While the slowdown of capital inflows, especially foreign direct investment (FDI), into Pakistan’s economy has triggered serious concerns of late, there is, on the other hand, another inflow that surges year after year and has not only successfully maintained its upward momentum even during the peak global recession period of 2008-09, but also proved to be the much needed support in a period where the Pakistani economy is confronted with serious economic challenges and very demanding constraints on its balance of payments.

This pertains to remittances or private transfers from the Pakistani Diaspora the potential of which, for now, has been estimated at about $20 billion in a World Bank report published in 2012 (currently these are on schedule to cross the $14 billion mark in the running fiscal year).

Remittances from Pakistanis, working in West Asia (Middle East), North Africa and in the developed regions like the USA and Europe, tend to be a big positive since they have literally transformed Pakistan’s external profile and are one of the biggest strengths of the economy.

During much of the post-independence Pakistan, foreign exchange reserves situation and a precarious balance of payments situation has been a serious constraint on our overall growth. Given our peculiar and in certain ways inelastic requirements on imports, the ongoing inflows from  remittances can be regarded as the key factor in saving us many a time from the dreaded situation of default on our foreign payments’ obligations.

As we know, these inflows help in financing the current account deficit (CAD) - which is the broadest measure of a country’s trade imbalance in goods and services - expected to be around four percent of the Gross Domestic Product (GDP). This help in somewhat easing of the external constraint is a profound transformation from the earlier decades of the Pakistani economic history. Though remittances are expected to keep rising, there are doubts, however, about their sustainability in the future or certainly about the sustainability in the pace of their growth.

After all, the West-Asian oil financed construction boom is over and there is now a less need in general of an unskilled Pakistani worker, who builds the basic infrastructure. As the process of recovery from the 2008-09 global crises is far from complete - with the largest economy in the world, the USA, likely to remain in recession - there is a growing backlash against foreign workers in the developed world (especially Europe).

Also, the question that arises here is that under such conditions, how much longer can even the emigration of Pakistani white collared and skilled workers sustain private transfers back home?

Further, the history and future of Pakistani remittances need to be looked at from a regional perspective. And in this context, Kerala’s (India) experience is quite relevant, since it vitally depends on private transfers that amount to one-thirds of its net state domestic product. Thiruvananthapuram-based Centre for Development Studies (CDS), India, has been doing pioneering work on emigration and the impact of remittances on Kerala’s economy. The CDS has, in fact, completed five large-scale surveys on migration - in 1998, 2003, 2007, 2008 and 2011.

A Return Migration Survey was done in 2009 to study the pre-recession (October-December 2008) and recession (June-August 2009) experiences of emigrants from the state. These surveys point to a decreasing trend in emigration from Kerala, bulk of which is to West Asia (Middle East).

Although the overall emigration numbers in 2011 were no different from the levels in 2008, important centres like Pathanamthitta district are already experiencing a decline in the number of emigrants and/or emigrants per household. This process could reach its “inflexion point in a matter of four to five years,” argues a recent CDS working paper by Professors K.C. Zachariah and Sirudaya Rajan titled “Inflexion in Kerala’s Gulf Connection: Report on Kerala’s Migration Survey 2011”.

Though there is no such report yet compiled in Pakistan, concerns are already being raised by the Chamber of Overseas Pakistanis about the fast-dwindling emigrant numbers from the historically high emigration areas of Khyber Pakhtunkhawa and Punjab.

Analysts believe that the era of large-scale emigration to West Asia may already be over due to a number of reasons, besides the construction boom petering out. Locally, demographics can be held responsible with the shrinkage due to internal relocation of the young working age population in the key areas of Pakistani manpower export.

Moreover, due to falling wages and rising inflation in the Gulf States, the wage differentials between the Gulf and those prevailing in the developed centres at home have narrowed. Monthly wage of an average unskilled worker in the UAE is Pak Rs 800 per day as against 300 per day in Pakistan, but when adjusted for living and travelling expenses and the inhuman working hours in the UAE, the gap narrows dramatically! Then, of course, there is a growing competition from other countries, whereas, the number of available employment slots abroad (as discussed above) is decreasing.

And if the above is to serve as a precursor for the rest of Pakistan, the big question is that how long will the good times last on the remittances front? What would be the impact of a negative or even a stagnant remittances’ trend on the economy of Pakistan?

Without the boom in remittances, Pakistan will most certainly register higher current account deficits, which if all other things remaining the same may not be sustainable. Having become so reliant on this inflow and its growing trend, financing the resultant balance of payments gap if the remittances were to fall (beyond a certain point) would, perhaps, just not be possible at least in the near-term. This shows the unhealthy nature of our dependence on these inflows and on which the economic managers have little direct control.

Moreover, if the FDI inflows remain sluggish as they are at present, the impasse could push us further towards a default situation, since the alternative of relying on incoming portfolio investments has never really been a significant option in our markets.

Further, portfolio investments more often than not tend to be quite risky, as they are pro-cyclical in nature - rising in good times and falling in bad times - and are highly-volatile as well. The World Bank report also highlights the research, which has established that remittances augment savings and hold, and help in poverty reduction. If such inflows reduce over the near-term, they would worsen these distributional outcomes. The report further warns that while remittances contribute to better economic performance, they can also at the same time be a source of output shocks when they turn volatile.

Such an outcome will be more keenly felt in Pakistan, since we have become highly dependent on foreign remittances from our Pakistani Diaspora abroad – arguably, the single most contributing factor to our current account after the textile sector, however, with a current growth rate higher than the growth rate of our textile exports.

Lower remittances, in turn, would lower per capita income, all of which contribute to social tensions. One understands that in the short term, it is neither possible nor can be expected of our economic managers to reduce our heavy dependence on remittances.

However, it will be in order to sound a warning that in the medium and long terms one of the principal challenges for our policymakers is to find alternatives and develop ways to reduce this dependency, so that the country can cope with a situation if such inflows hit a declining trend. And there is a strong likelihood on such a possibility arriving sooner than we expect!

The writer is an entrepreneur and economic analyst. Email: kamal.monnoo@gmail.com