Macroeconomic determinants of workers’ remittances and their effects on Pakistan’s economy

Large-scale migration to oil-exporting countries, driven by economic and labour market differentials, is one of the significant features of low- and middle-income economies. Pakistan is one of the leading labour-exporting countries among low- and middle-income countries. Remittances from overseas Pakistanis represent an important part of the country’s balance of payments and play a key role in the development of the economy. However, remittances can create important policy issues in terms of their volatility and their impact on the Pakistan economy. This phenomenon has not been adequately studied and remains extremely challenging because there are a number of unresolved policy issues that require careful investigation to understand their implications. This thesis investigates the macroeconomic determinants of remittances and examines their impact on major macroeconomic indicators using the linear autoregressive distributive lag (ARDL) model, non-linear autoregressive distributive lag (NARDL) model and structural VAR model (SVAR) from 1974 to 2019. Results show that remittance inflows are mainly affected by the macroeconomic conditions of Pakistan, macroeconomic condition of host countries, currency exchange rate and interest rate in Pakistan; however, the magnitude impact of these macroeconomic factors is greater in the case of remittances from high-income countries. Results indicate that remittances promote aggregate consumption and undermine aggregate investment because of moral hazards associated with a large inflow of remittances. Results also reveal that remittances lead to an appreciation in the real exchange rate, deterioration in international competitiveness and creation of inflationary pressure through the money supply channel because of a partial sterilisation of the large inflow of remittances in Pakistan. This thesis recommends that government of Pakistan formulate policies that minimise the adverse macroeconomic effects of remittances on the economy. For instance, the government can offer sufficient investment incentives for migrants’ families.