IMF asks Pakistan to scale back remittance incentives amid hawala fears

The International Monetary Fund (IMF) has asked the Pakistan government to scale down its spending on foreign remittance incentives, prompting experts to caution that such a move could result in the weakening of official transfer channels and will push more inflows back towards backstreet networks, Nikkei Asia reported.

 

The recommendation was included in a staff-level report released by the IMF earlier this month after the second review of its $7 billion bailout programme.

 

"Removing structural bottlenecks that raise the cost of cross-border payments will materially reduce the need for government support to incentivise remittances," the IMF report read.  

 

 

"To this end, we will complete and publish a comprehensive assessment of such impediments and costs and an action plan to address them alongside substantially reducing the fiscal support for remittance incentives," it added.

Why do remittances matter so much to Pakistan?

 

Remittances are Pakistan's biggest source of foreign cash. In the last financial year through June, Islamabad received $38 billion in remittances and exceeded the total revenue from exports, $32 billion. The country offers incentives mainly by offering cash rebates to banks and exchange companies for remittances that are routed via the formal channel, which allows them to pass on the better exchange rates or small bonuses to Pakistani remitters overseas.

 

Islamabad's balance of payment continues to be fragile, owing to the large trade deficit of approximately $27 billion in the previous financial year. However, due to strong remittance inflows, the country's current account posted a small surplus of about $2 billion. Other sources of foreign inflows remained limited, with foreign direct investment (FDI) at around $2 billion. That makes remittances crucial to easing pressure on the currency and reducing the risk of another foreign exchange reserves crisis.

How big is the impact of remittances compared with FDI?

 

Mutaher Khan, co-founder of Data Darbar, a market intelligence provider, told Nikkei Asia that remittances dominate all other inflows and FDIs usually remain at around $1.5 billion annually in Pakistan. "A 5 per cent movement in remittances is larger than Pakistan's entire annual foreign direct investment. Even small policy changes affecting remittances can have a meaningful macroeconomic impact," he said.

Could scaling back incentives revive hawala and hundi?

 

Experts believe that the changes mandated by the IMF will risk disrupting the remittance inflows. Citing an Economics professor, the report added that remittance incentive takes the form of a subsidy in which banks receive a payment from the government in return for processing a transaction. He further added that scaling back this incentive is likely to bring down the flow of payment via banking channels and incentivise remittance flows through the hawala and hundi system.

Hawala system

 

Hawala and hundi are informal, long-established ways of sending money that work through trusted intermediaries rather than banks, often moving funds across borders with little or no official documentation. Despite tighter rules, they remain common among migrant communities linked to Pakistan, India, Afghanistan and Iran, as well as across the Gulf. These routes can be quick and inexpensive, but they operate outside the formal system, making transactions harder to track and raising concerns about misuse for money laundering or terror financing.