Impact of Global Output Gap on Workers’ Remittances Inflows in Pakistan

Abstract

Pakistan received 75 percent of total workers’ remittances inflows (WRI) during FY2017 from four major source countries (Saudi Arabia, UAE, USA and UK). Economic situation in source countries relative to home country determines decision to remit by emigrants following either altruism (countercyclical) or portfolio rebalancing (pro-cyclical) approach. This study has applied Autoregressive Distributed Lag (ARDL) approach of cointegration to investigate whether WRI in Pakistan from four major source countries followed countercyclical or procyclical approach during the period 1982-2016. The results showed that WRI are positively and significantly affected by real per capita income difference between major source countries and Pakistan. WRI in Pakistan also responded positively and significantly to difference in domestic and foreign real interest rates, however, exchange rate changes showed insignificant impact. The study concluded that WRI in Pakistan follow compensatory (countercyclical) approach and these inflows respond to interest rate differential as well. The policy implication of the findings is that WRI being countercyclical may support policies of government towards social protection in bad economic conditions and interest rate increase may improve current account through surge in WRI.