The International Monetary Fund has urged Pakistan to gradually scale back government spending on foreign remittance incentives, a move that economists warn could undermine formal transfer channels and revive the use of informal money networks such as hawala and hundi.
The recommendation was included in a staff-level report released earlier this month following the second review of Pakistan’s $7 billion IMF bailout program. The report argues that reducing structural inefficiencies in cross-border payments would lessen the need for fiscal support aimed at incentivizing remittances.
“Removing structural bottlenecks that raise the cost of cross-border payments will materially reduce the need for government support to incentivize remittances,” the IMF report said, adding that authorities plan to assess these impediments and substantially reduce fiscal support for remittance incentives.
Pakistan currently offers incentives in the form of cash rebates to banks and exchange companies that process remittances through formal channels. These institutions pass on the benefit to overseas Pakistanis through slightly better exchange rates or small bonuses, helping steer inflows away from informal systems.
Remittances are Pakistan’s single largest source of foreign currency. In the last fiscal year ending in June, overseas Pakistanis sent home $38 billion, surpassing export earnings of $32 billion. These inflows have been critical in stabilizing the country’s external accounts.
Pakistan’s balance of payments remains under strain due to a large trade deficit of around $27 billion last fiscal year. While the current account recorded a surplus of roughly $2 billion, this improvement was largely attributed to strong remittance inflows, as foreign direct investment stood at only about $2 billion.
Aqdas Afzal, an economist who advises Gulf Cooperation Council governments, told Nikkei Asia that remittances were decisive in offsetting external pressures. He noted that Pakistan ran a large trade deficit early in the current fiscal year, which only turned into a current account surplus by the end of November due to robust remittance inflows.
Mutaher Khan, co-founder of market intelligence firm Data Darbar, echoed this view in comments to Nikkei, saying remittances far outweigh other inflows. He noted that even a small change in remittance volumes could have a sizable macroeconomic impact, as a 5% swing in remittances exceeds Pakistan’s annual foreign direct investment.
Several experts cautioned that reducing incentives could push senders back toward informal channels. Naafey Sardar, an assistant professor of economics at St. Olaf College in the United States, told Nikkei that remittance incentives function as a subsidy to banks for processing transactions. Scaling them back, he said, could increase costs and divert flows toward hawala and hundi systems.
These informal networks, which operate on trust between brokers rather than formal banking systems, are widely used across South Asia and the Gulf. While they are fast and often cheaper, they lack transparency and carry risks related to money laundering and terrorism financing.
Sardar warned that IMF-backed changes increasing transaction costs could make informal channels more attractive to overseas Pakistanis, where exchange rates are often better. Khan agreed, telling Nikkei that cutting incentives under current conditions would further weaken the appeal of formal channels and strengthen the pull of informal systems.
Not all experts share this concern. Afzal argued that a gradual reduction in incentives would not significantly disrupt remittance flows, citing the consolidation and widespread adoption of formal remittance mechanisms. He said existing regulatory controls were strong enough to maintain stability even with lower incentives.
Others point to emerging risks from new technologies. Khan told Nikkei that innovations such as stablecoins and freer capital flows could further complicate Pakistan’s regulatory environment, adding pressure to the formal remittance system and potentially affecting future inflows.
