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Impact of Remittances on the Government of Developing Countries like Pakistan

Essay by   •  January 13, 2013  •  Research Paper  •  8,614 Words (35 Pages)  •  1,591 Views

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IMPACT OF REMITTANCES ON THE GOVERNMENT OF DEVELOPING COUNTRIES LIKE PAKISTAN

INTRODUCTION

A remittance is defined as any form of income coming into the household from a migrant worker working outside the society, situated in another place in the country or abroad. The migrants sent money to home is the second largest monetary inflow to many developing countries, beyond international aid. Most recent World Bank approximate is that some US$250 billion was remitted globally in 2006 and these figures are increasing by almost 30% year on year. Remittances put in to economic growth and to the livelihoods of poor people globally (info@cepa.lk).

Migrant remittances are a gradually rising outside supply of capital for developing countries.

The importance of remittances in developing countries is increasing according to UNCTAD. Formally documentation of remittances received in 2003 by developing countries goes beyond $93 billion. The remittances to developing and least developed countries (LDCs) arrive to US$316 billion in 2009.

Remittances in Pakistan are used to overcome the financial transfers within the country, as well as transfers outside the country. Study of remittances is limited for the abroad, that's the reason take remittances in Pakistan, means sending of money to Pakistan communities or colonies or Pakistan national living from outside the country to family and other friends in Pakistan, with in the country the receiving of households domestics transfers were combined for further study, but it is considered as a non-remittances receiving of households domestic products.

Migrant remittances play an important role in the labor exporting countries in the world. Remittances are the single important source of foreign exchange. Foreign exchange is an important recourse of labor exporting countries. The inflow of Remittances affected by both micro and macro factors. Migrant remittances are affected by economic policy failure. The macroeconomic policies vary on the inflow of migrant workers' remittances.

A well-functioning financial sector is expected to attract the idol funds for developing projects and financing economic growth. International migrants are important for low-level income economies like 2% of GDP and 6.2% of their imports (The World Bank, 2003)

LITERATURE REVIEW:-

In recent years, international migrant remittances flow to developing countries which attracted the attention policy makers, scholars and researchers. Remittances believe to be a catalyst for increasing economic growth and increasing purchasing power of households and also serve as an additional working capital for private enterprises of recipient households which belongs to low-income countries.

(Faini, 2002) found that the impact of remittances on economy which allow households to accumulate assets for employment. (Ahorter and Adenutsi, 2009) they found that remittances promotes long-term growth. (Giuliano and Ruiz-Arranz, 2005) found that impact of remittances is not directly related with growth but positive for less developed financial markets.

Remittance is outer supply of money, which helps in developing a country. Remittances are directed towards the requirement of recipient country. It has greater contribution in development of country rather than authorized financial assistance and FDI. Migrants should not charge tax or give direction for the use of remittances. In 2006, remittances sent to developing countries were $221 billion, which was double than remittances in 2002 and it reached to $240 billion in 2007. Informal sources are not included in this record. The reason for doubling of remittances from 2002 to 2006 is because of better measurement of transfers, more inspection since September 2001, decrease in remittances cost and decrease in dollar price, improvement in global remittance stock and intensifying industrial sector. In 2007, large volume of remittances was flowed towards India, China and Mexico. Each country received $25 billion. Share of GDP of some countries is: Tajikistan: 36%, Tonga: 32%, Moldova: 36%, Kyrgyz Republic: 27%. Economy of some developing countries is suffering from political and financial divergence, the volume of remittances tends to increase (Ratha; 2007, Yang; 2006). In India and Bangladesh, remittances are positively related to economic development and it is negatively related in Japan and Moroco. In Africa, remittances are more constant than FDI and bureaucratic financial aid (Global Economic Prospects 2006)

ROLE OF REMITTANCES IN ECONOMIC DEVELOPMENT OF DEVELOPING COUNTRIES: -

Income of recipient countries increases due to remittances. It helps to reduce poverty. Remittances have reduced poverty, 11% in Uganda, 6% In Bangladesh and 5% in Ghana. Remittances can be used as business investment at smaller scale (Mishra; 2005, Sayan; 2006, Gupta; 2007). In EI Salvador and Srilanka, remittances have increased the ratio of school going children. U.S has invested its 1\5 of remittances in small enterprises (Global Economic Prospects 2006). Remittances have positive impact on growth and development as it lessens the constraints on credit. It increases per capital income and minimize income disparity. Remittances are more effective in those countries where developed institutions and strong financial system. In countries where situation is counter cyclic, there is reverse relationship between growth and remittances. But it increases income and minimizes inequality and poverty. If remittances are constant, it will increase real exchange rate and cause loss in exports. Countries, which receive large amount of remittances, should formulate policies to minimize the negative impacts of remittances. Which may consist of: monetary measures, short term and long-term inflows, to enhance labor output and competition in market? Workers' remittances can be increase by decreasing government expenditures. The use of such policies can be restricted by political economy. The negative impact of remittances can be reducing by capturing foreign exchange market. It has less concern with impact of natural resources windfalls and better exchange rate (Loper; 2006, Chami; 2006, Kiriyev; 2006). Central bank of Maldova is capturing exchange market to decrease the pressure of remittances (Kiriyev; 2006). Countries should prefer formal inflows of remittances and make it available to international investors. In developing countries, commercial banks can control remittances inflows to increase capital for their infrastructure projects. Banks in Egypt, Brazil, EI Salvador, Mexico and Turkey have increase more than $15 billion from international market. Remittances help to provide foreign help to banks. It reduces the cost

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