IMF urges Pakistan to cut remittance incentives, experts warn of shift to hawala channels

New Delhi, Dec 25 The International Monetary Fund (IMF) has asked the Pakistan government to reduce its spending on incentives given for foreign remittances, a move that has raised concerns among experts about a possible shift of money flows back to informal channels.

According to a report by Nikkei Asia, analysts fear that cutting these incentives could weaken official banking routes and push more remittances towards backstreet networks such as hawala and hundi.

The IMF’s recommendation was mentioned in a staff-level report released earlier this month after the second review of Pakistan’s $7 billion bailout programme.

In the report, the IMF said that lowering the cost of cross-border payments would reduce the need for government-funded incentives.

It added that Pakistan plans to assess the barriers and costs involved in remittances and prepare an action plan, while significantly reducing fiscal support for these incentives.

Remittances play a crucial role in Pakistan’s economy as they are the country’s largest source of foreign exchange.

In the last financial year ending in June, Pakistan received around $38 billion in remittances, which was higher than its export earnings of about $32 billion.

The government currently offers incentives by giving cash rebates to banks and exchange companies for remittances sent through official channels.

These benefits are often passed on to overseas Pakistanis in the form of better exchange rates or small bonuses.

Pakistan’s balance of payments remains under pressure due to a large trade deficit of nearly $27 billion in the previous financial year.

However, strong remittance inflows helped the country record a small current account surplus of around $2 billion.

Other sources of foreign inflows have been weak, with foreign direct investment standing at roughly $2 billion, making remittances vital for supporting the currency and preventing another foreign exchange crisis.

Experts say remittances have a much bigger impact on Pakistan’s economy than foreign direct investment.

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