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Friday October 18, 2024

The remittance bubble

Increasingly unliveable conditions here offer no incentive for anyone to stay

By Nauman Ahmad Bhatti
July 20, 2024
A currency exchange agent counts US Dollars at his company in Iraqs southern city of Basra, on December 8, 2023. — AFP
A currency exchange agent counts US Dollars at his company in Iraq's southern city of Basra, on December 8, 2023. — AFP

According to a recent Gallup survey, 56 per cent of Pakistanis would leave Pakistan for another country if given the opportunity. Why wouldn’t they?

The increasingly unliveable conditions here offer no incentive for anyone to stay. Besides the government’s consistent inefficiency, its policies are also boosting brain drain in the country.

Consider the 2024-25 budget. Tax on low- and middle-income earners has been doubled. The low-income class has been exempted from income tax; while this may seem like a relief, the government’s intent becomes questionable when its next strategy is to increase tax rate for non-filers from 30 per cent to 45 per cent.

Filers are typically those who earn enough to require filing tax returns. Non-filers, on the other hand, include those who either evade taxes or do not earn enough to be in the formal tax system. This punitive measure disproportionately affects the poor and the middle class, which accounts to more than 75 per cent of Pakistan’s population. While higher taxation is not the primary reason behind such large-scale emigration, it is not an incentive to stay either.

The year 2023 saw the highest rate of inflation at 29 per cent. It is projected to be no less in the current year. As of 2024, 40 per cent of the population lives below the poverty line. Unemployment also reached a record high in 2023 and stood at 8.5 per cent. The middle class, already burdened by these economic pressures, finds itself further squeezed by these tax policies.

Meanwhile, the elite class, whose monthly income exceeds Rs2 million, remains largely exempted from any additional taxes. This glaring disparity highlights the government’s skewed priorities, favoring the affluent while neglecting the backbone of the nation’s economy – the middle class and skilled professionals.

In a world where developing nations vie to retain talent, Pakistan stands out by doing the opposite. By making life increasingly untenable for the middle class and skilled labour, the government indirectly encourages emigration. In 2023 alone, more than 860,000 Pakistanis left the country in search of better opportunities abroad, a significant increase from 765,000 in 2022 and 225,000 in 2021.

This export of human capital is not just a strategy, but it is a symptom of a deeper economic malaise. Now, the line between patriotism and pragmatism is drawn with a dollar sign.

Over the years, Pakistan has been increasingly depended on remittances from abroad to keep its economy afloat. The amount of money that the Pakistani diaspora sends back home significantly contributes to GDP.

Economic policies appear to be designed with one primary objective: to maximize remittance inflows. This brain drain is not seen as a loss but rather as a strategic asset by the government. Leaders view the outflow of skilled labour as a means to bolster remittance inflows. The remittance target for 2024 is estimated at $28.5 billion, up from $24 billion in the previous year. As of now, the remittance-to-GDP ratio stands at around 7.0 per cent. This figure surpasses the contribution of more than eight main sectors and subsectors of the GDP.

It is because of this consistent increase over the last years that the government has started to rely on the remittance economy. Hoping that this money will add to its foreign reserves and stabilize the balance of payments; remittances have now become an important factor in policymaking.

This overreliance is not only unsustainable but also indicative of a deeper, more troubling trend: the systematic expulsion of the country’s skilled labour force through ill-conceived policies and neglect.

Reliance on remittances is a short-term solution to a long-term economic crisis. As more Pakistanis seek to settle abroad permanently, driven by factors such as economic inequality, social injustice and extremism, the country’s future becomes increasingly bleak. This heavy reliance on remittances is unsustainable and masks the underlying issues of economic mismanagement and lack of industrialization.

The current economic policies are highly influenced by the IMF as part of the conditions to secure the next tranche of debt. The IMF-centric budget further exacerbates the economic divide, with generous concessions to the elite and increased pressure on the middle class. This approach is counterproductive as it leads to the exodus of skilled professionals whose potential contribution to the local economy can prove to be a game-changer.

The remittance economy may rise in the coming years. But, there are multiple reasons the remittance bubble is bound to burst in the long run.

Most of the ones emigrating do not plan to be back. Once settled, they seek to have their families settled abroad with them. Whom will then they send the remittance money to?

The increasing cost of living in West Asian countries, like Saudi Arabia and the UAE, which host a significant number of Pakistani expatriates, will reduce their amount of savings. The UAE’s plan to increase the remittance fee by up to 15 per cent will further strain the finances of overseas Pakistanis working there. On top of this, a global decline in the demand for manual labour is being observed, especially in Western countries where Pakistanis desire the most to be settled.

All of these factors will have a direct impact on remittance flows. The government seems to have no backup plan once the remittance graph takes a downhill trajectory.

The onus for contributing to foreign reserves lies on the government, not the poor and the middle class. This exodus of skilled professionals will only lead to a shortage of qualified personnel in critical sectors such as healthcare, education and technology. Such a drain hampers innovation and progress.

The heavy reliance on remittances is an unsustainable economic strategy. Rather than the easy way out of kicking its people out to send back dollars, the government must do more.

It must come up with a plan that will create a positive investment climate for entrepreneurs, provide incentives for local businesses, and tax the rich in a way that maintains healthy competition. Only then can the country shift its focus towards a sustainable economy and foster domestic growth.

The writer is a freelance contributor. He tweets/posts @naumanbhatti_1 and can be reached at: naumanahmadbhatti@gmail.com