Impact of Foreign Remittances on Macroeconomic Variables in Receiving Countries

Abstract

This paper investigates how workers’ remittances impact macroeconomic variables, income distribution, and living standards in receiving countries, specifically Pakistan. Remittances are injections into the economy, which, through the multiplier effect, increase the total amount of money circulating in the economy.  Money injection causes demand-pull, cost-push, and imported inflation, which depreciates the currency. Depreciation of the currency does not increase exports of the receiving country because the Marshall-Lerner-Condition does not hold in Pakistan. Remittances increase the standard of living, consumption level, and aggregate demand. The interest rate rises because the LM curve in the money market shifts to the left due to a reduction in the real money supply. The supply of labour is reduced, which in turn increases the country's dependency ratio. Immigration leads to acculturation. The injection of money decreases the Gini coefficient, showing a fairer distribution of money. Remittances reduce macroeconomic volatility and have a negative impact on the current account component of the balance of payments because a rise in imports is more than the rise in exports. Remittances positively impact the capital account of the balance of payments and increase the country’s foreign exchange reserves.  The financial gap between the haves and have-nots decreases. Owing to remittances, the borrowing requirements of the receiving country decrease.