IMF's Push to Cut Remittance Perks Could Revive Pakistan's Shadow Banking, Experts Warn

Will the IMF's cure be worse than the disease for Pakistan's economy? The International Monetary Fund's directive for Pakistan to phase out incentives on foreign remittances is sparking alarm among economists. They warn the move, aimed at fiscal discipline, could backfire by driving money away from official banks and into unregulated, informal channels.

The Lifeline of Formal Remittances

For Pakistan, money sent home by its large overseas workforce is a critical source of foreign currency, essential for bolstering reserves and stabilizing the Pakistani rupee. The government has long used financial incentives to encourage the use of formal banking channels for these transfers, ensuring the funds contribute transparently to the national economy.

A High-Stakes Gamble

The IMF's request to scale back these incentives is likely driven by a goal to reduce government spending. However, experts cited by outlets like Reuters fear it's a risky move. Without the incentives, many Pakistanis abroad may revert to informal 'hawala' or 'hundi' systems, which are faster and cheaper but operate entirely outside government oversight. Such a shift would weaken the formal banking sector and reduce financial transparency.