Ghalib penned, “I go along some distance with every swift walker/ I do not yet recognise the guide.” This perfectly unspools the dilemma that accompanies every economic headline – ‘swift walkers’, particularly the ones favouring government narratives, filling the news cycle. The latest commotion surrounding remittance inflows is no exception.
Ghalib penned, “I go along some distance with every swift walker/ I do not yet recognise the guide.” This perfectly unspools the dilemma that accompanies every economic headline – ‘swift walkers’, particularly the ones favouring government narratives, filling the news cycle. The latest commotion surrounding remittance inflows is no exception.
At the heart of the discussion lies an economic phenomenon known as Dutch Disease, which refers to the negative consequences that arise when large foreign inflows -- such as remittances -- cause a surge in currency value, distorting the broader economic structure.
Well recently, remittances from overseas Pakistani workers soared by around 40 per cent year-on-year in February 2025, reaching $3.12 billion. Compared to January, inflows increased by 3.8 per cent. For the first eight months of FY25, total remittances have reached $24 billion, marking a 32.5 per cent rise from the previous year.
Several factors seem to have contributed to this increase, including a radical brain drain, the inflationary squeeze that extends beyond the NCPI, seasonal inflows during Ramazan and government policy interventions. Incentives for banking channels, combined with crackdowns on illegal money transfers, have encouraged the use of formal channels, while a more stable exchange rate and reduced informal market premiums have further discouraged unofficial avenues.
On the surface, the remittance surge appears to be a lifeline for Pakistan’s struggling economy. However, a closer look reveals an unsettling paradox. Historically, remittances have grown exponentially -- from $984 million in 2000 to over $30 billion in 2024 -- yet the Pakistani rupee has continued to depreciate, from 51.77 PKR/USD in 2000 to 282.9 PKR/USD in 2024. The logic of Dutch Disease suggests that large foreign inflows should lead to currency appreciation, making exports less competitive.
But Pakistan’s structural weaknesses -- import dependency, fiscal mismanagement, ill-conceived subsidies and policy distortions -- have produced a different outcome: currency depreciation despite rising remittances. This has exacerbated inflationary pressures and increased production costs for domestic industries rather than stabilising the economy.
The influx of remittances has also reinforced a consumption-driven economic model at the expense of productive investment. Household consumption, which stood at 75 per cent of GDP in 2000, has now climbed to nearly 85 per cent, reflecting an economy sustained by spending rather than savings or capital accumulation. Meanwhile, investment as a share of GDP has remained stagnant between 13-18 per cent, signaling that remittances are not being effectively funnelled into sectors that generate long-term economic growth. The outcome is a classic symptom of Dutch Disease: an illusion of prosperity driven by inflows rather than structural improvements.
This pattern is further reinforced by Pakistan’s trade dynamics. Despite rising remittances, the country’s trade deficit has persistently widened. In 2000, the deficit stood at 2.0 per cent of GDP; by 2018, it had reached 10 per cent, and even in 2024, it remains at 7.0 per cent. This reflects two interconnected problems: first, an import-dependent economy where remittance-fueled consumption increases the demand for foreign goods; and second, a weak export sector that has failed to capitalise on currency devaluation.
The Real Effective Exchange Rate (REER) also signals the same trend, declining from 121 in 2017 to 88 in 2023, theoretically making Pakistani goods cheaper in the global market. Yet, exports have not significantly benefited due to energy shortages, inefficient policies, politically motivated subsidies and incentives, and a lack of industrial competitiveness.
Without structural reforms, Pakistan risks falling deeper into the Dutch Disease trap -- where foreign inflows provide short-term relief but erode long-term competitiveness. By adopting forward-looking policies that encourage investment, improve labour market efficiency and enhance industrial capacity, remittances can be transformed into a driver of sustainable growth
While remittances have provided, prima facie, temporary relief to the current account and have masqueraded underlying weaknesses -- bringing the deficit-to-GDP ratio to near zero per cent in 2024 -- this improvement is more a result of import restrictions rather than genuine export growth.
Since 2008, Pakistan has shifted toward protectionism, raising customs duties and additional taxes. Pakistan’s weighted average tariff of 12.7 per cent is the highest among the top 70 exporting countries, far exceeding the global average (2.7 per cent), South Asia (5.9 per cent), ASEAN (2.5 per cent), China (3.8 per cent) and India (5.8 per cent). This reflects its restrictive trade policies compared to global and regional standards.
On the export side, Pakistan heavily relies on four markets -- the US, EU, China and Afghanistan -- limiting export diversification. Low-tech products dominate, with 70 per cent of exports being low-tech and textiles and clothing comprising 58 per cent of total exports. The export-to-GDP ratio was only 8.4 per cent in 2023, far below India’s 19 per cent and Bangladesh’s 15 per cent, highlighting Pakistan’s need for greater export competitiveness and diversification.
Beyond macroeconomic indicators, the remittance surge has had profound implications for domestic labour dynamics. Studies suggest that remittance-receiving households often reduce their workforce participation, as financial support from abroad lowers the immediate need for domestic earnings.
This, coupled with the mass migration of semi-skilled and skilled blue-collar workers, particularly to THE Gulf countries, may lead to labour shortages and declining productivity in key sectors. A World Bank report highlights that between 1991 and 2021, labour productivity in Pakistan lagged behind other countries, rising only from approximately $3,200 to $4,700 -- a mere 0.5 times increase. In contrast, Vietnam’s labour productivity surged from $1,200 to $6,000, a fivefold increase.
Further, despite its role in alleviating household poverty, remittance inflows do not directly contribute to GDP, since they are categorised as unrequited transfers rather than income generated through production. The long-term challenge, therefore, is to channel these inflows into productive investments rather than fueling consumption. A strategic approach would involve policies that encourage savings, industrial expansion and technological advancement, making remittances a catalyst for sustainable growth.
To mitigate adverse effects, policymakers must design mechanisms that direct remittance flows into sectors that enhance economic resilience. Targeted incentives for export-oriented industries, manufacturing, and infrastructure could help counterbalance rising input costs and prevent stagnation in industrial productivity. Strengthening vocational training programmes and ensuring that skilled workers remain in the country is equally critical.
Further structural reforms are needed to repair the export sector. Gradual trade liberalisation is essential, with trade barriers reduced gradually to help domestic firms adapt. Tariff rationalisation and improved trade infrastructure are critical, as reducing trade costs by just 1.0 per cent can increase trade volumes by 0.7 per cent. Exporter incentives, such as performance-linked and time-bound support, should be introduced for both traditional and non-traditional industries. Reforms to improve the investment climate are also needed to boost private and foreign investment, driving economic growth.
To ensure sustainability, right-to-party privatisation, public-private partnerships (PPPs), rationalisation duties and reforms in the Public Sector Development Program (PSDP) are fundamental.
Lastly, while remittances offer crucial financial support, their unchecked reliance can entrench economic vulnerabilities. Without structural reforms, Pakistan risks falling deeper into the Dutch Disease trap -- where foreign inflows provide short-term relief but erode long-term competitiveness. By adopting forward-looking policies that encourage investment, improve labour market efficiency and enhance industrial capacity, remittances can be transformed from a precarious economic crutch into a driver of sustainable growth.
The writer is a Peshawar-based researcher who works in the financial sector.
