Impact of Remittances in Pakistan Economy

RMITTANCE EFFECT ON CONSUMPTION AND INVESTMENT

by

Affan Iftikhar

A Thesis Proposal Submitted to the Faculty of the Lahore School of Economics

in Partial Fulfillment of the Requirements for a Bachelor of Science Degree in

Economics and Management

Lahore School of Economics

Barki Campus, Lahore

2015

Contents

Introduction        3

Literature review        5

Theoretical Framework        8

Bibliography        12

Introduction

The transfer of remittance is the flow of money from one person who has emigrated from his /her country of origin to another country in search of employment, to another individual usually a relative or friend at home. It could be one-off substantial amount or small monetary payments, repatriated mainly for both consumption and investment. Remittances laid great importance in the success of many economies. It has contributed a lot to the foreign exchange reserves of Pakistan, since the 1970s. The flow of remittances leave a positive impact on consumption and investment, increase in consumption and investment leads to higher economic growth which in turn reduces the deficit of balance of payments and improve the current account balances. However, remittances also facilitate the country to rely more on its own reserves instead of relying on the external borrowing (Sattar, 2005). Remittances contribute in an economy in several ways as it has a positive effect on economic growth and also reduces the poverty level by increasing the income of the recipient countries. It helps in reducing the credit constraint and also to accelerate the investment in an economy. Furthermore the remittances also empower the people to spend more on education and health care services which in turn contribute to human development (Lucus, 1988). Developing countries like Pakistan rely a lot on the inflow of remittances so there is a positive correlation between the GDP and worker’s remittances, the per capita income in Pakistan is very low and the poverty level is high. Remittances inflows contribute to the overall productivity of all the resources in an economy.

The flow of remittances has a great impact on consumption and investment. There are several studies done for Pakistan which shows positive effects of remittances on the consumption and investment. The flow of remittances is mostly directed towards increase consumerism in households. Poor families who have their members working abroad would get income from remittances and will spend it for consumption purposes to fulfill their need and wants which would otherwise not be fulfilled. Consumption of several families in Pakistan is fully dependent on remittances. This helps them to improve their living standards  (Iqbal, 2005). During the 1970s remittances contribute 4.2 percent in GDP it further increased to 7.5 percent in 1980s. However in 2007 the remittance to GDP ratio is 4.2 percent. Therefore it shows a higher contribution to the Consumption and Investment as both are the component of GDP (Javid, 2012). Remittances are the source of investment for most of the people. The money from the remittances can be invested and can generate returns. It motivates investment in liquid assets which are readily available via financial services. It gives an incentive for exploring new investment activities. The incentive to invest remittances depends on good policy environment as well, as it will increase the returns on investment and raise the opportunity cost on consumption that is if the amount is not consumed it can be invested and a specified amount of return can be earned from it. Remittances facilitates society by first affecting the consumption and investment level and then affecting the GDP positively, which in turn improves the standard of living of individual. As it is being concluded from previous studies that remittances have a positive contribution towards the investment and consumption in an economy therefore it is very important to analyze this fact in more detail. It is expected that this study will positively contribute to the available literature in a significant way by improving upon the previous studies and determining the factors affecting the remittance flow. Furthermore this study will help policy makers understand the importance of remittances and will make policy makers more aware of the policy implications regulations, which directly and indirectly affect remittances, will have.