EFFECT OF THE RECESSION ON UK REMITTANCES TO

UNCLAS SECTION 01 OF 03 LONDON 001911

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN ETRD PK SA UK XC
SUBJECT: EFFECT OF THE RECESSION ON UK REMITTANCES TO
PAKISTAN

REF: LONDON 01542

LONDON 00001911 001.2 OF 003



1. (SBU) Summary. UK remittances to Pakistan have continued
to increase in 2009, according to official data, but experts
are skeptical that the trend will continue. Unlike
remittances from other parts of the world, which experts
speculate are being boosted in the short term by the return
of the migrant population and their savings, British
Pakistani workers are not re-emigrating in large numbers.
Rather, academic and think tank contacts suspect the growth
is likely due to the relative strength of Pakistan-born
workers' employment numbers, the "lag effect" created by an
immigrant's tendency to remit even after the onset of
economic hardship, growing economic difficulties in Pakistan,
and greater use of official transmission channels--a
phenomenon that has artificially boosted the official data
for the last few years. However, experts forecast that
Pakistan-born workers' jobs and income will be more directly
affected in the coming months as Britain's overall
unemployment increases. Data suggest remittances are the
largest source of financial flows from the UK into Pakistan,
exceeding both foreign direct investment and development aid,
which would make their downturn particularly negative. End
Summary.

Characteristics of British Remittances to Pakistan
-------------- --------------


2. (SBU) Robert Ballard, Director of the Center for Applied
South Asia Studies, and Massimiliano Cali, research officer
at the Overseas Development Institute, spoke with Econoff
recently about the impact of the recession on worker
remittances to Pakistan. Both contacts have written
extensively on the topic of remittances and the British
Pakistani community. The UK is the fourth largest source of
remittances to Pakistan after the UAE, U.S., and Saudi
Arabia. According to data from the State Bank of Pakistan
(SBP),approximately eight percent of total remittances to
Pakistan came from Britain in fiscal year (FY) 2009, or USD
606 million. (Note: Pakistan's fiscal year is from July 1,
2008 through June 30, 2009. End Note.) However, both experts
told Econoff that the actual amount remitted is likely much
higher, as the SBP data include only funds sent through
official channels. Unofficial channels, such as hawala dars,
while becoming less popular, still transmit a large
percentage of remittances from the UK.


3. (SBU) Ballard told Econoff that those living in Britain of
Pakistani origin who remit typically fall into two groups: 1)
newly arrived migrants, and 2) established immigrants between
the ages of 40 and 60. The newly arrived migrants typically
have immediate family members still in Pakistan and send a
significant portion of their earnings home. Once the
families have been reunited, remittances tend to drop off,
increasing again when the immigrants enter middle-age. This
group of Pakistanis uses remittances to support elderly
parents who are still in Pakistan and to invest in real
estate for their own retirement. Ballard said that while the
newly arrived migrants send home a greater proportion of
their income, the bulk of remittances comes from the second
group. He noted that patterns from previous recessions
indicate remittances from the newest immigrants are affected
most by an economic downturn.
Remittances Still Growing in 2009...
--------------


4. (SBU) The World Bank in March revised downward its outlook
for remittances, predicting remittances to South Asia would
decline by between 4.2 percent and 7.3 percent in 2009.
However SBP data show that remittances from the UK to
Pakistan actually increased during the first six months of
the 2009 calendar year. From January through June 2009, UK
workers remitted USD 366 million to Pakistan, a 58 percent
increase over the same period in 2008, and a 73 percent
increase over the same period in 2007. Monthly data showed a
similar trend, with workers in Britain remitting USD 68
million to Pakistan in June 2009, an 80 percent increase over
June 2008.


5. (SBU) The upward trend is not unique to Britain. According
to SBP data, of the countries that are Pakistan's main
remittance sources--the UAE, U.S., and Saudi Arabia--only
remittances sent from the U.S. fell in FY 2009. Press reports

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speculate that some of the growth is attributable to migrant
workers returning home after losing their jobs and taking
their savings with them. However, both Ballard and Cali say
that this scenario does not apply to Pakistani workers in the
UK. Ballard told Econoff that he believes Pakistani
immigrants in the UK are staying despite the recession and
that migrants returning to Pakistan are largely workers from
the Gulf States, especially Dubai, who lost their jobs in the
construction sector and do not have residency rights.


6. (SBU) While both Ballard and Cali agreed that the increase
in remittance flows to Pakistan from the UK in recent years
in part reflects a movement of funds from unofficial to
official channels, rather than an absolute increase in the
total amount remitted, they did not believe that this can
fully explain the resilience of remittances in 2008 and 2009.
Cali noted that a main determinant of remittances is
employment and the fact that in the UK, Pakistani workers'
employment has remained fairly resilient through the spring
of 2009 is likely the key factor. However, he added that his
research has shown that even in situations where unemployment
increases in remittance-sending countries, the result is a
decrease in the rate of the growth of remittances, rather
than a proportional decrease in remittances.


7. (SBU) Data from the UK's quarterly Labour Force Survey
show that employment of Pakistan and Bangladesh-born workers
has held up during the recession. According to the survey,
in the 12 months to March 2009, the Pakistan and
Bangladesh-born workforce rose by 39,000 workers to reach
231,000. During that same period, the UK-born workforce fell
by 451,000 workers to 25.3 million. The growth was not
merely a result of immigration, as Pakistan and
Bangladesh-born workers also saw their employment rate
increase by 3 percent in the 12 months to March, compared to
UK-born workers who experienced a 1.3 percent decline. The
employment rate for Pakistan and Bangladesh-born workers fell
slightly in the first quarter of 2009 compared to the
previous quarter, but the decrease was in line with the rest
of the working age population.


8. (SBU) Cali speculated that the better-than-expected
employment data may be reflective of the sectors in which
Pakistani expatriates are employed. Both experts noted that
in the UK, the Pakistani community has a high percentage of
self-employed workers and "corner-shop" businesses in the
grocery and retail sectors. Recent British press reports
have found that food sellers in the UK, especially cheaper
markets, are seeing their sales increase as people dine in
more and seek less expensive food options.

...But Experts Wary About Continued Flows
--------------


9. (SBU) Both Ballard and Cali told Econoff that despite the
optimistic data from early 2009, they expect to see
remittances from the UK negatively affected in the coming
months. While Cali forecasts that the rate of growth of
remittances will slow in line with what he has seen happen in
Bangladesh, Ballard was less optimistic and predicted an
outright decline in remittances. Ballard noted that
recessions in the UK labor market have historically always
led to reductions in the volume of remittances. He said that
the recession of the early 1980s that closed many of the
textile mills where the majority of Pakistanis worked had a
"devastating" effect on remittances, and while the employment
pattern has changed over the last two decades, he does not
believe that today's Pakistani workers are immune from the
coming employment hardships. The British Government forecasts
unemployment will continue to rise into 2010, and Ballard
believes the service sector jobs that employ many Pakistanis
will be affected, if they haven't been already.


10. (SBU) Cali said that his research has shown that workers
tend to remit the same proportion of their income over time,
so if income falls, then the value of remittances will
eventually decline. The employment figures do not account for
the lower earnings by those that have negotiated lower wages
or fewer hours to keep their jobs or who have wages that are
heavily affected by commissions or bonuses. However, there
is often a "lag effect," between a decline in income and a
decline in remittances. The personal connection between the
remitters and receivers means that many workers will continue

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to remit until their savings are nearly depleted, creating a
delay between the onset of economic hardship and the actual
fall in remittances.


11. (SBU) As the economic downturn in Britain is part of is
part of a global recession, Ballard also suggested that
Pakistani workers may be increasing their remittances to make
up for greater economic hardships at home, especially if
family members in Pakistan have lost their jobs. However,
this up-tick is unsustainable in the medium-term, especially
if the remitters themselves face economic hardships. He
added that there is a risk that a downturn in remittances
could lead to a "nasty reinforcing cycle." As large share of
the remittances from the established Pakistani immigrants
have been used to invest in real estate in Pakistan, a drop
would likely cause property prices to fall. This, in turn,
could further drive down the inflow of remittances from those
immigrants looking to invest in real estate back home for
their retirement. In the UK's previous recessions, he noted,
house-building in Pakistan "virtually stopped."
Importance of UK Remittances to Pakistan's Economy
-------------- --------------


12. (SBU) Remittances form the largest share of financial
flows into Pakistan from the UK, exceeding both FDI and
development aid. Britain is the largest European investor in
Pakistan, according to SBP data. However, UK foreign direct
investment (FDI) into Pakistan averaged just USD 401 million
annually during the last five years, compared to an annual
average of USD 461 million in officially reported
remittances. Similarly, while the UK has pledged to increase
development assistance to Pakistan to USD 1,096 million (BPS
665 million) over a five-year period from 2009 to 2013, at an
annual average of USD 219 million (BPS 133 million),UK aid
would still be far less than annual remittances.


13. (SBU) In the current economic climate, any decline in
remittances would be disproportionately felt as other private
financial inflows have declined significantly. SBP figures
show total UK investment into Pakistan, including portfolio
and FDI, was 45 percent lower in FY 2009 than in FY 2008.
Moreover, if British press reports are correct and a large
proportion of growth in remittances from the Gulf States are
transfers from migrants returning home, inflows from these
countries are likely to experience an abrupt downturn in the
coming months, making flows from the UK, with its persistent
stock of immigrants, that much more important.

The Post-Recession Outlook For Remittances
--------------


14. (SBU) Both Ballard and Cali predicted that any downturn
in remittances will likely reverse once the recession has
ended, as the immigrants are staying in Britain and
obligations to family members will continue at least in the
medium-term. However, Ballard told Econoff that over the
long-term, he does not expect the growth in remittances from
the UK to Pakistan to continue at the same pace. While in the
UK the Pakistani community is growing, he explained that this
is mainly due to the birth rate among established immigrants.
Second- and third-generation British Pakistanis will not
have the same strong familial obligations or the interest to
invest in Pakistan. He added that if the recession prompts
Britain to adopt even tighter migration controls, this
process is likely to be accelerated. (Comment: The UK has
revised its points-based immigration system. Reftel explains
in-depth the new system. End Comment)

15. (SBU) The experts noted that the British Government's
focus has been on moving remittances from unofficial to
official channels. Neither could estimate the rough
percentage of remittances now in official channels, but
Ballard believes that the strong growth in remittances
reflected in the official data indicates progress. According
to Haroon Sharif, the Department for International
Development's lead on finance and growth-related work in
Pakistan, DFID will start work on remittances this fall under
its ongoing Financial Inclusion Program with the SBP.


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