Understanding the remittance growth
Decent growth in remittances of late has lured analysts to connect it to increased vigilance on money laundering, crackdown on hundi/hawala and amnesty scheme offered earlier in the year. First of all, there is no research to substantiate the linkage of remittance growth to the above mentioned factors. Secondly, October 2018 is not the first time in the country, when the monthly inflows approached $2 billion and this could well be an organic growth.
Money laundering is crudely estimated at $10 billion per year and potential gap in remittances is perceived at similar levels too. However, any number is a mere conjecture which cannot be proved or rejected based on available data sets. However, based on the fact that average ticker size of remittances is below $1,000 suggests that the official channels of home remittances are probably not used much for money laundering.
It is pertinent to note that apart from banking channels, money sent back home from exchange companies also constitutes as official remittances.
Exchange companies can still settle the transactions without official recordings and in such cases, money does not cross borders.
If imports are under invoiced to avoid taxes at import stage, the undocumented payment is paid abroad against the remittances, the exchange companies receive. For instance, party A imports $5 million worth of goods and invoiced it at $3 million to avoid sales tax and other import duties, the remaining $2 million is paid in rupees to an exchange company in Pakistan and the company settles this amount against remittances received by its counterpart in Dubai or from any other foreign destination.
The exchange company in Dubai will pay the $2 million on behalf of importer to the relevant exporting party in foreign currency. While in Pakistan, the amount received in rupees by importer is paid to numerous remittance recipients. If the under invoicing is curbed, exchange companies in Dubai are ought to send money in Pakistan through official channels as in case of hundi/hawala money does not cross border.
There are no apparent measures to date on curbing under invoicing. However, there is a case of fall in non-essential imports, lately. Under invoicing is mostly in case of consumer goods which are termed as non-essential. It is likely that the under-invoiced amount of imports declined, and in turn, part of unofficial channel remittances could not be settled through hundi/hawala which is probably reflecting in official flows.
Similarly, the money earned at home is sent abroad through hundi/hawala and the money either stayed abroad or sent back home through official channels to launder it - mostly it comes back in FE25 accounts, not remittances. However, the fine point is that illegal money is paid to an exchange company at home in rupees and that is paid here to numerous recipients of remittance. Thus, if the illegal money transferring though hundi/hawala is stopped, it has a potential to boost official remittances.
This can happen in future; but it is not happening just yet. The recent surge in remittances is attributed to some other factors - increase in labour force going to Malaysia and SBP’s efforts to open up channels with banks, economic recovery in the US, government, release of Rs4 billion subsidies to banks to incentivize official flows along with banks recent marketing activities in Dubai, and thinning spread between kerb and inter-bank foreign currency rates.
