective December,1997, every bank was required to maintain capital and unencumbered general reserves equivalent to 8 per cent of its risk weighted assets.

The "Rules of Business" for NBFIs became effective since the day NBFIs came under State Banks jurisdiction. As from January, 1997, modarbas and leasing companies, which are also specialized type of NBFIs, are being regulated/supervised by the Securities and Exchange Commission (SECP), rather than the State Bank of Pakistan. Exchange rate management and balance of payment One of the major responsibilities of the State Bank is the maintenance of external value of the currency. In this regard, the Bank is required, among other measures taken by it, to regulate foreign exchange reserves of the country in line with the stipulations of the Foreign Exchange Act 1947. As an agent to the Government, the Bank has been authorised to purchase and sale gold, silver or approved foreign exchange and transactions of Special Drawing Rights with the International Monetary Fund under sub-sections 13(a) and 13(f) of Section 17 of the State Bank of Pakistan Act, 1956. The Bank is responsible to keep the exchange rate of the rupee at an appropriate level and prevent it from wide fluctuations in order to maintain competitiveness of our exports and maintain stability in the foreign exchange market. To achieve the objective, various exchange policies have been adopted from time to time keeping in view the prevailing circumstances. Pak-rupee remained linked to Pound Sterling till September, 1971 and subsequently to U.S. Dollar. However, it was decided to adopt the managed floating exchange rate system w.e.f. January 8, 1982 under which the value of the rupee was determined on daily basis, with reference to a basket of currencies of Pakistans major trading partners and competitors. Adjustments were made in its value as and when the circumstances so warranted. During the course of time, an important development took place when Pakistan accepted obligations of Article-VIII, Section 2, 3 and 4 of the IMF Articles of Agreement, thereby making the Pak-rupee convertible for current international transactions with effect from July 1, 1994.

After nuclear detonation by Pakistan in 1998, a two-tier exchange rate system was introduced w.e.f. 22nd July 1998, with a view to reduce the pressure on official reserves and prevent the economy to some extent from adverse implications of sanctions imposed on Pakistan. However, effective 19th May 1999, the exchange rate has been unified, with the introduction of market-based floating exchange rate system, under which the exchange rate is determined by the demand and supply positions in the foreign exchange market. The surrender requirement of foreign exchange receipts on account of exports and services, previously required to be made to State Bank through authorized dealers, has now been done away with and the commercial banks and other authorised dealers have been made free to hold and undertake transaction in foreign currencies. As the custodian of countrys external reserves, the State Bank is also responsible for the management of the foreign exchange reserves. The task is being performed by an Investment Committee which, after taking into consideration the overall level of reserves, maturities and payment obligations, takes decision to make investment of surplus funds in such a manner that ensures liquidity of funds as well as maximises the earnings. These reserves are also being used for intervention in the foreign exchange market. For this purpose, a Foreign Exchange Dealing Room has been set up at the Central Directorate of State Bank of Pakistan and services of a Forex Expert have been acquired.

Development role of state bank The responsibility of a Central Bank in a developing country goes well beyond the regulatory duties of managing the monetary policy in order to achieve the macro-economic goals. This role covers not only the development of important components of monetary and capital markets but also to assist the process of economic growth and promote the fuller utilisation of a countrys resources. Ever since its establishment, the State Bank of Pakistan, besides discharging its traditional functions of regulating money and credit, has played an active developmental role to promote the realisation of macro-economic goals. The explicit recognition of the promotional role of the Central Bank evidently stems from a desire to re-orientate all policies towards the goal of rapid economic growth. Accordingly, the orthodox central banking functions have been combined by the State Bank with a well-recognised developmental role. The scope of Banks operations has been widened considerably by including the economic growth objective in its statute under the State Bank of Pakistan Act 1956. The Banks participation in the development process has been in the form of rehabilitation of banking system in Pakistan, development of new financial institutions and debt instruments in order to promote financial intermediation, establishment of Development Financial Institutions (DFIs), directing the use of credit according to selected development priorities, providing subsidised credit, and development of the capital market.

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Introduction to Remittances International migration can generate substantial welfare gains for migrants, as well as countries of origin and destination, and reduce poverty. The benefits to origin countries are realized mostly through remittances. Remittances are an important source of external finance for developing countries, with remittances larger than official development assistance, foreign direct investment, and portfolio flows in many countries. Remittances are person-to-person flows, well targeted to the needs of the recipients, who are often poor, and do not typically suffer from the governance problems that may be associated with official aid flows. Fundamentally, remittances are personal flows from migrants to their friends and families. They should not be taxed or directed to specific development uses. Instead, the development community should make remittance services cheaper and more convenient, and support the development of instruments for these remittances to be leveraged for improving financial access of migrants, their beneficiaries, and the financial intermediaries in the origin countries. The benefits of remittances for development are, however, conditional upon the broader economic and political context. Impact of remittances on the economy Remittances are an important source of external finance for developing countries Recorded remittances sent home by migrants from developing countries reached $240 billion in 2007, up from $221 billion in 2006 and more than double the level in 2002. The true size of remittances, including unrecorded flows through formal and informal channels, is believed to be even larger. Remittances were more than twice the level of official development assistance (ODA) flows to developing countries in 2007. In many poor countries, they are the largest source of external financing. The doubling of recorded remittances over the last five years is a result of better measurement of flows,

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increased scrutiny since the terrorist attacks of September 2001, reduction in remittance costs and expanding networks in the industry, and growth in the global migrant stock and incomes. Recent trends on the macro-impact of remittances for development Remittances are stable or even countercyclical Unlike private capital flows, remittances tend to rise when the recipient economy suffers an economic downturn following a financial crisis, natural disaster, or political conflict. Migrants send more funds during hard times to help their families and friends. Remittances thus smooth consumption and contribute to the stability of recipient economies by compensating for foreign exchange losses to due to macroeconomic shocks. For example, remittances as a share of personal consumption expenditure rose in Indonesia, Mexico and the Philippines following financial crisis and in Central America following natural disasters. In many conflict countries such as Haiti and Somalia, remittances provide a lifeline to the poor as well as work effectively as an informal stabilization fund. To the extent that remittances are used for investment purposes, they may behave procyclically just as other investment flows do. Remittances are more likely to be countercyclical in poor countries. Remittances tend to be strongly countercyclical in India and Bangladesh, and procyclical in Jordan and Morocco. In Turkey and the Philippines, remittances were more volatile and procyclical in the 1990s than in the 1980s. In general, the volatility of remittances is lower than that of private capital inflowsand official flows. Remittances reduce poverty in the recipient economy Remittances directly augment the income of the recipient households. In addition to providing financial resources for poor households, they affect poverty and welfare through indirect multiplier effects and also macroeconomic effects. Also these flows typically do not suffer from the governance problems that may be associated with official aid flows. Remittances have reduced poverty and resulted

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in better development outcomes in many low-income countries. Remittance recipient households have a lower school drop-out rate. Children in remittance recipient households have higher birth weights and better health indicators than other households. Remittances are also often used for small business investments, especially in countries with a good investment climate. Crosscountry analysis also show significant poverty reduction effects of remittances: a 10 percent increase in per capita official remittances may lead to a 3.5 percent decline in the share of poor people. Remittances have reduced poverty, although with heterogeneous effects across countries. The analysis of poverty impact of remittances must account for counter-factual loss of income that the migrant may experience due to migration (for example, if the migrant has to give up his or her job). Such losses are likely to be small for the poor and unemployed, but large for the middle- and the upper income classes. Very poor migrants may not be able to send remittances in the initial years after migration. Also the remittances of the very rich migrants may be smaller than the loss of income due to migration. But for the middle-income groups, they enable recipients to move up to a higher income group. In Sri Lanka, for example, households from the third through the eighth income deciles moved up the income ladder thanks to remittances. Remittances are also associated with increased household investments in education, entrepreneurship, and healthall of which have a high social return in most circumstances. Children of remittance recipient households have a lower school drop-out ratio and that these households spend more on private tuition for their children. In Sri Lanka, the children in remittance receiving households have higher birth weight, reflecting that remittances enable households to afford better health care. Several studies also show that remittances provide capital to small entrepreneurs, reduce credit constraints and increase entrepreneurship.

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The evidence on the effect of remittances on long-term growth is inconclusive To the extent that remittances finance education and health and increase investment, remittances could have a positive effect on economic growth. In the economies where the financial system is underdeveloped, remittances may alleviate credit constraints and act as a substitute for financial development. Even when they increase consumption, remittances may increase per capita income levels and reduce poverty and inequality, even if they do not directly impact growth. On the other hand, large outflow of workers (especially skilled workers) can reduce growth in countries of origin. Remittances may be more effective in a good policy environment. For instance, a good investment climate with well-developed financial systems and sound institutions is likely to imply that a higher share of remittances is invested in physical and human capital. Remittances may promote financial development, which in turn can enhance growth. Empirical evidence on the growth effects of remittances, however, remains mixed. In part, this is due to the fact that the effects of remittances on human and physical capital are realized over a very long time period. In part, this is also due to the difficulty associated with disentangling their counter-cyclical response to growth which implies that the causality runs from growth to remittances, but the correlation between the two variables is negative. It has not been easy to find appropriate instruments for controlling such reverse causality. It would be easy to conclude that remittances have a negative effect on growth, but that would be erroneous. Also, to the extent that they increase consumption, remittances may increase individual income levels and reduce poverty, even if they do not directly impact growth.

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Large remittance inflows can lead to exchange rate appreciation and lower export competitiveness Large and sustained remittance inflows can cause an appreciation of the real exchange rate and therefore a loss in relative export competitiveness, by making the production of cost-sensitive tradable, including cash-crops and manufacturing less profitable. Although empirical evidence on the adverse effect of large inflows of foreign exchange on terms of trade and growth is limited, it is plausible that this effect exists and is significant for some small economies where remittances are very high. Remittances to India Registered Migrants REASONS FOR MIGRATION OF MIGRANTS BY LAST RESIDENCE WITH DURATION (0-9 YEARS) INDIA 2001 Reason for migrations Total migrants Reason for migration : Work / Employment Business Education Marriage Moved after birth Moved with households Other Number of Migrants Persons Males Females Percentage to Migrants Persons Males Females 100.0 100.0 37.6 2.9 6.2 2.1 10.4 25.1 15.7 3.2 0.3 1.3 64.9 4.8 18.9 6.7

98,301,342 32,896,986 65,404,356 100.0 14,446,224 12,373,333 2,072,891 1,136,372 2,915,189 6,577,380 9,517,161 950,245 2,038,675 3,428,673 5,164,065 186,127 876,514 3,148,707 4,353,096 14.7 1.2 3.0 6.7 9.7

43,100,911 679,852 20,608,105 8,262,143

42,421,059 43.8 12,345,962 21.0

Source: Table D3, Census of India 2001

Relative Importance of Remittances It is generally assumed that in a large economy like India's, the impact of

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remittances is negligible. But, compared with some important economic and fiscal indicators, their relative importance is significant. Remittances represent 3.08 percent of the country's GDP a sharp rise from 0.7 percent in 1990-1991. In 2005-2006, remittances were higher than the US$23.6 billion in revenues from India's software exports, which is particularly impressive since software exports increased 33 percent that year. In 2004-2005, the state and federal governments in India combined spent less money on education than India received in remittances , according to the India's Ministry of Finance. And, in the same year, combined state and federal government expenditures on health care came to less than half of the remittance flow. Remittances as a Percentage of Total Indian Government Expenditures on Education, 1990-1991 to 2004-2005 (US$ Billions) Year 19901991 19951996 20002001 20012002 20022003 20032004 20042005 Remittances Education 2.07 8.51 12.85 15.4 16.39 21.61 20.25 3.8 7.19 14.9 15.13 16.11 17.95 18.97 Percent of education 55.47 118.36 86.24 101.74 104.9 120.39 196.75

Source: Reserve Bank of India: RBI Bulletin December 1997,

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December 2004, January 2005, February 2006. Economic Survey 2004-05, Government of India, Ministry of Finance, Economic Division.

Remittances as a Percentage of Total Indian Government Expenditures on Health, 1990-1991 to 2004-2005 (US$ Billions) Year Remittances Health Percent of health 1.62 3.14 6.21 6.35 6.99 8.19 8.97 127.78 271.02 206.92 242.52 234.48 263.86 225.75

1990-1991 2.07 1995-1996 8.51 2000-2001 12.85 2001-2002 15.4 2002-2003 16.39 2003-2004 21.61 2004-2005 20.25

Source: Reserve Bank of India: RBI Bulletin December 1997, December 2004, January 2005, February 2006. Economic Survey 2004-05, Government of India, Ministry of Finance, Economic Division. The impact of remittances is more pronounced in parts of the country that have experienced higher volumes of emigration. In the southern state of Kerala, for example, remittances constitute 22 percent of the state domestic product. Experts on Kerala's economy found that per capita income in Kerala is much higher than the national figure because of remittances. Including remittances, Kerala's per capita income in 2002-2003 was 60 percent higher than the national figure, and 34 percent higher excluding remittances. Context for Understanding Indian Remittances

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According to RBI, remittances include two flows: inward remittances and local withdrawals from Non-Resident Indian (NRI) deposit accounts. The term NRI popularly refers to members of the Indian Diaspora, including Indian citizens living abroad and people of Indian origin. Inward remittances are direct transfers of funds from one person abroad to another in India, typically through a bank or wire transfer agency. Such transfers are generally understood to provide family support. Indian banks created NRI deposit accounts exclusively for NRIs. These deposit schemes, which the government of India authorized in the 1970s, have been used to attract foreign capital when the Indian government felt the need to shore up foreign-exchange reserves. To make the accounts attractive, NRI depositors are given the choice of holding deposits in foreign currency denominations or in Indian rupees. Depositors in foreign denominations can repatriate their principal and interest in foreign currency when they choose. Thus, repatriable deposits are treated like a debt. On the other hand, RBI treats funds that NRIs locally withdraw from rupeedenominated deposits as remittances; to RBI these transactions cease to be a liability and assume the form of "unrequited transfers." The relationship between the two components of the remittance flow is important for understanding remittances in India today. Although private transfers "total remittances" as a whole have increased by 88 percent since 2000-2001, inward remittances have only increased by 30 percent (40 percent at its highest since 2000 in 2003-2004). For the last three years, local withdrawals from NRI deposit accounts have exceeded the amount of inward remittances; the difference was $2.3 billion in 2005-2006 .Local withdrawals exceeded inward remittances in 2003-2004 by a ratio of 1.02:1, in 2004-2005 by a ratio of 1.11:1, and in 2005-2006 by ratio of 1.23:1. Thus, some analysts have argued that India's remittance boom "is largely a massive withdrawal surge."

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Source: Reserve Bank of India: "Handbook of Statistics on the Indian Economy," September 2006; and "Invisibles in Indias Balance of Payments," RBI Bulletin, November 2006.

The Diminishing Role of Unofficial Channel A significant factor contributing to the remittance surge is simply the increased use of official channels for remitting money. Prior to 1993, the government of India strictly regulated the exchange rate of the Indian rupee, creating huge incentives to transfer money through informal, unregulated hawala networks. Hawala, a system of money transfer with roots in South Asia, relies less on formal negotiable instruments and more on trust and extensive use of family and business networks. The system which depends on efficient communication

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between the members of a network of dealers not only provides quick transfers of money, it also generally pays a premium exchange rate. Hawala networks in India were used because of the advantageous exchange rate as well as to circumvent tight controls on the transfer and possession of gold, a commodity highly valued in India. With the liberalization of gold imports, beginning in 1992, the incentive to employ hawala networks diminished. In 1993, the government established a market-based exchange rate, further reducing the appeal of hawala networks. Finally, in the wake of the September 11 attacks, there has been heightened interest in tracking and regulating Hawala-type networks, reflecting international concern about the financing of terrorist activity. In the United States, these networks came under the money transfer regulations at the end of 2001, and the assets of at least one "hawala conglomerate" have been frozen.

The Declining Emphasis on Foreign Currency The government of India's change in exchange-rate policies was followed by a change in exchange-control policies. Before 1991, rigid regulations on the conversion of rupees to foreign currency meant that most NRIs chose to keep their money in repatriable foreign currency. Liberalization of the exchange regime started in 1992, and the highly criticized Foreign Exchange Control Act (FERA) was repealed in 2000. FERA imposed a strict control system on all transactions in foreign exchange, permitting only a

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limited number of transactions per year, and fixed the rupee exchange rate. FERA was repealed by the Foreign Exchange Management Act in 2000, which relaxed controls on foreign-exchange transactions. With the gradual relaxation of exchange controls, NRIs are now less concerned about being able to convert rupees to foreign currency. Consequently, NRIs' reluctance to place money into rupee accounts is declining. The numbers from RBI are quite striking. In March 1991, foreign currency-denominated deposits formed 72 percent of total NRI deposits; such deposits constituted only 34.7 percent of total outstanding deposits by March 2005. In addition, they are also withdrawing more money for local use, which may partly explain the recent increase in the local withdrawal component of the remittance figures. The Shift in Emigration Patterns If the migration of Indian workers to the Gulf states was the dominant story of the 1970s and the 1980s, the migration of information technology (IT) workers, principally to the United States, has been the trend since the mid-1990s. Indian migration to the United States doubled in the 1990s, mostly through the use of H-1B temporary worker visas, which allow those in specialty occupations to work in the country for up to six years with the possibility of receiving permanent residence. Indian software engineers became an important element of the US IT boom. Even in the Gulf countries, the number of Indian professional and managerial workers is increasing. Thus, the relative number of Indian professional workers going abroad has been growing. This new "class" of high-skilled Indian workers has greater purchasing power as well as more saving potential than lower-skilled workers. The recency of their migration also keeps them more connected to India. Plus, the growth of India's homegrown IT services industry has helped foster strong business connections between India and Indian IT professionals abroad.

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The change in patterns of emigration has led to a significant shift in the source regions of remittances to India. According to RBI, North America has replaced the Gulf states as the most important source for remittances. RBI estimates that 44 percent of remittances originate in North America, 24 percent in the Gulf region, and 13 percent in Europe In contrast, studies show that in 1990-1991, 40 percent of the remittances came from Gulf countries and 24 percent from North America. Indian banking officials believe the shift began in the late-1990s, with North America solidifying its dominance in 2002-2003.

While not disputing the shift, other experts caution that the sources of remittances are more diversified than RBI figures recognize. Central banks like RBI tend to attribute money transfers from intermediary banks to the countries where those banks are headquartered. As a result, it is possible to overestimate transfers from the United States.

Source Regions of Remittance Flows to India

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Source: Reserve Bank of India: "Handbook of Statistics on the Indian Economy," Seps 2006; and "Invisibles in Indias Balance of Payments," RBI Bulletin, November 2006.

More Options for Money Transfers The stability of remittances, in some measure, reflects the increasing use of formal channels for transmitting money to India. Options for transmitting money to India have also become much more competitive; the field is no longer dominated by traditional transfer agents like Western Union. A survey of commercial banks conducted by RBI in 2006 indicates that 53 percent of remittances were transmitted by electronic wire/Swift, making it the dominant choice of overseas Indians. Although electronic wires are the fastest means of remitting, they can be expensive: 2.5 to 8 percent for amounts less than US$500 (US$6 to US$20 to remit US$250); the cost drops to 0.7 to 2 percent for transfers between US$500 and US$1000 (US$5 to US$15 to remit US$750). Yet the RBI study indicates that the average size of remittance transfer to India is
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relatively high. Out of the total remittance inflow to India, remittances of $1,100 and above accounted for 52 percent. And within that high remittance category, 63 percent of remittances exceeded $2,200. Only 30 percent of remittances were for amounts less than $500. But the system certainly favors the richer end of the remitting spectrum. For the tech-savvy with Internet access, Internet-based providers have become another option for remitting money. The popular Remit2India, a collaboration between the Times of India and UTI, an Indian bank, led the way in 2001, and others have followed. These services are more convenient and less expensive than conventional methods. For example, Remit2India charges US$3 to send up to US$200, while the Bank of India's online system charges a flat rate of US$8 per transfer. Western Union is reaching out to the lower end of the customer base. It has established an unusual partnership with the Indian Post Office in which the post office's network of 150,000 offices the largest in the world provides Western Union potential access to customers in the most remote parts of India. Lastly, Indian banks, not known for their agility, are now aggressively tapping into the NRI market. Banks like ICICI, the State Bank of India, and the Andhra Bank allow customers who maintain a minimum balance free transfers from a branch abroad to a branch in India. With competition growing at home, Indian banks see the NRI market as relatively virgin territory with strong potential. NRIs, attracted by these money-transfer schemes, are then targeted for other bank products, such as mutual funds, mortgages, and insurance policies.

Impact on economy:

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The debate whether remittances uses are productive or wasteful with two divergent schools of thought on the subject. Negative school of thought holds that as little is devoted to productive investment, developmental value of remittances is highly questionable. Positive school of thought holds that remittances do contribute to local and national development. Remittances were mainly utilized for living expenses, debt repayment, marriage expenses, and improvement in housing /purchase of land for house or buying a new house and furthering emigration of other family members. In a few cases, however, part of remittances was invested in agricultural land and equipments as well as small business ventures to augment the family income. The remittance use pattern was mainly dependent upon three factors, namely; i) Socio-economic background of the migrants; ii) mode of financing the emigration; and iii) duration of stay in host country. Most of the migrants are from rural areas and had a poor economic background in terms of income and asset base. Prior to emigration, they were working in traditional agriculture and petty rural occupations with meager and unstable income. To finance their emigration trip, the majority had raised resources through selling off whatever little assets they possessed and by raising loans. In Lebanon they were working in various sectors of the economy including manufacturing, construction and service sector such as hotels, petrol stations, etc, and in farm sector. Their monthly average income was US $275. The majority of migrants remitted on average US $ 140 per month. This is such a meager amount that a poor family back at home can hardly afford to spend it wastefully with pressures of meeting living expenses and repaying the debt. It was found that economic status and living standards of migrants families at the origin had positive impact on remittance utilization patterns as better status implied greater availability of resources from elsewhere to meet living expenses, leaving remittances to be utilized for investments. Further, better economic status implies greater capacity to raise resources for emigration without significant recourse to incurring debt and, thus, reducing liability of debt repayment on

25

family. Thus, study demonstrates the importance of examining initial economic status of migrant household for any implications about remittances uses. Remittances to Pakistan Pakistan as a populous country has seen an increasing number of its labor force moving to other countries around the world with the total number of Pakistani overseas workers and their families estimated to be around 4 million. Over the past 60 years migration from Pakistan to other countries has largely been for seeking better economic opportunities and benefits to individuals, their families and communities. Unfavorable socio-economic conditions and uncertain political circumstances over the years have acted as an impetus and a push factor in the growing numbers of Pakistani's traveling from their country of abode to other countries in Europe, North America, East Asia and the Gulf States. Workers from Pakistan migrated to the UK and other Western countries in the 1950s and1960s. These migrants were mostly men and relatively little educated who took up lowpaid industrial jobs in the UK. The male migration gave rise to the migration of families in these countries. It was after the oil boom in the 1970s that a great avenue was opened in the countries of the Gulf which has today become the principal destination of Pakistani workers. Since the late 1980s and early 1990s, there have been new waves of migration by young men to the European countries and North America. Emigration to developed countries has, by and large, involved young men from better off and upwardly mobile families and communities in Pakistan. Because of the high costs involved in overseas migration, it is much harder for the poorest strata in Pakistan to participate in the migration process. An increasing number of Pakistanis have in the past decade or more been leaving their country of abode for higher educational. At the same time the general pattern of migration to developed countries has been changing; greater numbers of less educated young men are now taking their chances and overstaying their visitor visas. These young men are relatively less likely to be able to settle in their countries of destination or to bring their families with them. However post 9/11 has seen a growing number of restrictions
26

on migrants especially from Muslim countries like Pakistan with many being deported back to their Magnitude of Pakistani Migrant Workers and their Geographical Distribution According to the estimates of the Emigration Pakistan, over 4 Million Pakistani Migrant Workers live around the globe. This corresponds to around 2.5 % of the total population of the country and is roughly in line with the global percentage of migrants. An estimated 94 % population of Pakistani Migrant Workers is concentrated in 6 countries of the Gulf which are Saudi Arabia, United Arab Emirates (UAE), Kuwait, Qatar, Bahrain and Oman. 80 % of Pakistani Migrant Workers are seen to be located in just two countries, Saudi Arabia and UAE

27

] 1 2 3 4 5 6 7 8 9 10 11 12 13

Countries Saudi Arabia U.A.E Oman Kuwait Bahrain Iraq Libya Qatar Malaysia South Korea U.K U.S.A Japan

19732002 1648279 626705 212131 106307 65987 68132 63701 504/81 1993 3634 1059 802 91

2003 97262 18421 3802 440 1173 1 713 1633 64 271 800 788 24

2004 104783 34113 95 3204 1022 0 781 480 59 564 703 310 10

2005 126397 61329 6911 12087 809 0 1374 367 114 2144 858 140 12

2006 70896 65786 8928 18492 855 0 375 2383 65 2474 1419 130 12

2007 25117 73642 8019 7185 1612 0 261 2175 7690 1970 1611 238 22

2008 45599 100207 12614 10545 1630 0 67 2247 4757 1082 1741 202 53

2009 84587 139405 32474 14544 2615 0 450 5006 1190 434 1111 297 33

Total 2212975 1119608 285028 172810 75703 68133 67722 64772 15932 12573 9302 2907 257

Percentage 53.2% 26.9% 6.8% 04.1% 01.8% 01.6% 0.1625 0.155% 0.38% 0.30% 0.22% 0.06% 0.01%

While the Middle East still continues to be a major destination for unskilled, semiskilled and skilled workers mostly from twenty or so districts in Pakistan, the flow of emigrants to the region has stabilized since late 1980s. Unlike other labor sending countries such as, India and the Philippines, Pakistan has not been able to diversify the countries of destination for its workforce. Profile of Pakistani Migrant Workers Illiterate and unskilled workers constitute around 50 % of the total Pakistani Migrant Workers. 40% of the total Migrant Workers are categorized as Manual Laborers. Only 2.2 % workers can be categorized as White-collar workers such as Doctors, Engineers, Accountants, Managers and teachers, etc. 40% workers may be classified as Skilled Workers. Among the skilled laborers, drivers are in the highest number followed by masons, carpenters and tailors. 85% of Pakistani Migrant Workers leave their families behind in Pakistan. An estimated 52% of the Pakistani Migrant Workers is from
28

the Punjab province while 9.4% come from Sindh, 25% from the Khyber pakhtunkhwa1.3%, from Balochistan, 5.4% from Tribal Areas( and Northern Areas) Khyber pakhtunkhwa and 6.5% from Kashmir (AJK). This shows that the Punjab province is over-represented and the NWFP combined with the adjoining Tribal Areas has a share in the Gulf labor force which is twice its share in the population, while the other provinces Sindh and Balochistan are underrepresented among migrant workers. Trends in Pakistani Workers' Migration Approximately, 287,000 workers left for foreign destinations during 2007. Since 2001 this number has increased from 127,929 by about 124 %. In 2001, Saudi Arabia was the destination of the highest percentage (76 %) of Migrant Workers. Saudi Arabia has retained its position as the most favorite destination for Pakistani Migrant Workers but its share has gradually decreased to 29 % in 2007. On the other hand the percentage of Migrant Workers traveling to UAE has steadily increased from 14 % in 2001 to 48 % in 2007. Over the years Middle East has more or less retained its dominant share of Pakistani Migrant Workers which has changed from 94 % in 1971-2000 periods to 97 % in 2007. It does not seem probable that this share will undergo any substantial change in the coming decade. Table 4 shows the number of various categories of Pakistani Migrant Workers traveling during the past 37 years.

Provincial Background of Pakistani Labor forces Regions No. in Millions Percentage in total pool of labor force

29

Punjab Sindh Khyber pakhtunkhwa Balochistan Tribal Areas

1841487 337178 903051 47285 192747

52% 9.4% 25% 1.35% 5.4%

Comparison of Migration Polices with other Countries The employment policies of Bangladesh, India, and Sri Lanka are quite similar and these include good working conditions, good wages and employment agent doing most of the job, etc. When it comes to migration policies, Philippines has a different set of laws. In fact, Philippines follows the best practices in the realm of migration. The government of the Philippines has provided immense support and has laid down minimum standards of treatment for its migrant workers. The Immigration Act of 1940 is the cornerstone of the Philippine Immigration Law. About 10 Million Philippines' citizens are living outside the country. Overseas employment became an official policy in 1974 with the signing of the Labor Code by the Philippines Government. The Philippines Overseas Employment Administration (POEA) is an agency attached to the Department of Labor and Employment (DOLE), which is responsible for managing the country's Overseas Employment Program. The POEA was created in 1982 through Presidential Decree No. 797 to promote and develop the Overseas Employment Program and protect the rights of migrant workers. The POEA works for ensuring fair employment terms and conditions, good living conditions, better wages, addressing recruitment abuses, following measures to regulate recruitment and have adequate exit controls, welfare funds for migrant workers, foreign market development, remittances, return and reintegration or returnee migrants. Both Pakistan and Philippines have encouraged migration especially for employment and flow of remittances. According to the Bureau of Emigration

30

about 4 million Pakistanis are living around the globe while about 10 million migrated from Philippines to various parts of the world. The trend of migration is different in both the countries. About 94% of the migrants from Pakistan move to Middle-Eastern countries. Although a large number of migrants from Philippines migrate towards Middle-East, but still Philippines have had greater access to markets globally than Pakistan. Another significant difference between these two countries is about women's participation. In Pakistan, women less than 45 years of age are not allowed to migrate so as to control the threat of trafficking. The system in Philippines has encouraged women migration enormously in the past few years and this not only includes the labor class but a diverse group of technical and professional workers. Presently, According to the POEA, the number of women migrants is approximately near 60% of the total migrant population. The data for return migrants is an important issue that needs to be dealt with effectively in Pakistan. In Philippines, over a period of time they have been able to monitor migrants returning to their country, which reduces the risk of illegal migration. Role of government Pakistan Remittances Initiative (PRI) 1. Ownership In order to provide for an ownership structure in Pakistan for remittance facilitation, State Bank of Pakistan, Ministry of Overseas Pakistanis and Ministry of Finance launched a joint initiative called Pakistan Remittance Initiative (PRI). This initiative has been taken to achieve the objective of facilitating, supporting, faster, cheaper, convenient and efficient flow of remittances. This initiative shall take all necessary steps and actions to enhance the flow of remittances. 2. Enhancing Outreach PRI is encouraging banks in Pakistan to enhance their outreach worldwide through new remittance-specific related arrangements.
31

3. Incentive for the Remitter and Beneficiary In order to support the overseas Pakistanis and their family back home, a reimbursement scheme is being implemented whereby Government of Pakistan through State Bank of Pakistan reimburse 25 Saudi Riyal equivalent per transaction to the banks in Pakistan provided that; a) Transaction should be a home remittance transaction (from individual to

individual) b) c) fee. The distribution bank and the overseas entity share the reimbursement amount as per the mutually agreed term. 4. Incentive Scheme for Overseas Entities To increase the flow of remittance through formal channels, it has been decided to encourage overseas entities, having specific home remittance arrangements with banks in Pakistan to make additional marketing efforts to facilitate home remittance flows through formal channels under the auspices of PRI, a performance based scheme has been launched to encourage overseas entities to enhance marketing efforts at origination end. Government of Pakistan shall reimburse marketing expenses through state bank of Pakistan as per the below mentioned subject to related terms and conditions. The transaction size should be at least 100 US$ or equivalent. The remitter and the beneficiary should not be charged any remittance

Remittances Mobilized by an Overseas Entity Reimbursement From any One Particular Jurisdiction (in Mobilized in

Marketing Expenses

(as % of Remittances

32

Equivalent US$) Up to 100 million Above 100 million to 400 million amount (i.e. on

Equivalent US$) Nil 0.50 % on incremental

Remittances above 100 million).

Above 400 million to 800 million amount (i.e. on

0.75 % on incremental

remittances above 400 million), plus amount calculated in the above slab.

Above 800 million to 1,200 million amount (i.e. on

1 % on incremental

remittances above 800 million), plus amount calculated in the above slab.

Above 1,200 million mobilized. Distribution Channels

1% on total remittances

33

a)

Cash Over Counter

The banks of Pakistan are offering Cash over the Counter facility to the beneficiaries. b) Payment and Settlement of Home Remittance Transaction under PRI

Reliable and efficient payment systems are vital to facilitate delivery of home remittances securely and efficiently. State Bank of Pakistan has already taken initiative to develop Payment Systems Architecture of the country which would also help in achieving following objectives at the completion of all the phases:

Automatic delivery of home remittances in beneficiary account/over the counter system in real time; generating confirmation SMS to the beneficiary.

Development of robust and reliable ATM Network to offer an option to beneficiary of home remittances to withdraw cash even after banking hours and holidays.

Development of integrated and secured payment system infrastructure of Alternate Delivery Channels (ATM POS, IVR, Call Centre, Mobile Banking) offering option to

Beneficiary of home remittances to make P2P payments. This would encourage beneficiaries to maintain balance in bank accounts eventually helping increase savings/ deposits.

These goals would be achieved through phased implementation of payment system strategy. In the first phase banks are using PRISM (RTGS) to transfer and settle inter-bank transactions.

6. Complaints Handling and Feedback Mechanism

34

a) Call Center In order to provide a reliable and immediate contact point, 24 hours, 7 days a week call centre has been established by PRI which is now operational. All overseas Pakistanis and their families can inquire about the remittance services of banks and lodge their complaints with the call centre. b) PRI Website A comprehensive website has been established to provide maximum information about the processes involved in the remittance transactions. Further to facilitate the remitters in identifying the places near to them to route remittances through banking channels, a locator has been placed on website http:/www.pri.gov.pk 7. Monetary penalty on Delay in Remittance With a view to encourage overseas Pakistanis and others to use banking channels for home remittances, and to protect the remitters / beneficiaries from any losses that they may incur due to unwarranted delays in receipts of funds in the beneficiaries accounts, it has been decided that the banks shall put in place a mechanism as per PSD Circular No.02/2009 dated August 22, 2009 available at http:/www.sbp.org.pk/psd/2009/C2.htm In case where the amount of remittance is not credited/paid to the beneficiary as per stipulated instruction, the beneficiary shall be entitled to a return of sixty five (65) paisa per thousand rupees per day for the number of days credit/payment on account of remittance was delayed. The banks are, therefore, directed to ensure that the amount of remittances is credited/paid to the beneficiary within time frame laid down. In case of delays in the crediting/making payment of remittance amount, they shall remunerate the beneficiaries at the rate given above. Remittances, Growth and Poverty

35

Research has shown that a very high proportion of remittances are spent on consumption instead of productive investments. Theoretically, however, the relationship between remittances and growth can be positive or negative. Remittances may generate positive spillovers through efficient financial markets, easing the credit constraints of business as well as common men or on the contrary, it may increase consumption more than investment and negative chain of events can be triggered through low labor participation, low investments and so on. One important feature of remittances is that it can indirectly affect labor supply. This could reduce economic growth through reduced labor supply. Moreover, large and consistent remittance inflows could make the exports less profitable through appreciated real exchange rate. However, remittances can reduce poverty through increase in income of the recipient households which finances their Consumption and hence improves their standard of living.

The positive impacts of remittances can emerge through a number of channels. Remittances ease the credit constraints often faced by citizens of developing countries by increasing their household income. This does not only increase their consumption level but also increases their savings which ultimately translates themselves to private investments. The higher level of disposable income allows the households to spend more on health and education, through which the overall labor productivity increases, raises their standard of living and ultimately reduces poverty. There is direct and significant impact of remittances on poverty reduction through higher per capita income and ease of credit constraints. Remittances improves child enrolment in schools and increases education expenditure In terms of poverty, remittances acts as a blessing to the household, there is a cost associated with it. The most obvious one is of migration itself. Since migration is not cheap, poor are least likely to be recipient of remittances from abroad hence the impact may be negligible on poverty or it may even increase the levels of poverty and inequality in the country. Positive impact of remittances on the savings in Pakistan during the 1980s and early 1990s was

36

found. The marginal propensity to save out of international remittances was found to be 0.71 compared to the marginal propensity to save out of rental income of just 0.085. Analysis of the impact on remittances on economic growth in Pakistan for the period 1959-60 to 1987-88. The results indicated a strong positive impact of remittances on GNP, consumption, investment and imports. They argue that remittances increase the dependency on imports through increase in consumption of imported goods and worsen balance of payments problems. Illegal and Unsafe Migration Illegal migration refers to migration across national borders in a way that violates the immigration laws of either the country of origin or the destination country. Under this definition, an illegal immigrant is a foreigner who either has illegally crossed an international political border, be it by land, water, or air, or a foreigner who has entered a country legally but then has overstayed his/her visa. People opt for illegal migration even though they know the consequences they will have to go through if they are caught. A lot of people even die before reaching out to the destination. Restrictive immigration policies of western countries could even lead to the educated class to follow illegal means if the poverty conditions in the country force them to do so. One reasons for the illegal migrants could be high cost of migration. People tend to find the illegal ways as cheaper when compared to the actual cost. Another reason could be lack of access to information regarding regular migration practices and procedures. The middle man involved in the process at times tends to misguide the people, especially women. How migration affect Pakistan remittances One of the most profound and positive effect of migration of Pakistani Workers has been in the form of remittances sent home by these workers. While remittances were an important source of earning foreign exchange after exports prior to 9/11, they have registered a tremendous growth post 9/11 as informal means of remitting money came under increased scrutiny. Average annual remittances were to the tune of US $ 1.5 Billion during the pre-9/11 era. This

37

figure jumped two and a half times to US $ 3.6 Billion in the post-9/11 period. The remittances touched an all time high of US $ 5.5 Billion. For a country like Pakistan which has very few avenues to earn foreign exchange, these remittances play an important role in sustaining national economy and constitute a share of around 3 to 5 % of the GDP These remittances have also. played an important role in stemming the tide of poverty in the country where the percentage of people living below the poverty line is nearly 24%. Those who are already abroad in some employment and switch over to the other job, without returning back to Pakistan Those who visit abroad for any other purpose and secure employment without getting through the process of OEC/PO coercion. Illegal immigrants who either travel without travel documents through unauthorized routes or travel with fake/fraudulent documents. Job seeker who travel on pretext of sightseeing/tourism or visiting relationship. At an individual level, money sent home by migrants constitutes the second largest financial inflow to many developing countries, exceeding international aid. Remittances directly augment the income of recipient households. In addition to providing financial resources for poor households, they affect poverty and welfare through indirect multiplier effects and also macroeconomic effects. Remittances finance education, health, and entrepreneurship and are associated with increased household investments in education, entrepreneurship, and health all of which have a high social return in most circumstances. Overseas Pakistani Workers Remittances (2001-2007) Years Remittances % of GDP Major Countries Middle Europe East North America Other countries

38

2001 2002 2003 2004 2005 2006 2007

2389.05 4236.85 3871058 4186.79 4600.12 3629.68 4450.12

3.3 5.1 3.9 3.7 2.9 2.5 3.1

1070.57 189.95 1614.32 1851.96 2081.26 1617.81 2111.1

171.95 309.54 390.65 444 514.5 406.85 435.65

98.42 1252.71 1247.99 1342.57 1324.2 1054.72 1245.74

299.25 735.78 573.21 513.78 686.13 534.52 655.5

Methods used to transfer remittances (%) Methods Total Urban Rural Punjab Sindh Other Areas 37.5 26.6 22.6 13.3 31.3 31.8 18.7 18.2 45.6 26.5 16.3 11.6 sample Method used since migrant went abroad Bank 39.6 42.5 33.2 Hundi 28.8 26.5 33.2 Friends/Relatives 17.9 18.8 17.6 Migrants himself 13.7 12.2 16

during home visit Total 100 100 100 100 100 100 Method used during year preceding survey (August 2008-July 2009) Bank 38.3 39.6 33.5 38.9 32.8 32.4 Hundi 28.2 29.4 30.5 29.1 24.2 31.4 Friends/Relatives 17.9 14.2 21.7 13.8 21.5 22.8 Migrants himself 15.6 16.8 14.3 18.2 21.5 13.4 during home visit Total 100 100 100 100 100 100

Use of Remittances and Investment Behavior With respect to the use of remittances, the prevailing view in the literature on the subject is that the share of remittances channeled towards consumption is generally very high. This has motivated a number of observers to view remittances transferred to Asian countries entirely as a consumption expenditure. However, that the propensity to invest appears to be considerably larger for households with migrants. The decision on how much of the remittances to invest and how much to consume depends upon many factors. First, the economic and social conditions of the household before migration are two of the main

39

determining factors. Migrants may differ widely with respect to the pre-migration economic position of the household. Workers from better-off households were likely to have access to some assets and resources before migration, and these resources could form a base for further improvements and investments from new overseas earnings. Second, the life cycle stages of migrants may affect the patterns of remittance use. For example, most Pakistani workers go abroad during the period in their lives when they are likely to have young children. Thus, the consumption demands of their families are likely to increase during the period of migration. Third, in Asia, including Pakistan, high costs are involved in securing a job in the Middle East, and those who succeed in finding employment abroad finance their overseas trips in various ways. The salaries earned during the first few months generally disappear as a consequence of the debts incurred due to the migration. Fourth, the duration of the stay abroad can be one of the most important factors in determining the use of remittances by migrant families; a longer stay can provide families with more resources for investments. Finally, when it comes to relative success in handling remittances, an important variable is the level of household non-remittance income, particularly during the migration phase. Thesis important both as a supplementary source of income and as a disciplining factor regulating the economic behavior of the family. The absence of any stable income implies that the earnings from overseas employment are likely to be used for the maintenance of the household and little is left for savings and investments convenient Remittances to Nepal Nepal has become one of the major labors exporting country in recent years. The history of foreign employment in Nepal dates back to the early nineteenth century when Nepalese soldiers began to work for the British army. In the ensuing decades, hundreds of thousands of Nepalese have worked in British and Indian army. Currently, over 60 thousand Nepalese are working in the Indian Army and

40

other government institutions in India. As the border between India and Nepal is open, hundreds of thousands of Nepali goes to India for labor works. The pace of the foreign employment increased dramatically after 1996 and the consequent of shrinking economic opportunities back home compelled Nepalese youths to look for alternatives elsewhere. The massive unemployment inside the country is the main reason behind this upsurge in venturing out to distant lands. As per the government data among the total population of 23.2 million, 47 percent are underemployed. Every year 300,000 to 350,000 new Nepalese enter the labor market. Out of these new entrants, 30 to 40 thousand find jobs within the country; 100,000 to 150,000 go abroad and the rest remain in the country with no job. According to the National Planning Commission (NPC), the number of overseas workers has grown, on average, by 30 percent in the last couple of years. There are now an estimated 1.2 million Nepalese working in 40 countries, excluding India. In the Gulf region alone, about 700,000 Nepalese are working in Bahrain, Kuwait, Saudi Arabia, Qatar and the United Arab Emirates (UAE). The demand was so high that Nepal had to open a consulate in Qatar to supplement the efforts of the embassy in Saudi Arabia, where there are over 200,000 Nepalese. Malaysia first opened its domestic job market to Nepalese in 2001, and it is estimated that about 150,000 workers have legally entered the country since then. Around 70,000 more are estimated to work in Hong Kong. Large numbers are also illegally employed in the rest of Southeast Asia. There are huge number of Nepalese in UK and USA. They went to those countries as a student but their returning to Nepal is rare. They are remitting their earnings through unofficial channels since the commission charge in official channels is very high. Today, the process of money transfer to Nepal from abroad through banking channel has become efficient and easy. It is now possible to measure the amount repatriated by the Nepalese migrant from abroad to Nepal every year through formal channel. However, it is estimated that only around 40 percent of Nepalese migrant workers use formal channel to send their earning back home. The rest still rely on the informal channel like hundi that is believed to be fast and

41

economic. Now, there are 26 recognized remittance companies including Western Union, operating to transfers money from all over the world to all the part of Nepal. Since 2001, the flow of remittance to the country has grown at an annual pace of 15-20 percent. It is expected to grow more as number of people going abroad is increasing day by day. Remittance market study shows that around 40 percent of the total inward remittance volume to Nepal is paid within Katmandu valley. Migrant workers remittance is a strong source of foreign exchange earnings for Nepal. It is estimated that in 2004 money transferred from migrant Nepalese have crossed Rs 100 billionmaking it a bigger source of foreign exchange than tourism and all exports combined. Workers remittance is now consider as a backbone of our economy. According to a study by David Seddon for the DFID, the value of foreign remittance from migrant laborers could be equivalent to 25 percent of official gross domestic product (GDP). Since last few years remittance income is playing a vital role for the foreign currency earnings and favorable impact on balance of payment situation, to reduce the number of people in the country below poverty line and ultimately to the economic growth of the nation. Mainly the remittance in Nepal from Gulf countries comes through Exchange Houses, Western Union Money Transfer, Money Gram, Himal Remit, and Nabil Speed Remit of which, Western Union Money Transfer and Money Gram are the international brand whereas Himal Remit and Nabil Speed Remit are the local brand. Himalayan Bank Ltd. is the sole agent of Money Gram. Himal Remit was mainly confined to the Gulf countries but now it has extended its service to Europe also. Similarly, Nabil Speed Remit is focusing its business in Doha, Qatar. The remittance from Gulf countries mainly comes through Exchange Houses. For this, Exchange Houses form Gulf countries maintain their accounts in Nepalese banks and issue either drafts or send the payment instructions through telex/e-mail/fax messages to remit the fund to the concerned beneficiary. The exchange houses in the Gulf are depending on these channels since they

42

are not authorized to use SWIFT yet. Recently they have started using web based programme to transfer funds to Nepal, which has became easy and fast.

Heading

2001

2002

2003

2004

2005

2006

2007

Total Remittances in million Share of remittances to current a/c receipts excluding grants(in %) 33.6 37.8 36.6 38.2 46.7 45.3 50.8 47536.3 54203.3 58587.6 65541.2 65541.2 100144.8 142682.7

Ratio of remittances to GDP (in %) 10.3 11 10.9 11.1 14.9 13.8 17.4

Remittance Income in Nepal Initially, remittance in Nepal was introduced with Gurkha remittances. 'The Gurkhas' were renowned for good qualities of soldiers. That is why British India formally recruited Nepalese youth as a regular army, which later divided into British and Indian army. Now-a-days, Nepalese going abroad are not only for armies but also spread all over the world for work and mostly they are concentrated in Gulf areas in civilian front .Any Nepali to go for work legally, he/she needs to get permission from the Department of Labor under the Ministry of Labor and Transport of the Government of Nepal. From the official report of the Labor Department it is known that 107 countries are at the government list where Nepalese are allowed to go for work . But still some people are found going abroad without permission and working in the government restricted areas
43

too. Because of this trend, data on foreign employed workers are not available in exact form. Majorityof those who have left home for overseas job are eager to earn foreign currency by hard working to support their families. With regard to the delivery of remittances, the World Bank has expressed the view that the procedure of receiving remittance in Nepal is the best one in compare to others. Remittance Transaction Company cannot receive cash directly from the Nepalese workers remaining outside. The workers have to deposit their remittances in foreign commercial banks account and the transaction company through its account delivers the remittance services to the recipients at the cheapest cost (about 1 percent of remittance income). Moreover, the Hundi system is almost closed due to the establishment of Remittance Company in Malaysian and Gulf countries. However, the system of Hundi is still working in Japan and Korea where most Nepali workers are living even if their visa date is expired. Over the past 15 years from 1991, international migrants' remittances have become increasingly prominent in Nepal. The amount of remittances reflects only transfer record in the balance of payments. Unrecorded flows through informal channels are believed to be more than the recorded flows. Regarding the transfer of remittances in Nepal, the record of banking sector showed that Rs.15.9 billion was received in FY.2000/01. However, Hundi operators or money transferring agencies handled the bulk part of remittances. Considering the increasing number of workers, assuming four lakh per year going outside the country in this perspective, remittance received was estimated at Rs.50 billon in FY. 2001/02. In this regard, it is also estimated that more than 500 people per day are going abroad for foreign employment. From such migrants, about Rs.100 billion per year is expected to enter into the country through remittance income only. In order to provide access for transferring remittances, Western Union, IME and Prabhu Money Transfers are found active in Nepal. Of these agencies, more than 200 sub-agents of single Hulas remittance including banks, finance companies, trading concerns,

44

enterprises etc. under the province of Western Union, have been opened in five Development Regions of Nepal. These agents deliver remittances to the recipients of local areas within a short span of time. Contribution of Remittance to GNP Remittance as major component of current account, plays a vital role in increasing current transfers in balance of payments. The basic factors of determining current transfers are grants, workers remittances, pensions and others including excise refund also. Initially, the share of remittance to GNP was found 1.74 percent in mid-July 1991.This share increased sharply (9.38 percent) after the period of mid-July 1999 and eventually reached to 12.03 percent in midJuly 2005. On average, the share of remittance to GNP was 11.03 percent during the review period from mid-July 2000 to 2005. Under the transfer category of BOP, remittance income increased by 11.65 percent totaling Rs.65.42 billion in 2005 due to the increasing trend of Nepali workers going to Malaysia and Gulf countries for employment. During that period, the grants and pension also increased by 7.72 percent and 58.06 percent respectively. Thus, from this analysis it is clear that the remittance income has become an important contributor (64.72 percent) to the current transfers in balance of payments of Nepal.

GNP at years 2001 2002 2003 2004 2005 2006 Grants 128748 12046.4 12650.5 13842.2 19557.8 21067.2 Workers Pension Other 1378.9 1456.1 1700.9 2392.3 3110.2 2109.8 Total 56952.8 67027.7 70157.3 77765.1 89161.8 current price 392613 427447 441182 472869 509700 remittances 36818.1 5941 47216.1 47536.3 54203.3 58587.6 65416 6309.1 8269.6 7327.3 7906.2 12496.4

Share of remittances to GNP 9.38 11.05 10.77 11.46 11.49 12.03

101084.9 543902

45

Socio-Economic Implications of Remittances The income of migrants from the foreign employment has not only increased their personal income but also their social prestige. The rural people lying below the poverty level have succeeded to uplift their economic standard receiving the opportunity of foreign employment. Moreover, the downside of remittance reflects the view that the shortage of labor due to emigration has not only compelled to keep barren land in rural areas but also hamper agricultural productivity and ultimately the country would be liable to import the large quantity of food grains. Despite these, remaining young generation from the families for long time may affect their reproductive age and their vulnerability may be subject to communicable diseases. It is also possible that if they come back with good skills and earnings, they may not normally cope with the environment of the homeland and consequently they will have a tendency to leave the country again. Thus, the remittances from foreign employment on the one hand, has played an important role to increase their personal income and thereby improve standard of living and a risk of diseases like HIV/AIDS through migrants on the other may enter into the country. More specifically, this type of communicable disease may be due to poverty, illiteracy, gender discrimination, women exploitation, insecurity, and the lack of legal advice as well as proper treatment. Thus, to minimize this problem, especially rural people should be made aware of the communicable diseases through mass media, education, health care and training cum workshops. Furthermore, a part of remittance income should set aside by the government through welfare scheme that may become the long run solution to the problem of communicable diseases. Recently, the decision made by British government has provided the permission for the permanent residence in U.K. to the ex-army of Nepal retired before 1997. From this decision, remittance as a major source of the Nepalese economy will have negative impact in the long run.

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Modes and Instruments used in Remittance Business i. ii. iii. iv. v. vi. vii. Swift (Society for Worldwide Interbank Financial Telex Demand Drafts Fax Transfer Tested Email Online Remittance Cash Card etc. Telecommunication)

Online Remittance: Western Union Money Transfer Western Union is recognized for sending money quickly, reliably, and conveniently with more than 150 years experience and 245,000 agent locations in over 200 countries and territories. Currently there are 5 main agents of Western Union viz. CG FINCO, SITA World Travel, Annapurna Travel, NABIL Bank Ltd. and Hulas Remittance. Proposal had been received from all the agents except Annapurna Travel for sub agency, Hulas Remittance being the latest to offer the sub-agency. Likewise, Hulas Remittance offered the exclusive sub agent in banking sector and all USD remittance . After analyzing the proposals of the above four agents, Nepal joined hand with Hulas Remittance on 22 December 2005. After joining hands with Hulas Remittance, it has selected 25 branches in the first phase for Western Union's services from different region. All the concerned staffs from these branches have already been provided basic orientation programme about the Western Union's services in NBL's Training Centre. After the completion of the first phase programme, it has selected another 35 branches in the second phase for this business from different region and the regional level training has already been provided to the concerned staffs of these branches.

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Now, Nepal bank Limited is providing Western Union's services through its 60 branches covering all the regions of the country and we are in the process of adding the rest branches in this network in the near future.

Remittances to Philippines Overseas Filipinos' Remittances

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Countries 2003 Total 7578458 Asia America Oceania Europe Middle East Africa 894310 4370705 44470 1040562 1166937 6 11371

2004 2005 8550371 1068900 918329 5 1172373

2006 1276130 8 1496120 7198212 85610 2061067 1909208 10272

2007 1444992 8 1543173 8244399 121417 2351704 2172417 16072

2008 1642685 4 1883996 9213372 149423 2658726 2502639 17746

2009 1739805 2 2078241 9307781 212983 3061625 2665031 22282

2010 187629 89 236300 1 998762 8 236358 318047 4 296434 1 31187

5023803 6605231 42600 54573

1286130 433933 1232069 1417491 3439 4517

People, the Philippines' best export The most successful export of the Philippines remains its people. In the first 11 months of 2009 remittances from 9m overseas Filipinos, nearly a tenth of the country's population, rose by 5.1% compared with a year earlier, to $15.8 billion. Remittances are now equivalent to 11% of the economy, with double-digit growth in remittances predicted for this year. Remittances are the force behind powerful consumption growth of more than 5%, easily outstripping the country's annual economic growth of less than 2%. As the global economic crisis hit, many predicted that remittances would be an early victim as overseas Filipinos lost their jobs in hordes. A mix of factors seems to account for their resilience. Plenty of overseas workers have indeed lost their jobs and, returning home, tend to repatriate all their money in one go. On that interpretation, a surge in remittances is bad news, not good. A quarter of the

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600,000 Filipinos in the Middle East, for instance, work in the United Arab Emirates, afflicted by Dubai's woes. Factories in Taiwan and hotels and casinos in Macau have also laid off Filipinos. Yet returning workers are only a small part of the story. One reason why far fewer Filipinos have come home than thought is because a shift in employment patterns means that overseas Filipinos are moving from the construction industry to service sectors, including accounting and finance. Jobs in these sectors are relatively secure. Filipino seamen, who man the world's merchant fleets, have not been laid off even if their ships have been laid up, so valuable is their reputation for dependability. And as for the vast number of Filipino domestic helpers and chauffeurs in Asia and around the world, spoilt employers have simply come to depend on them. So, remittances will continue to be the chief bright spot for the Philippines, whose domestic economic affairs are colored by corruption, sloth and poor governance. Still, actively exporting your best and brightest is hardly the best long-term policy.

Remittances and the Philippines' economy: the elephant in the room While we project growth to decelerate from its 2007 peak of 7.2 percent to 1.9 percent this year (after a respectable 4.6 percent in 2008), the Philippines would still be far from a recession contrary to what happened during the 1997 Asian crisis. Many reasons explain the country's resilience, including policy and regulatory reforms that responded to the lessons drawn from the Asian crisis. However, there is one key factor driving this resilience. It is, remittances the fairly stable 10 percent of GDP sent back home year-in and year-out for the past six years from overseas family members is key to the health of the Philippines economy. Not only does it boost private consumption (from the purchase of basic necessities to big ticket items such as cars and housing private consumption accounts for over 75 percent of GDP), it also lifts foreign exchange reserves, the current account, and deposits in the banking system. But
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as the wealthiest countries drag the world into a recession, and world unemployment is projected by the International Labor Office to potentially increase by 50 million, many Filipinos working overseas will also be affected. Some will loose their jobs, others will see their incomes reduced, net deployment overseas will decelerate (though still expected to remain positive), but all are adjusting to the risk that their income and jobs are less secure than they thought even a few months ago. On the whole, remittances have been countercyclical in the Philippines. This time, as the downturn is truly global both in terms of geographic reach and scope of jobs affected, one of the strengths of the Filipino Diaspora, namely its diversification in terms of geography and skills, will be less effective this time. Ongoing study from the World Bank's Manila office points to some potentially large downsides, though the confidence interval from the analysis is fairly large, as several empirical and theoretical channels are at play and the magnitude of the shock being experienced is fairly unique. The latest data do point to a significant weakening of remittances as of the last quarter of 2008. In January, remittances posted zero annual growth in dollar terms. Looking into the details of the January numbers, remittance from the all important countries USA (accounting for over half of total remittances to the country) were down by 25 percent compared to January 2008 (in dollars). Surging remittances from the Gulf managed to offset the decline from the U.S. As the Gulf-related surge is expected to slow down, and given global growth prospects in the rest of the world, estimate are revised downward for the dollar growth rate of remittances to the Philippines to minus 4 percent. In real Peso terms, expectation on exchange rate and inflation, the impact will be more muted. Nonetheless, this means that around 2 in every 10 families who are receiving remittances will be adversely affected, and the fight against poverty with it. Remittance Growth in the Philippines

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Remittances enter the Philippines through a number of formal and informal channels, including the banking system, informal wire transfer businesses, cellular phones, and hand-carrying into the country. Officially reported banking sector remittances to the Philippines have been increasing over the last several years, reaching record high levels in 2007. For the first nine months of 2007, officially reported remittances grew by 15 percent despite a declining OFW population. This increasing trend in officially reported remittances is partly a function of the banking sector capturing a larger share of the total remittance market from informal non-bank market participants. The other contributor to the increasing trend in reported remittances is the recent shift in the OFW population to more highly skilled jobs (e.g., healthcare) with higher wages than historically. Total remittances from OFWs are expected to reach $14.7 billion for 2007, according to the BSP, of which 95 percent is expected to be sent via the banking system, versus 72 percent in 2001. The continued strong growth of remittances to the Philippines plays an integral role in the strength of the Philippine economy. At 12.5 percent of GDP in 2006, remittances are largely responsible for improving the Philippines international reserve position, maintaining the countrys strong balance of payments position, and generating strong fee income for a banking system that had historically weak profitability. The Philippine Banking Systems Response to the Growing Remittance Market The remittance market is a highly competitive field for the major Philippine banks. Due to a historical overhang of poor asset quality, Philippine banks suffered from stagnant loan growth and therefore increased their dependence on noninterest income sources, such as remittances, to boost earnings in the years following the Asian financial crisis. Several major Philippine banks report that remittances are an important business line and have stressed their intention to continue to focus on growth in that area. For example, Bank of the

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Philippine Islands (BPI), the nations third largest bank, saw its remittance business grow by 27 percent in 2006. In its most recent annual report, the bank defined the OFW market as a considerable and special consumer segment, stating expansion in that market as one of their strategic initiatives going forward. In addition, Metropolitan Bank and Trust, the nations largest lender, reported 14 percent growth in remittance volume in 2006, and similar to BPI, indicated in its most recent annual report that the volume of remittances sent home by OFWs warrants the series of expansions the bank continues to implement abroad. As the Philippine banking systems share of the total remittance market has grown, so has competition among the banks. Historically, Philippine National Bank (PNB) had dominated the remittance market, with about a 20 percent market share. However, in 2005, PNB was replaced as market leader by BPI as competition in the remittance market escalated. PNB then fell to third place when Metro bank in 2006 increased its market share to 22 percent. In order to compete more effectively in the growing remittance market, Philippine banks have been expanding their operations and forming strategic alliances. Important advantages for Philippine banks and their remittance customers include accessibility and cost efficiency. Not surprisingly, given the role of the U.S. in generating OFW remittances, a spate of remittance centers (and subsidiaries) has recently opened in the U.S. In 2007 alone, three Philippine banks each opened remittances branches in the U.S. (two in the Bay Area and one in Miami), and several formed partnerships with existing third-party remittance companies that have an established client base. Overall, in the U.S., eight of the ten largest Philippine Banks have some form of remittance operation catering to the U.S.based OFW population, either through their own remittance centers or branches or through strategic partnerships with other institutions. In addition, Philippine banks have been diversifying the services they provide to OFWs in order to gain a competitive advantage and to use remittances as a tool to reach the unbanked. In 2007, for example, Metro bank partnered with internet-based company Xoom.com to permit their OFW customers to remit money via the internet. In the Philippines, Banco De Oro, through its affiliation with one of the

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Philippines largest retailing conglomerates, the SM Group, permits remittance beneficiaries to pick up their remittances at SM Supermalls and Hypermarkets so that they can use the money immediately for purchase in those same stores. Several Philippine institutions, including Metrobank and PNB, offer the convenience of door-to-door remittance in order to gain a competitive advantage. Several other banks have been tying their remittance services to loans and savings products as a means of introducing banking services to the rural population. Remittances to Sri Lanka Trends in migration Trends in migration for employment Increased in late 1970s. Due to the Economic reforms during 1977/78 which saw relaxation of exchange control. Opening up of opportunities in the Middle East due to oil price hike in 1979 Gross annual outflow has increased from 20,000 (mid 1980s) to 200,000 (2008) and Outflow of migrants per annum exceed the number entering the labor market annually. By 2008, estimated 1.8 million Sri Lankans were working abroad (SLBFE) Type of migrants -Nearly 62% -female migrants - Early emigrants were unskilled workers (majority were house maids) - Some increase in skilled migrants in recent years - But, unskilled migrants still account for 80% of the total migrants The outbreak of ethnic conflict, in early 1980s, also led to a large number of political migrations. Middle East is the main source of remittance. North America and Europe were important sources during1980s. Declining trend in North America has been seen. Recent growing trend in Europe Changes in composition of Sri lanka migrants & Changes in the global labor market.

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Regions Middle East North America European Union Europe Other South Asia South East Asia Far East Asia Australia Other Total

1987 45.5 20.5 16.1 5.0 1.8 4.2 4.1 1.5 1.2 100.0

1999 61.7 7.3 13.6 5.6 0.8 1.9 6.1 1.0 2.0 100.0

2008 59.8 3.9 1.8 4.4 1.1 3.1 6.0 1.9 1.8 100.0

Migration Policy Framework First Act : Sri Lanka Bureau of Foreign Employment Act, 1985 Lead agency for oversea employment administration Ratification of international convention on the protection of the rights of all migrant workers and their families (1996) Establishment of a separate ministry Ministry of Foreign Employment Promotion and Welfare (MFEPW) (2007) Sri Lanka Bureau of Foreign Employment (established in 1985) Manage emigrations, data collection, standards for employment contracts, workers welfare Sri Lankan Foreign Employment Agency (pct) Ltd. (established in 1996) Established for sourcing foreign employment. for youth Secure employment abroad, ensuring worker welfare The Association of Licensed Foreign Employment Agencies Ensure and enforce best ethical practices for foreign employment trade Sri Lanka National Policy on Labor Migration-2009 promote skilled and safe migration, ensure worker freedom and rights strengthen institutions and regulation

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Macro Level Impacts Remittance flows are An important source of external financing for developing countries Steady source of funds Are often Large (in excess of Official Development Assistance (ODA), Foreign Direct Investment (FDI), and portfolio flows Stabilize economic downturns during external shocks such as natural disasters, financial crisis, political conflict, etc. Micro Impacts Impact of remittances on HH incomes and expenditures Can reduce poverty Improve households capacity to cope with shock (e.g., health shocks, crop failure) Improve the households investments on health and education Incidence 10% of households receive remittances A higher percent of urban and richer households receive remittances On average households receive RS. 8,177 a month from remittances Impact of remittances on income and expenditure Impact on expenditure In total migrant-households spent more compared to matched-migranthouseholds Expenditures on food, non-food, health and education are higher for migrant house holds However, expenditure on durable goods are lower Differences are significant (at 1 % level, except for durable goods (5% level)) Impact on incomes

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 Incomes are higher for migrant-households They also receive a higher level of income from properties, financial and physical assets Migrant-households receive income from a more diverse set of sources (more stable) Differences are significant at 1% level. Economically, migrant-households are better off compared to non-migrant households Impact on health and education Theory Mixed effects on health and education Expenditure on health and education more for migrant hhs But, lack of parental guidance and additional household responsibilities may Increase school absenteeism or dropouts Reduce nutrition and health care for children (younger children) Increase substance abuse (older children) Results from impact study Expenditures on health and education are higher But no significant effect on health and education outcomes Enhancing quality and reach of remittance channels High outreach Wide network of state banks Including North and East Several banks have Business Promotion Officers in foreign countries Western Union has 3007 agent locations in Sri Lanka Lower transaction cost High speed Other incentives NRFC and RFC are tax exempted

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 Higher interest rates for NRFCs Special loan schemes for migrant worker (housing, self employment etc) Insurance coverage Reasons for Sri Lankan migrants to use informal channels High transaction cost at the destination Insufficient overseas branch network Government rules and high cost at foreign countries Undocumented workers Workers with expired visa Unaffordable minimum amount of money to open bank accounts at foreign countries Avoidance of the exchange controls Irregular money senders Measures to enhance formal channels Local level Strict enforcement of law Established committees to improve remittance flows should be more focused and constructive Government support in terms of legislation to enhance the foreign bank networks and business Destination countries Agreements between sending and receiving countries Orientation Programmes at the destination countries Strict exchange control regulations Low transaction cost Conclusions and Policy Implications Sri Lanka has experienced a steady increase in emigrations and remittance flows over the last couple of decades promotion officers Integration of local banking network

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 Majority of Sri Lankan migrants are housemaids and unskilled migrants But, number of skilled migrants has increased over time The expatriation of health sector workers are also high Evidence suggests that remittances are beneficial at the macro level Remittances are a more significant and stable source of foreign capital Remittances have provided significant BOP support Remittances have helped to offset adverse impacts of external shocks Remittances have improved national savings

Remittances to Sri Lank Years 2000 2001 2002 2003 2004 2005 2006 Remittances in ($000) 1165827 1184990 1309080 1437750 1589570 1990736 2184770 % of GDP 7.14 7.53 7.65 7.61 7.69 8.16 7.73

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2007 2008 2009

2526700 2927400 33621800

7.81 7.24 8.01

Remittances to Maldives Years 2000 2001 2002 2003 2004 2005 2006 2007 2008 Remittances in ($000) 2,196,855.00 1,823,119.00 2,012,192.00 2,012,192.00 2,900,092.00 2,257,250.00 2,800,000.00 2,982,000.00 3,377,000.00 % of GDP 0.35 0.29 0.31 0.29 0.37 0.30 0.31 0.28 0.27

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2009

3,714,700.00

0.25

Remittances to Bangladesh The economy of Bangladesh mainly agrarian base. The economy of Bangladesh has undergonerapid structural transformation towards manufacturing and services. The contribution of theagriculture sector to GDP has declined from 50 percent in 1972-73 to around 20 percent in 1999-2000 and 15 percent in 20042005. Although the contribution of agriculture sector to GDP ismoving downward, but still this sector is the main employment provider. The growth of industrial production has achieved more than 6% over the last 5 years. Moreover, the export sector has also accelerated with the averaged growth of 30% over the last 5 years. Years 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Remittances in ($000) 1,967,529 2,104,552 2,858,058 3,191,665 3,583,817 4,314,503 5,427,516 6,562,316 8,940,611, 10,523,100 % of GDP 4.18 4.48 6.01 6.15 6.34 7.16 8.77 9.59 11.24 11.78

The Financial System of Bangladesh

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The financial system of Bangladesh consists of Bangladesh Bank (BB), the central bank, 4Nationalized commercial banks (NCB), 5 government owned specialized banks, 30 domestic private banks, 10 foreign banks and 28 non-bank financial institutions. The financial system also includes insurance companies, stock exchanges and co-operative banks.

Financial System of Bangladesh (According to Bangladesh Bank)

Bangladesh Bank

Banks - 49

Non-Bank Financial Institutions -28

Nationalized commercial banks- 4 Private banks 30

Leasing companies Housing Finance Investment companies

Bank has legal authority to supervise and regulate all the banks. Although the financial system Includes other players like insurance companies, stock

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exchanges and co-operative banks, but Bangladesh Bank doesnt regulate these institutions. Each of the institution is regulated by different authorities. The insurance companies are regulated by Ministry of Commerce; Stock exchanges are regulated by Securities and Exchange Commission (SEC) and Cooperative banks are regulated by Ministry of Local Government, Rural Development and Co-operatives.

Flow of Migration from Bangladesh Bangladesh is considered as a huge labor surplus country. From 1976 to 2004 total about 3.92 million people migrated temporarily from Bangladesh. On an average, the country exports about 140,000 people annually from 1976 to 2004. Systematic recording of information on migration of Bangladeshi workers began in the mid-70s. Bureau of Manpower, Employment and Training (BMET) of Labor Ministry maintains the record. Now BMET is under the Ministry of Expatriates' Welfare and Overseas Employment. BMET has classified temporary migrant population into four categories. These are professional, skilled, semi-skilled, and unskilled. Doctors, engineers, nurses and teachers are considered as professionals. Manufacturing or garments workers are considered as skilled; while tailor, mason etc. as semi-skilled workers; housemaid, cleaner, laborers are classified as unskilled. the skill composition of those who migrated over this period, in general, indicates a consistent level of comparatively high proportion of semi and unskilled migrant workers. In 1990, 40 percent of the migrant workers were in professional and skilled category, and the rest of the 60 percent were in semiskilled and unskilled category. In the year 2004, although the number of migrant workers increased significantly but the proportion of

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professional and skilled category; and semiskilled and unskilled category remained almost unchanged. In 2004, 44 percent workers were in professional and skilled category, and the rest of the 56 percent were in semiskilled and unskilled category. The manpower export increased gradually after 1990 and the number of skilled workers also increased but it was not that significant proportionately to that of semiskilled and unskilled workers. Increase in the flow of semi- skilled and unskilled workers in proportion to professionals indicates two things. Firstly, Bangladesh hardly took into account that in order to advance and protect its international market of professional and skilled workers it needed to invest in development of its human resources in accordance with the market need. Failing to do so has resulted in losing its traditional market to other competing countries and also to newly emerging ones. Secondly, according to migration experts, during the early years of the oil price hike, the Middle Eastern countries mostly needed professional and skilled persons for their rapid infrastructure development. The 1990s saw the gradual slowing down of the pace of infrastructure development. This does not mean that there has been an overall reduction in the need for labor. Rather, these economies now need more semiskilled and unskilled labor for maintenance purpose and domestic work. Global Bangladeshi Diaspora Diaspora is an old term originating from a Greek word. Diaspora is defined as transnational groups of immigrants living abroad in host countries but maintaining economic, political, social and emotional ties with their homeland and with other diasporic communities of same origin. Such view sometimes brought suspicion in some quarters about the ultimate loyalty of the emigrants. Trans nationalism in this context helped explain the loyalty of the immigrants. Many Bangladeshi went to the developed countries for better life. Their most preferred destinations are Western Europe, North America, Australia and New Zealand. However, they are also located in almost all the federating states of formed Soviet Union and the eastern European states of Bulgaria, Hungary, Czech and Slovak Republics,

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Romania and Poland. However, there is a relatively small presence of Bangladeshis in Africa and Latin America, South Africa being the only exception. There is no information readily available on the number of Bangladeshi long-term emigrants. The population census data of Bangladesh does not include information on migration, internal or international. BMET, the repository of information on short-term migration, does not have any mechanism to keep record on the long-term migrants. The countries on which such estimation available were: UK, USA, Italy, Japan, Australia, Greece, Canada, Spain, Germany, South Africa, France, Netherlands, Belgium and Switzerland.

Country UK USA Italy Canada Japan Australia Greece Spain Germany South Africa France Netherlands Belgium Belgium Total

Number of Bangladeshi Immigrant 5,00,000 500000 70000 35000 22000 15000 11000 7000 5000 4000 3500 2500 2000 1400 1178400

The above table presents the estimated number of Bangladeshi migrants in those countries. It provides estimates of fourteen countries. In these countries there are about 1.178 million Bangladeshis now living abroad permanently either as citizen or with other valid documents. South Africa is the only country of the African continent that has some information on expatriate

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Bangladeshis. On the other hand, though Japan does not admit long-term residents officially, there is a good segment of Bangladeshi Diaspora population living in Japan. At present a huge Bangladeshi community, with a population of 639,390 people lives in Britain. The third generation of the pioneers is on their way to establishing themselves in the mainstream British business, commerce and politics. Trends of Remittance in Bangladesh Bangladesh is considered as one of the major labor exporting country of the world. Since independence over 4 million Bangladeshis went abroad. The cumulative receipts of remittances from Bangladeshi migrants during 1976-2003 stood at around US$22.0 billion5. In 2003, through the official channels Bangladesh received 3 billion US dollars and it is estimated that another 3 billion US dollars came in through the informal channels. Bangladesh accounted for 12% of all remittances coming into South Asia and 2% of the overall global remittances6. According to Ministry of Expatriates Welfare and Overseas Employment, despite a sharp decline in manpower export, the countrys remittance earning increased by 27 percent in the year 2005 than the previous year with the total remittance crossing US $ 4 billion mark for the first time. In 2004, the earning was US $ 3.5 billion while 0.25 million Bangladeshis went abroad for job purposes this year against 0.27million last year. Careful analyses of the available household survey data indicate that remittances have been associated with declines in the poverty headcount ratio in several low-income countries and in Bangladesh remittances play a significant role to decline poverty by 6 percent. In the year 2000, remittances contribute 4% in total GDP in Bangladesh. Among the top 20 remittance-recipient countries, the position of Bangladesh was fourteenth and amount was US$3.4 billion in 2004. In Bangladesh, remittance hits a record $653 million growth in March 2006. The main sources of remittance of Bangladesh is migrant workers living in Kingdom

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of Saudi Arabia (KSA), which contributed 41.1% in Fiscal Year (FY 2004 and 39.3% in Fiscal Year 2005. Besides, Bangladeshi migrant in USA contributed 14.5%, UK 9.8% and migrant workers in Kuwait contributed 10.6% in FY 2005.

Government and Private Sectors Initiatives for Transferring Remittance Bangladesh Bank continues its efforts to encourage Non-Resident Bangladeshis (NRBs) to send their money through official channels. Remittance has become a good source of income for some of the banks with strong network abroad. Earlier the Nationalized Commercial Banks (NCBs) were the main official channels to transfer remittance. The NCBs have some overseas branches in United States, Europe and Middle East. Moreover, NCBs have agreement with the foreign banks in many countries for smooth transferring of remittance. But the process of transferring remittance through NCBs is lengthy and takes some days. So, now a day the private commercial banks (PCBs) have become more aggressive in remittance business providing quick and reliable services and attracting the Bangladeshi wage earners to send money home through banking channel. Although the flow of transferring remittance in Bangladesh through official channels is increasing, but according to World Bank staff estimates based on household survey, the informal sources of remittance channel is still higher. The choice of Remittance channel in Bangladesh: formal 46% and informal 54 %. The formal system means the transferring through banking system and the informal system can be through hundi system, friends and relatives, hand carried etc.This informal system is based on trust and is underpinned by a loose network of traders (shop owners, money changers etc.) who settle transfers amongst themselves, using their existing trading relationships. For the remitter, the hundi system has the advantage of being inexpensive, fast and accessible. Its two significant

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drawbacks are that it is illegal, and is based purely on trust and is therefore theoretically a high-risk proposition.

Estimates of Remittance Channels Channels Formal Channels Hundi Friends and Relatives Hand carried Other Proportion 46% 40% 5% 8% 1%

To attract Bangladeshi wage earners by providing quick and reliable services three PCBs i.e. National Bank Ltd., Arab Bangladesh Bank Ltd. and BRAC Bank Ltd. have made an agreement with Western Union, an US-based organization for financial services which has been covering more than 200 countries with its network. The number of branches of each bank which is transferring remittance through Western Union as following table:

Name of Banks and number of centers transferring remittance through Western Union Name of Banks National Bank Ltd. Arab Bangladesh Bank Ltd. Number of Centers 76 34

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BRAC Bank Ltd. Total

450 560

Remittance and Economic Development in Bangladesh The remittance and economic development in Bangladesh can be broadly explained in two ways: overall Macroeconomic benefits of remittance and Macroeconomic Benefits at Household Level. Macroeconomic Benefits of Remittance Remittance plays a significant role for the economic development of Bangladesh. According to latest economic and social survey of UN Economic and Social Commission for Asia and the Pacific (UN-ESCAP), annual remittances exceed official development aid and foreign direct investments in Bangladesh. Formal remittances stood at US$3.8 billion in 2004, equivalent to around 6% of GDP. It is extremely hard to measure the informal remittance flow, but these channels are considered to be almost as much as formal remittances. Therefore, if informal channels are included this figure reaches US$5.9 billion, or around 910% of GDP. Formal remittances have been growing at over 10% annually since 2000, due to effective government policies encouraging greater efficiency and confidence in formal remittance payment channels. Formal remittances alone are equivalent to more than 50% of total government revenue, and are equivalent to around 4 times total annual aid flows in 2004. Remittances also represent around 40% of export values, and play a critical role in providing foreign currency and financing the countrys trade deficit. Remittances play a critical role in generating foreign exchange reserves for Bangladesh equivalent to around 40% of export revenues, and around 6% of GDP. The foreign currency aspect of remittances is especially important as Bangladesh runs a trade deficit and is currently suffering from a serious foreign exchange crisis. Growth in remittances is likely to be one of the key factors in the

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medium run in maintaining foreign exchange reserves and thereby maintaining economic stability.

Macroeconomic Benefit at Household Level The remittance has significant macroeconomic impact at household level. The macroeconomic impact of remittances at household level partially depends on the characteristics of the migrants and hence the recipients i.e. whether they constitute the rural poor, or the more educated sectors of the population generally residing in urban areas. The majority of Bangladeshi migrants abroad is unskilled, and originates from rural areas. Unskilled workers take jobs in Saudi Arabia, the United Arab Emirates, Malaysia, and to a lesser extent US and UK as domestic staff and laborers. Saudi Arabia alone accounts for around 43% of migrants out of Bangladesh. According to official statistics, from 1976 to 2004, 46% of migrants were unskilled, lacked access to land and resources. The poverty profile of migrants is looked at more closely in the social appraisal. However the evidence clearly shows that most short-term migrants abroad are poor and from rural areas. The poorer the household, the more impact or benefits remittance income can have on alleviating poverty. In the short-term remittances help loosen the budget constraints of their recipients, allowing them to increase expenditures on both durables and non-durables products, and provides them with protection against negative income shocks. Remittances are cited as making up around 60% to 70% of recipient poor households total income. Investment in health and education is valuable for long-term economic growth and poverty reduction. Studies conclusively found that migrant families invested more in these areas. The most comprehensive review of the literature on remittances in Bangladesh lays out a number of benefits that are listed in the table below.

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Major Indicators Nutrition

Positive Impact of Remittances Allow families of migrants to meet basic nutritional needs

Living condition and Housing Education Healthcare Social security

Living condition and housing improved Invest for education of children Increased investment for healthcare Social security for elderly people increased

Investment

Increased investment in business or income generating activities

An average each migrant remitted 55.65 percent of his income. Again remittance constituted 51.12 percent of the total income of these households. Ahigher portion of remittance is used for consumption. Another significant portion of remittance is used for purchase of land and home construction. It may be mentioned here that while going abroad a migrant worker usually manages the fund for his migration either by selling land or mortgaging land. So to retrieve the sold or mortgaged land and also purchase additional land remittance plays an important role. Moreover, some portion of remittance is used for food, clothing, health care and childrens education. A very small portion of remittance is used by the recipients for investment in business or other ventures and savings. Besides, during returning home the migrant workers bring some luxurious products i.e. color television, CD and VCD player, cosmetics and other electronics item for home use, which reduce the usual amount of remittance that could be sent by the migrant workers. If the utilization of remittance is

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categorized as productive and non-productive purposes, then it will be found that most of the remittance goes to non-productive purposes and a very insignificant portion is utilized for productive purposes.

Government initiatives to Encourage Remittance Flow and Utilize for Economic Development The Bangladesh Government has established the Ministry of Expatriates' Welfare and Overseas Employment on December 20, 2001 to ensure welfare of the expatriate workers and increase of the overseas employment. The Ministry has been rendering ceaseless efforts in enhancing the flow of remittance and to provide equal opportunity for the people of all areas of the country for overseas employment and ensuring overall welfare of the migrant workers. Bureau of Manpower, Employment and Training (BMET) was established in the year 1976 by the Government of the Peoples Republic of Bangladesh as an attached department of the then Ministry of Manpower Development and Social Welfare with specific purpose of meeting the manpower requirement of the country and for export of manpower as well. BMET is engaged for over all planning and implementation of the strategies for proper utilization of manpower of the country. Presently BMET is under administrative control of Ministry of Expatriates Welfare and Overseas Employment. With the support of government Bangladesh Association of International Recruiting Agencies(BAIRA) is an association of national level with its international reputation of co-operation and welfare of the migrant workforce as well as its approximately 700 member agencies in collaboration was established in 1984 with a view to explore job opportunities for skilled, semiskilled, and unskilled personnel, to facilitate the migration process of workers and provide necessary information to them, to advise the government for revising foreign policy according to the current discourse of manpower export. Government has also undertaken different savings and investment facilities for non-resident Bangladeshis. Moreover, tax holiday and tax exemptions are also provided to encourage remittance flow and utilize it for economic development.

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Determinants of remittances Despite the important volume of these informal inflows in labor-exporting countries, the factors that affect the volume, direction and forms of these informal remittances and whether and how policies can influence them. Remittances are considered to be influenced by the following factors:

number of workers wage rates economic activity in the host country and in the sending country exchange rates relative interest rate between the labor-sending and receiving countries political risk facility for transferring funds marital status level of education of the migrant whether accompanied or not by dependents years since out migration and household income level.

These factors affect the total pool of remittance income, the decision whether or not to remit, the amount to remit and the uses of remittance incomes. Factors that affect migrant workers' choice between the formal banking system and informal channels in remitting their earnings include: individual socio-economic
73

characteristics of their household members, levels and type of economic activity in the sending and host countries, differential interest and exchange rates and the relative efficiency of the banking system compared with informal channels. Analyze the determinants of remittance levels with a view to gauging the potential responsiveness of remittances to policy interventions designed to encourage migrants to remit more. She found that the level of and the cyclical fluctuations in economic activity in the host countries explain 70 to 95 per cent of the variation in remittances flowing into labor-exporting countries. The number of migrant workers abroad and their wages together explained over 90 per cent of the variation in inflow or remittances into these countries. Looking at per capita remittances instead of total remittances, the study showed that the length of actual or expected stay of the migrant abroad and the number of dependents at home appeared to have some influence on remittances. Use of remittances Micro and Macro Implications The expenditure pattern of migrant households is central to any meaningful discussion on the development implications of labor migration and the design of policy measures to enhance the developmental impact of remittances. There is a striking convergence on the nature of the expenditure pattern of households and the potential benefits and costs of remittances for the labor sending countries. Micro-Implications For the most part, remittances are used for daily expenses such as food, clothing and health care -- basic subsistence needs -- and they make up a significant portion of the income of those households. Funds are also spent on building or improving housing, buying land or cattle, and buying durable consumer goods such as washing machines and televisions. Generally only a small percentage of remittances are used for savings and what is termed "productive investment" for

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e.g. income and employment-generating activities such as buying land or tools, starting a business and other activities with multiplier effects. There is however an opposing view which sees remittances as a household strategy for improving recipients' standard of living, providing resources for food, housing improvements, education and small household appliances. These researchers feel that the criticism of consumption patterns ignores the personal circumstances as well as structural conditions in which migrants make their decisions as well as the inherently private nature of the transfers and the limited opportunities for small-scale investment in the community and the social and financial capital needed for a new business. Thus, given the circumstances in the various countries (poor infrastructure, lack of access to credit, etc) the migrants are making rational decisions about the use of their remittances. Macro-Implications At a macroeconomic level, remittances often provide a significant source of foreign currency, increase national income, finance imports and contribute to the balance of payments. Remittances also have economic, social and political life and contributed to the expansion of wire transfer and courier companies as well as money exchanges. Negative school of thought says Remittances not only fail to help the economy but also decrease the likelihood of an improved economy. The inflow of funds can be deceptive if it creates dependence among the recipients, encourages the continued migration of the working age population and decreases the likelihood of investment by the government or foreign investors because of an unreliable workforce. Also remittances are frequently spent on imported consumer goods, rather than locally produced ones wage rates and dramatic changes in the relative price of labor. The availability of foreign exchange, together with growing demand for consumer goods not available in the domestic market, has been linked with a rising demand for imported goods. On the one hand, they find that informal remittances in the form of foreign exchange are pumped into finance trade and lead to the same impact

75

as formal inflows. On the other hand, if the remittance is made in the domestic currency, the net effect of the remittance is on the domestic economy and not on trade. Benefits and costs of remittances from international worker migration Benefits Ease foreign exchange constraints and improve balance of payments Permit imports of capital goods Are spent on consumer goods which increases and raw materials for industrial demand, increases inflation and pushes up wage development levels. Are potential source of savings Result in little or no investment in capital and investment for capital formation and development Net addition to resources generating activities High import content of consumer demand increases dependency on imports and Raise the immediate standard of living of recipients exacerbates BOP problems Replace other sources of income, thereby increasing dependency, eroding good work habits and heightening potential negative effects of return migration Improve income distribution (if Are spent on 'unproductive' or 'personal' poorer/less skilled migrate) investment (e.g. real state, housing) Create envy and resentment and induce consumption spending among non-migrants Costs Are unpredictable

Policy measures to influence the flow and use of remittances

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Over the years, governments have introduced a number of policy measures to affect migrants' decisions to maximize the flow of remittances back to the laborsending country and to direct them to socially optimal ends. Because remittances are essentially private transfers, these policy measures have been largely in the form of incentives, but in some instances they have also been imposed as mandatory requirements. It is generally accepted that policies can encourage remittances - recorded or unrecorded - for longer-term growth and income security in labor-sending economies:

by encouraging migrants to hold savings in financial assets in the laborexporting country rather than abroad (or spending their savings on consumer goods)

by redirecting remittances to official channels and by facilitating the investment by migrants in self-employment and enterprise creation in labor-exporting countries.

Governments of labor exporting countries have introduced a variety of schemes for migrants with the above policy objectives in mind: repatriable foreign exchange accounts to encourage the greater use of official channels, foreign currency denominated bonds to encourage the acquisition of financial assets in the labor sending country and self employment investment schemes to stimulate more direct investment in productive assets.

Policy measures to influence the choice of the remittance channel

Mandatory remittance requirements Only Korea has used mandatory requirements as an effective tool for attracting remittances to the domestic banking system. As a condition for issuing exit permits, the Korean government stipulated that at least 80 per cent of the earnings of migrant workers be remitted through the Korean banking system. Available estimates indicate that the average formal remittance ratio of Korean workers (about 90 per cent) usually exceeds the minimum legal limit. In the Philippines minimum remittance requirements (50 per cent to 80 per cent, depending on the profession ) were introduced in 1982 by Executive order no. 857, but the law soon became inactive because of implementation difficulties. Attempts in Pakistan, Thailand, Bangladesh to introduce mandatory remittance limits have experienced similar fates. The effectiveness of the Korean policy is closely related to the unique features of the Korean labor exporting process, perhaps best described as "package" approach. Almost all Korean migrant workers are employed directly by Korean companies involved in construction projects in the Middle -East. The government plays an active role in the process by directly assisting companies to win contracts, as part of its strategy of export promotion. The Korean corporations deposit their employees salaries in foreign currency accounts in Korean banks. The "package" approach ensures a higher remittance rate and promotes savings by workers in general; the workers are housed in work camps where their daily requirements are provided for by the company, and they are recruited for shorter terms (rarely exceeding a year) so that family ties remain intact and there are positive incentives to maximize remittance. In contrast to Korea, a large number of workers from the Philippines, Thailand and Bangladesh find employment overseas through "unofficial" channels. There is no package approach conforming incentives and constraints. The level of remittances is in these countries correspondingly lower, particularly in conjunction with exchange rate overvaluation, high bank charges, delays involved in clearing foreign-currency

78

denominated cheques, negative interest rate on domestic savings and economic uncertainty associated with domestic political instability. This suggests that a legal remittance requirement policy can be effective only in the rare situation where the authorities have direct control over the entire process of labor migration. Incentive Schemes Given the essentially private nature of the remittance decision, labor-exporting countries attempt to attract remittances rather through incentives rather than through mandatory means, primarily:

repatriable foreign currency accounts and Foreign-currency denominated bonds.

a) Repatriable foreign currency accounts Many countries give migrant workers (both temporary and permanent) the opportunity to remit their earnings into foreign-currency accounts (RFCAs) in domestic banks. These accounts are not subject to foreign exchange regulations. This is all the more attractive in a context of an economy which restricts foreign capital movements. India and Pakistan pursue an active interest rate policy relating to these accounts in order to ensure an attractive premium over world financial market rates for account holders. Since 1980, rates on foreign currency accounts in Pakistan have been adjusted in line with the movements in the Eurodollar deposit rate in London. In 1991, the margin over the Eurodollar deposit rate ranged from 0.75 per cent for three month deposits to 1.63 per cent for three year deposits. Likewise, since 1982, the Indian government consistently maintained interest rates on these accounts at a substantially higher level than that on comparable domestic or Euro-currency deposits. In contrast, in Sri Lanka, interest rates on

79

these accounts have, in fact, remained below world market rates in most years. In Korea, the Philippines and Thailand, interest rates have mostly been at par with exchange-rate adjusted domestic-currency deposit rates. In Bangladesh, the foreign currency account scheme (Wage Earners' Scheme (WES) initiated in 1974) offers a premium exchange rate to the conversion of foreign -currency balances into local currency (Taka). Migrant workers are also permitted to sell the balances in foreign currency accounts directly to importers, through daily "auctions" conducted by the major national banks. Importers are allowed to use foreign exchange thus purchased to import a list of commodities authorized by the import control authorities. During 1974-82, the exchange rate premium applicable to WES dealings was about 30 per cent. It is generally assumed that this was instrumental in diverting remittances to official banking channels. Since 1983, the premium has, however, tended to decline, as the government gradually embarked on a policy reform involving the removal of quantitative import restrictions and rectifying exchange rate misalignment. A major limitation of foreign currency accounts as a tool for stimulating remittances is that they, by their very nature, are attractive only to migrants belonging to professional and higher-skilled categories who earn relatively higher incomes. According to a survey conducted in Sri Lanka in 1984, only 8 per cent of return migrants had used this facility, of whom 90 per cent were skilled workers, and no housemaids (who account for about 70 per cent of migrantworkers from Sri Lanka). In his analysis of the behavior of net repatriable deposits in India, also comes to the conclusion that these deposits originate predominantly from relatively high-skill and high-income migrants who are in a position to assess investment opportunities and redeploy their investible resources. During 1977-85, the average share of inflow of remittances into repatriable accounts in the total formal remittance of India was only 15 per cent. The figures for Pakistan and Sri Lanka for the same period were 1.5 per cent and 5 per cent respectively.

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b) Foreign currency bonds Some labor-exporting countries like Pakistan, Bangladesh and India use foreign currency denominated bonds as a tool for stimulating remittances. Foreign currency bonds are similar to repatriable foreign currency accounts in that the money invested is repatriable without being subject to the foreign exchange regulations. Compared to repatriable foreign currency accounts, they are considered to be more effective in diverting unrecorded remittances into the formal banking system, because of the anonymity provided. In 1985, Pakistan introduced a scheme of Foreign Exchange Bearer Certificate (FEBCs) to supplement her foreign currency accounts scheme. The FEBCs are issued by the State Bank of Pakistan on payments of foreign currency and they carry an interest rate of about 2 percentage points above the Eurodollar deposit rate. They are encashable in foreign or domestic currency at a premium of 8 to 15 per cent on the official exchange rate. Given the high interest rate, the premium exchange involved and the anonymity of investment, these certificates appear to be an effective contender to the Hundi system. Total investment in FEBCs during the period from 1985/86 to 1987/788 amounted to US $300 million or about 6 per cent of total remittances for this period. In 1986, the Central Bank of Bangladesh introduced Wage Earner Development Bonds (WEDBs), a type of foreign-currency denominated government bonds specifically designed for migrant workers. The interest rate on these bonds is significantly higher than the rates paid on domestic bank deposits of comparable duration. In Bangladesh, there is also a single premium insurance scheme under which workers can obtain a life insurance cover by paying a lump-sum premium in foreign currency. Generally, one finds that none of the incentive schemes address all factors that lead to the leakage of remittances into informal channels. Exchange rate overvaluation acting as an implicit tax; low relative rates of return on domestic

81

financial assets induce the retention of money balances in foreign bank accounts; the lack of adequate and efficient banking facilities, and restrictive foreign exchange practices explain unrecorded remittances. Whether "migrant-specific" incentive schemes can significantly divert remittances when the fundamentals remain distorted and when institutional deficiencies remain unrectified, is doubtful. On the basis of three indicators of institutional deficiencies, i.e. the financial intermediation ratio (M2/GDP), the black market premium, a measure of the degree of exchange rate overvaluation, and the severity of exchange and trade restrictions in the economy and the real interest rate showing the degree of relative incentive for financial saving vis--vis consumption. The favorable domestic environment in Korea may explain why the remittance ratio has well exceeded the legal limit. For Sri Lanka, the low incidence of remittance leakage is in accord with the low degree of exchange rate overvaluation, the high degree of financial development in the economy, and positive real interest rates. Thailand shows a below-average remittance leakage ratio even though she does not have any specific policy aimed at influencing remittances. It is also worth noting that the degree of exchange rate overvaluation was one of the lowest in Thailand at that time. The country also shows the highest degree of financial intermediation and a high real positive interest rate. Bangladesh is a case apart; its general macroeconomic environment (as reflected in the overvalued exchange rate, low degree of financial development and the negative real interest rate) would in principle not suggest to be conducive to formal remittances. Here the low degree of remittance leakage could be due to the operation of the WES, to which workers of all walks of life have access to foreign currency account schemes in other countries. Given Bangladesh's fairly restrictive import regime, the import entitlement element of the WES scheme generates a handsome scarcity premium for workers.

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Policy measures to influence the use of remittances If governments in Asian labor-exporting countries have generally displayed a keen interest to develop policies to attract remittances, they have given much less attention to policies aimed at influencing the pattern of utilization of remittances. This is somewhat astonishing since channeling remittances into productive investment is generally considered an essential ingredient of growth promotion in labor exporting countries. Where they have been adopted, such policy initiatives have taken basically three major forms:

Facilities to allow migrants to import machinery and equipment at concessional rates of duty Business counseling and training Entrepreneurship programs.

Facilities for importing investment goods Pakistan has a "Non-Repatriable Investment Scheme" under which overseas Pakistanis (including those returning permanently) are allowed to import machinery and equipment at concessionary rates of duty to establish manufacturing enterprises. The rate of duty rebate varies i.e., projects in relatively underdeveloped areas receive a higher rate of rebate. As a part of the scheme, the Investment Advisory Service of Pakistan undertakes pre-feasibility studies to facilitate the choice of investment projects. Pakistani migrant workers are also allowed to invest in export processing zones which enjoy complete duty exemptions on machinery and raw material imports. In India, migrant workers who return home for permanent settlement and wish to set up a new industrial unit or participate in the expansion of existing business units are given preferential access to capital goods and raw material imports. The impact of these schemes has not yet been assessed. However according to the available fragmentary evidence, so far their overall impact has been rather insignificant.
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Business counseling and training The Government of Korea launched an experimental training program for return migrants in early 1986. The program aims at retraining return migrants in new skills so that they can move to other industries or establish their own business. By mid-1986, some 4,000 workers were participating in the scheme . In Thailand, the Bangkok Bank offers an advisory service on investment opportunities to its migrant-worker customers. The workers who seek advice are also eligible to obtain supplementary loans from the bank if they have a good record of savings. As of 1987, only a few return migrants had approached the bank to obtain these services. The overseas Pakistanis Foundation (OPF), a non-profit organization created for the welfare and advancement of overseas Pakistanis, offers investment advisory services to return migrants and assists them in obtaining services from relevant government departments in setting up business. The Welfare Division of the OPF has published a 'Guide to Investment' for return migrants giving information on the available credit facilities, savings schemes and business advisory services. In the Philippines, the POEA (Philippines Overseas Employment Administration) prepared in collaboration with the ILO, a proposal to establish training centers in various high-migration regions. These centers would provide business consultancy, information services, training in small-scale business management and financial supports to return migrants and their family members. In Sri Lanka, the Department of Labor initiated a counseling service for return migrants in 1981. A "Return Migration Branch" was established in the Research and Development Division of the Ministry of Labor, to identify the problems of returning migrants and provide counseling and advice. For different reasons however, the program never became fully operational. Entrepreneurship development Sri Lanka was the first labor-exporting country in Asia to launch an entrepreneurship development programme for return migrants. This programme, inaugurated in 1982 by the Sri Lankan Ministry of Labor in collaboration with the

84

Merchant Bank of Sri Lanka (referred to henceforth as 'ML-MB Program'). Aimed at guiding returning migrants in business creation. This initiative showed that return migrants belonging to higher occupational categories are suitable for an orientation program of this type leaving out unskilled return migrants. Second, the possibilities for guiding candidates into business are limited unless accompanied by measures to facilitate the access to capital. Third, the ability to identify and develop a project, as well as managerial skills needed to run a business, cannot be imparted only through a program of class instruction. In the Philippines, by 1987 the Welfare Fund had funded 23 single-owner ventures. Like Sri Lanka, the majority of workers involved in these projects belonged to relatively high-income occupational groups. A systematic study of the sustainability of these businesses has not yet been undertaken. In the South Pacific there has been no concerted effort by government to offer incentives to remit more through official channels and to induce more investment of remittances in productive activities. The potential role of micro-finance in linking unrecorded remittances to development On the whole, then, the attempts of Governments of labor-exporting countries to attract unofficial remittances and influence their uses domestically have had a mixed record. There are a few schemes for self-employment and vocational retraining, but these contribute only marginally to the re-absorption of labor. Clearly, it is difficult to convert successful migrant workers/savers with no prior business experience into dynamic entrepreneurs. It could be argued that it is more realistic to introduce financial intermediaries that capture migrant remittances as deposits and channel them to existing small and microbusinesses, rather than transforming migrants directly into entrepreneurs.

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In other words, rather than focusing on 'migrant-specific' investment Programmes, labor exporting countries might wish to induce micro-finance institutions to capture remittances. The basic idea would be to design policies to transfer funds of the migrant workers through to entrepreneurs. Savings and credit schemes and investment instruments specifically designed to suit migrant workers' risk profiles could be important vehicles. This could involve elements of a payroll deduction scheme and a fund mechanism offering competitive remuneration and little restriction on withdrawals. Partnerships with commercial wire transfer and courier service companies could help share risks and costs. Migrant worker savings could also be managed similar to pension funds. These options need to be explored in greater detail by policy-makers. It is plausible that these types of savings-credit schemes are attractive to migrant workers who often consider overseas employment as a means of saving money for the undertaking some investment upon return.

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T.T charges as a ratio of total remittances Years Total Remittances in USD Millions TT Charges paid to banks in million (PKR)

2004 2005 2006 2007 2008 2009 2010

3,872 4,169 4,600 5,494 6,451 7,811 8,906

535 714 795 854 1,198 1,876 3,599

9000 8000 7000 6000 5000 4000 3000 2000 1000 0

Total Remittances in USD Millions TT charges paid to banks in million(PKR)

2004 2005 2006 2007 2008 2009 2010

During 1970s and 1980s, Pakistan has experienced a massive outflow of Pakistanis migrating to work in other countries particularly in the Middle East. This has resulted in a significant financial inflow in the form of remittances. The

87

remittances have become a valuable source of foreign exchange for economic development of Pakistan. It had resolved in improving the balance of payments problem of the country. Worker's Remittances (US $ Million)

Year Remittances % Change 1972- 132.00 73 1973- 139.14 74 1974- 211.10 75 1975- 339.20 76 1976- 577.72 77 1977- 1156.33 78 1978- 1397.93 79 1979- 1744.14 80 1980- 2115.88 81 1981- 2224.89 82 1982- 2885.67 83 1983- 2737.44 84 1984- 2445.92 5.41 51.72 60.68 70.32

Year

Remittances % Change -11.67 -5.74 2.39 -4.84 -20.60 6.46 -7.47 29.09 -24.11 -0.47 5.68 -28.82

1987- 2012.60 88 1988- 1896.99 89 1989- 1942.35 90 1990- 1848.29 91 1991- 1467.48

92 100.15 1992- 1562.24 20.89 24.77 21.31 5.15 29.70 -5.14 -10.65 93 1993- 1445.56 94 1994- 1866.10 95 1995- 1416.17 96 1996- 1409.47 97 1997- 1489.55 98 1998- 1060.19 99 Jul806.98

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85 1985- 2595.31 86 1986- 2278.56 -12.20 6.11

Mar9899 JulMar9900 731.45 9.35

87 Source: Economic Survey 1999-2000, Government of Pakistan, Economic Advisers Wings, Finance Division, Islamabad, (www.finance.gov.pk) From the table, it is clear that in 1972-73, the workers remittances were about $136 million or 18% of the total merchandise exports and they increased every year. Since then a declining trend in the remittances started and during 1988-89 it reached at $1896.9 million. The share of Middle East in total remittances fell from 85% in 1983-84 to 68% in 1988-89. This decreasing trend continued in 1990's.In 1997-98 the remittances rose to $1489.5 million or by 5.7%.Worker's remittances during July-April 1999-2000 amounted to $731.41 millions as against $806.98 million in the comparable period of 1998-99, indicating a decline of 30.9%. The main reason behind the significant decline in remittances is the large difference between the open market rate and government fixed rate of foreign exchange. This large difference has discouraged expatriate Pakistani to send their remittances through official channels. Bilateral Remittance Estimates for 2010 using Migrant Stocks and Host Country Incomes (millions of US$) RemittanceBangladesh Bhutan India receiving country (across) Remittance89

Maldive s

Nepal

Pakistan Philippines Sri Lanka

sending country (down)

Bhutan Sri Lanka Nepal Bangladesh Cyprus Brunei Darussalam Portugal Finland Thailand New Zealand Iran, Islamic Rep. Korea, Rep. Israel Jordan Malaysia Austria Switzerland Sweden Other South Belgium Japan Ireland Netherlands Greece Denmark Singapore France Australia Bahrain Oman India Norway Spain Germany

0 0 0 0 4 9 2 8 5 11 0 23 0 55 215 21 16 46 215 13 115 37 13 34 7 194 21 237 0 434 864 16 71 74

14 137 75 120 14 28 40 28 19 257 0 10 125 22 147 97 125 134 122 127 165 140 143 34 64 1,167 301 1,906 496 1,021 0 130 208 552

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0

0 0 0 0 1 75 0 3 54 7 0 20 0 2 0 0 12 4 56 6 144 3 20 0 4 0 11 119 0 0 222 13 9 50

0 0 1 1 1 2 3 3 3 7 9 10 10 11 12 14 17 21 33 37 39 46 56 76 79 89 94 105 108 113 123 175 181 197

0 0 0 0 28 61 1 9 2 67 0 72 0 18 281 78 90 51 11 52 1,194 106 67 26 66 0 48 1,014 76 26 0 118 173 212

0 0 0 0 21 3 0 2 9 17 0 11 0 32 2 0 137 26 6 3 28 2 38 3 38 9 151 288 0 38 13 74 2 158

90

Remittancereceiving country (across) Remittancesending country (down) Italy Kuwait Qatar Canada Saudi Arabia United States United Kingdom United Arab Emirates ESTIMATED REMITTANCES IN 2010 647 1,372 0 390 1,310 1,748 1,887 933 11,050 710 2,025 1,033 4,080 3,339 15,279 4,629 15,879 0 0 0 0 0 0 1 0 8 0 1,386 58 81 708 435 0 3,513 237 331 540 641 1,208 1,390 1,661 1,720 9,407 714 326 380 2,053 946 11,685 593 646 21,311 227 436 147 394 365 130 324 475 3,612

55,000 3

91

92

Informal Channels

There are many terms used to describe informal remittance systems such as hawala, including alternative remittance systems, underground banking, ethnic banking, and informal value transfer systems. For a basic transaction to take place there needs to be a remitting party, two remittance service providers and a recipient (see figure below). Once the funds have been paid to the recipient, the agent in the remitting country is indebted to the agent in the recipient country. The principals to the initial transaction do not play any role in subsequent clearing and balancing of this position.

The Basic Informal Remittance Transaction

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In order to be able to make quick and regular payments upon request, each hawaladar needs to maintain a cash pool proportionate to anticipated demand. It is instructive to look into the sources of cash pools in labor-importing (A) and labor exporting (B) countries. Hawala operations thrive not only in regions with less developed or unregulated formal banking infrastructures, but in all countries with significant South Asian communities, including North America and Europe. The following are the main sources for cash pool A (labor-importing countries): 1. Remittances of expatriates to their families 2. Payments for imports 3. Payments for services received overseas 4. Investment funds in excess of permitted limits 5. Traders who over-invoice exports or engage in bogus exports 6. Income not declared in the country of residence (tax evasion money) 7. Proceeds of misconduct or criminal enterprises of all types 8. Contributions to militant groups and ethnic causes The sources for the South Asian hawala pools are slightly different. Cash pool B (labor-exporting countries) is fed by: 1. Funds to cover students tuition overseas 2. Funds to cover medical expenses overseas 3. Tourists money beyond amounts allowed under currency controls 4. Capital flight 5. Payment for imports 6. Tax evasion 7. Miss invoicing of trade 8. Bribes of politicians and government officials 9. Money from criminal enterprises

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There are several reasons for the popularity of the Hundi market. First, the hundi rates of exchange are almost always higher than the official exchange. Second, most of the people believed that though only market is informal in nature but operates on the basis of trust and it is not the interest of the agent to acquire a bad reputation. Third, the key reason for the success of hundi market is the relative efficiency of the hundi system over the commercial banks. These include easier access, convenient timings, faster service and home delivery service. Despite the increase in remittances, the money received through legal banking channels, the unofficial hawala, business is thriving in Pakistan. Operators of that illegal business have changed the way they conduct it. In some cases, they receive money from the expatriates in the host country and give them a code number. Their sub-office in Pakistan makes payment to the recipient on disclosure of the code number. As an additional safeguard, a copy of the identity card of the recipient is also obtained before making the payment. In 2009, remittances are expected to fall by 0.9 per cent. Migration flows from developing countries may slow as a result of the global growth slowdown, but the stock of international migrants from these countries is unlikely to decrease, says the World Bank. Discussion on Pakistan The US State Department document,(2005) asserts that remittances can play an important role in development finance and in promoting economic. It is obvious evident that remittances in Pakistan persistently increasing on yearly basis but the rates of growth in not matched with that rise in remittances. But there are some obvious reasons behind this negative relationship in case of Pakistan and these are; terrorism, insecurity, milt insurgency as well as the law and order conditions and shortage of power, if the situation are normal in Pakistan, he will obtain the benefits of high growth using the amount of remittances for the development purposes .

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Gross Domestic Product and Remittances of Pakistan (2000-01 - to - 2008-09) Period GDP (%) (FC) Remittances (%) 10.4 119.8 77.4 - 8.6 7.7 10.4 19.4 19.7 20.5

2000-01 2.0 2001-02 3.1 2002-03 4.7 2003-04 7.5 2004-05 9.0 2005-06 6.6 2006-07 7.0 2007-08 5.8 2008-09 2.7 Source: Pakistan Economic Survey; Various issues

In Pakistan, another impediment is non-availability / non-responsiveness of formal banking institutions in the important destination countries let the Pakistani emigrants to continue their reliance on the informal mode of money transaction i.e. Hawala system because this mode of transaction is approachable, cheaper and faster. These enterprises (formal and informal channels) need to contend with competition from the hawala system. They also face tough competition from wire transfer services, such as Western Union, which have more market power. According to certain estimates, this type of business is gradually losing global market share, from 50% in 1996 to 45% in 2001.

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REMITTANCE FROM SAUDI ARABIA

Receiving country

First quarter 2011

Third quarter 2010

Fee

Exchange Percent Total rate margin (%) 1.38 (%) Cost

Percent Total (%) Cost

Pakistan

2.74

2.75

5.49

4.12

8.24

Nepal

5.2

0.88

3.48

6.95

3.27

6.55

Bangladesh 5.45

1.37

4.09

8.19

4.19

8.39

Indien

5.87

1.69

4.63

9.26

5.05

10.1

Philippinen

8.09

0.91

4.95

9.9

4.5

97

12 10 8 6 4 2 0 Exchange rate margin Percent (%) Percent (%) Total Cost Total Cost Fee Pakistan Nepal Bangladesh India Philippines

First quarter 2011

Third quarter 2010

COST OF SENDING REMITTANCE FORM SAUDI ARABIA Firm Name Firm Type Fee Exchang Total e Rate Margin (%) Bank Al-Rajhi Bank TeleMone y MTO 0.00 22.52 1.23 1.23 9.24 Less than one hour MTO Express Money 0.00 22.51 1.28 1.28 9.57 Less than one hour 0.00 22.52 1.23 Cost Percent (%) 1.23 9.24 Total Cost(S AR) Transf Network er Spee d 2 days Branches of MCB Nationwide Bank counters in receiving country Nationwide Branches of MCB Nationwide Jan 30, Jan 30, 2011 Jan 30, Habib Bank, 2011 Coverage Date

Habib Bank, 2011

98

MoneyGra m

MTO

22.00

22.51 1.28

4.21

31.57

Less than one hour

Money Gram branches/ag ents Branches of Nationwide

Jan 30, 2011

Saudi American Bank (SAMBA) Western Union

Bank

25.00

22.42 1.67

5.00

37.53

Less than one hour

Jan 30,

United Bank 2011

MTO

25.00

22.42 1.67

5.00

37.53

Less than one hour

Western Union branches/ag ents

Jan 30, 2011

REMITTANCE FROM U.A.E Receiving country Fee First quarter 2011 Third quarter 2010 Exchange Percent Total Percent Total rate margin Sri Lanka (%) 4.72 1.37 3.73 7.46 3.29 6.59 (%) Cost (%) Cost

Philippines 5.99 1.45

4.44

8.88

3.74

7.48

Nepal

6.24 1.49

4.61

9.23

3.27

6.55

Indien

6.73 1.58

4.94

9.89

4.33

8.67

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12 10 8 6 4 2 0 Total Cost Exchange rate margin Percent (%) Percent (%) Total Cost Fee Sri Lanka Philippines Nepal India

First quarter 2011

Third quarter 2010

COST OF SENDING REMITTANCE FORM UAE Firm Name Firm Type Fee Exchan ge Rate Margin Wall St Exchange MTO 0.00 (%) 0.60 Total Cost Percent (%) 0.60 . Total . Cost( USD) 1.21 Transfe r Speed 6 days or more Bank account in receiving country Nationwide MTO Al Fardan Exchange MTO UAE Exchange 0.00 0.90 0.90 1.81 2 days 0.00 0.82 0.82 1.64 2 days Bank account in receiving country Nationwide Bank account in receiving country Nationwide Jan 23, 2011 Jan 23, 2011 Jan 23, 2011 . Network Coverage Date

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MTO Wall St Exchange MoneyGram MTO

0.00

1.12

1.12

2.23

Less than one hour Less than one hour

Branches/agents Nationwide

Jan 23, 2011

5.44

0.77

3.50

6.99

MoneyGram branches/agents such as Wall Street Kiosks Nationwide Western Union branches/agents Nationwide

Jan 23, 2011

MTO Western Union

6.80

1.46

4.86

9.72

Less than one hour

Jan 23, 2011

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As for as the cost of transferring money is concerned it varies greatly from country to country due to exchange rate differential and according to the method of transfer, but migrants are not interested only in transfer costs. They are also interested in the risk they carry. The cheapest transfer methods are self handcarries and ordinary post, but they involve also the highest risk of being stolen. The hawala system is par excellence a system of trust. It is very popular because it is relatively inexpensive, senders do not have to provide identification and it is well organised in the migrants home countries. countries Future of Remittances The Economist belongs to the Pakistan Institute of Development Economics (PIDE) revealed that if improper channel are vanished, the Pakistan can earn about 20 billion dollars per year and there is dire need to guide properly for the utilization of those remittances for the development purposes (personal communication 2009) Recently Pakistan has received $ 11.2 billion remittances by the grace of God. If this huge amount is utilized properly it ensured to reduce poverty in Pakistan. According to population census (1998) Pakistan has one of the youngest populations among the worlds more populous countries. The populations median age is 17 years which means that some 80-85 million people are less than 17 years old, assuming that the countrys population is between 160-170 million at this time, this young population could become a burden for the economy of Pakistan and it could also be turned into an asset. The process of labor migration is important as it is a source of getting a respite from the unemployment issue and also providing important foreign exchange that contributes to the socio-economic development plans and policy. It has been

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observed that remittances can have an important multiplier effect. One remittance dollar spent to fulfilled desires will stimulate retail sales, which stimulates the drive demand (Demand for factor of production) which then ultimately stimulates output and employment. Following Table shows that the average rate of increase in remittances from USA during the past four year has remained much lower than that from the GCC and UAE. An impressive average growth of 34.25 % per annum from UAE, and 33.75% collectively from Bahrain Kuwait, Oman and Qatar, which clearly indicates that the centre of gravity of Pakistans home remittances has shifted towards Middle East. However, still a huge amount of money comes from the USA and UK with an average rate of growth of 8.5 percent and 15.75 percent respectively. The remittances received from different countries from FY-2005 to FY 2009 and Average annual growth in four years in percentage. Period Remittances from USA Remittance s From Saudi FY- 05 FY- 06 FY- 07 FY- 08 FY -09 Average Annual Growth in Four Years FY -10 $ 1.318bn $ 1.34bn $ 1.497bn $ 933m $ 661m $ 1.294bn $ 1.242bn $ 1.460bn $ 1.762bn $ 1.736bn 8.5% Arabia $ 627m $ 750m $1.023bn $ 1.251bn $ 1.56bn 15% Remittance s From UAE $ 713m $ 716m $ 866m $ 1.09bn $ 1.689bn 34.25% Remittance s From other GCC $ 512m $ 596m $ 757m $ 983m $ 1.203bn 33.75% Remittance s From UK $ 372m $ 439m $ 430m $ 459m $ 606m 15.75%

(July. Mar) Source: Basic Data SBP:

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Remittances from GCC countries remained strong, though the oil price boom in the gulf region has decreased, but a large number of Pakistani professional, including Engineers, Doctors, Bankers, and Teachers and highly skilled to semiskilled laborers are well settled in those regions and most of them engaged in business activities. All this is going to keep the inflow of home remittances steady and high. Average annual growth of remittances i.e. 34.25 has been received from UAE, Bahrain, Kuwait, Oman and Qatar, while inflow of remittances from USA are declining because of obvious reason that USA economy has yet recovering from great recession of 2008-09. Recommendations

With globalization, international migration will continue to drive increasing levels of remittances to developing countries. The study identified five forces governing international migration patterns: Wage and opportunity gaps between rich and poor countries. Regional conflicts and political instability in developing countries. The relative share of young adults in the populations of sending and receiving countries. Numbers of migrant people residing in receiving countries. Reductions in the cost and inconvenience of travel.

All these factors apply to the South Asia region. Regional conflicts have led to the migration of many people. Governments in the region have rightly expressed a strong interest in macro- and micro impacts of remittance flows. Enhancing the Development Impact of Remittances The South Asia region has much to gain from the increased flow of migrants employment and higher wages for the migrants and the remittances that they send to their families.

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There are two key determinants to enhancing the development impact of remittancesthe education level of the migrants and the investment opportunities available to the migrants. It is recommended that more research work be done to clarify the impact of international remittances on poverty and economic development in South Asia. Such work should be focused in three areas. Data: Governments should make greater efforts to count the amount of remittance monies that are currently transmitted through informal, unofficial channels. Research methods: More household panel surveys need to be undertaken in South Asian countries to collect information on the expenditure patterns of international migrant households. Investment climate: More research and policy work needs to undertaken to encourage policy makers in South Asia to improve the investment climate for returning migrant workers.

Formal Financial Infrastructure for Remittances Following goals should be achieved to improving rural population access to remittance services: Easy, nearby, convenient access to electronic small-value payment services, particularly in rural areas Reliable, rapid, low-cost remittances to support the transition from informal to formal channels Basic financial services, including savings and credit facilities Affordable access to information and communication The above goals are all essential ingredients for attracting remittance clients. To achieve these goals, the following possible policy options should be considered across the spectrum of remittance options open to the public.

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 Competition among money-transfer agents: The competitive process would be strengthened if smaller firms could enter into agreements with the state banks or the national post offices to use their branch networks to remit funds. Shared payments systems platforms: In each country, the vast network of rural financial institutions should be converted into a single shared payments platform through which remittances could easily be channeled to any part of the country. Public-private partnerships: Partnerships across infrastructure, products, and services will yield the types of gains attained in Latin America and East Asia with respect to remittance costs and convenience. Fundamentally, remittance service providers should cooperate on infrastructure and compete on services, but not both. Cross-selling: Encouraging recipients to open and maintain bank accounts that might eventually lead to short- and long-term loans should be part of the business strategy of banks in the region. Credibility: Formal financial institutions, particularly state banks and post offices need to rebuild their credibility. People use informal remittance systems because they are not only cheaper, but they are also often more reliable than the formal institutions within their reach. Informal Financial Infrastructure for Remittances In Bangladesh, India, Pakistan, and Sri Lanka, informal remittance systems are commonplace. However, the informal nature of these systems, particularly anonymity and lack of records, presents risks of misuse. If the formal financial sector is to respond to the legitimate market demand for hawala type transactions, and if hawala operators are to be effectively regulated. The progress made by the formal sector in expanding its activity at the expense of informal activity could easily be reversed.

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In the majority of countries, where informal systems exist alongside a functioning conventional banking sector, it is recommended that hawala dealers be registered. In these systems, additional efforts should be made to improve transparency by bringing informal dealers closer to the formal financial sector. High transaction costs, long delays in transferring remittances, exchange controls, and overly bureaucratic policies and procedures for simple money transfers are major incentives for the existence of the informal financial system. To face the challenge, the formal sector should tackle its deficiencies and enhance its competitiveness.

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CONCLUSION

International migration and remittances are important to poverty and economic development in South Asia. Pakistan earned a huge amount of remittances by the grace of God, there is dire need to provide proper guidance to remitters to spend this money for development purposes, which ultimately generate income and create employment. Higher development spending on education sector to produce and export high quality professionals and high skilled manpower can help Pakistan in accelerating the pace growth in home remittances. When there was unemployment in the country, people were compelled to leave the country for livelihood and sustenance. Resultantly, they move to foreign countries at a very high psychic and unbearable logistic cost. The low wage rate forced the workers to move out and caused a massive brain drain from the country especially the skilled and professional workers. Formal Financial Sector Infrastructure for Remittances The combined state and private banking infrastructure, including the postal networks, provides a good basic infrastructure for remittances flows. However, the formal infrastructures potential is not being maximized. The region remains largely cash dominated. Several different factors account for the lower-than-possible penetration rate of remittance services across the region, including:

Rural outreach: Although progress has been made in the region on rural access to financial services, poorer households in rural areas still have little access to formal financial services.

Quality of financial services in rural areas: The limited access to financial services extends to the quality and choice of products and services provided by rural bank branches, which appear to be generally lower than similar products and services in urban areas.
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Regional disparities: Large regional differences exist in the distribution of financial services. The presence of branches alone does not ensure access to finance; as expected, income is a determinant to financial access.

Payments system technology: Improved payment systems platforms could substantially reduce transaction costs by expediting check clearance, reducing exchange losses, and improving disclosure, especially in rural areas.

Informal Financial Sector Infrastructure for Remittances Informal transfer systems remain prevalent in the South Asia region because of their speed, convenience, low cost, and accessibility. High transaction costs, delays in transferring remittances, exchange controls, and overly bureaucratic policies and procedures for simple money transfers are major incentives for the existence of the informal financial system. To face the challenge, the formal sector should tackle its deficiencies and enhance its competitiveness. There is a need of redirecting remittances from unofficial to official channels and the following prescription can be designed for that purpose. Opening of Pakistani commercial bank branches in major labor importing countries. The use of mobile banking service in the Middle East economies. Increasing the speed of transactions of commercial banks by reducing the rules and regulations related to remittances. Encouraging Pakistani migrants to open bank accounts in Pakistan prior to their departure abroad. There's a need that Pakistan should explore new market for manpower export and maximize the benefits of migrant labor through efficient enabling of productive investment of these remittances into the economy. The government should ensure economic stability and political stability.

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References

The State of Pakistans Economy,State Bank of Pakistan, third quarterly report for the year 2009-2010 of the Central Board of SBP: workers remittances

World Bank. 2005. Global Economic Prospects 2006: Economic Implications of Remittances and Migration. Washington, DC. www.worldbank.org/prospects/migrationandremittances.

IMF. 2005a. World Economic Outlook. International Monetary Fund, Washington, DC. Institute of Public Policy (2009). State of the economy: Emerging from Crisis. Second Annual Report, Beacon house National University, Lahore.

www.statebank.com/remittance.htms http://www.sbp.org.pk/ http://www.worldbank.org/prospects/migrationandremittances http://www.worldbank.org/migration. http://go.worldbank.org/QGUCPJTOR0). https://blogs.worldbank.org/peoplemove. http://go.worldbank.org/V6Y4QOL7A0. http://www.migrationinformation.org/dataHub/remit_pdf/All_regions. pdf http://data.worldbank.org/indicator/BX.TRF.PWKR.CD.DT www.odi.org.uk/resources/download/290.pdf http://www.migrationinformation.org/datahub/remittances/Philippine s.pdf

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