The International Monetary Fund has asked Pakistan to limit government spending on incentives for foreign remittances, leading to increasing concerns among analysts that a rollback could divert monetary flows to illegal hawala and hundi channels, further adding to financial woes.
The global money lender’s recommendation came in a staff-level report released earlier this month following a second review of its $7bn bailout package to Islamabad.
According to a report by Nikkei Asia, economists in the country have warned that curbing these incentives risks weakening the official banking networks that have helped direct remittance flows within formal registered legal fiscal channels.
In its assessment, the IMF said that lowering the cost of cross-border payments and avoiding structural bottlenecks could help in reducing the constant need for government-funded incentives, adding that Pakistan plans to review barriers and costs associated with remittances and prepare an action plan, while significantly reducing fiscal support for the current incentive schemes.
Remittances are a cornerstone of Pakistan’s economy and its single largest source of foreign exchange. At the end of its first fiscal year in Jun 30, Islamabad had received over $38bn in remittances, far exceeding its export earnings which roughly total $32bn.
By comparison, foreign direct investment remained subdued at around $2bn, underscoring the outsized role of remittance inflows in supporting the economy.
As such, the government encourages remittances through official channels by offering incentives such as cash rebates to banks, loyalty based initiatives, and exchange companies for every dime sent.
These benefits are often passed on to overseas Pakistanis in the form of slightly better exchange rates or small bonuses, making formal channels more attractive than informal networks.
As per Pakistani analysts, these incentives have been a key factor behind the steady rise in officially recorded remittances in recent years, helping to stabilise the PKR and ease pressure on foreign exchange reserves.
They caution that any sharp reduction could narrow the gap between official and informal rates, reviving backstreet money-transfer systems that are harder to monitor and regulate.
Pakistan’s external accounts remain fragile. The country posted a trade deficit of nearly $27bn in the previous financial year, continuing to strain the balance of payments.
Strong remittance inflows, however, helped offset that gap and allowed Pakistan to record a modest current account surplus of around $2bn.
As other foreign inflows are greatly limited, economists argue that remittances have a far greater and more immediate impact on Pakistan’s macroeconomic stability than foreign direct investment.
According to policymakers, authorities will need to tread carefully in implementing the IMF’s recommendation, balancing fiscal savings against the risk of undermining one of the economy’s most reliable lifelines.
