Blessing or curse: The stabilizing role of remittances, foreign aid and FDI to Pakistan

Inflows of remittances to Pakistan are being increasingly viewed as a relatively attractive source of external finance, one that can help to foster development and manage economic shocks. Remittances have become a major source of revenue, surpassing the volume of FDI and official development assistance that the country receives. This study focuses primarily on the stability, cyclicality and stabilization impacts of migrant remittances to Pakistan. It is evident that foreign inflows exhibit different types of volatility; remittances are found to be a less volatile source of external finance than FDI and ODA that are counter-cyclical and stabilizing, thus serving to steady the recipient economy in times of economic downturns. ODA appears to be acyclical and stabilizing, whereas FDI emerges as pro-cyclical and destabilizing. Furthermore, remittances are insensitive to cyclical fluctuation in source countries. We also proceed with SVAR-based identification in order to examine the responses of financial flows to innovation in receiving and source economies. We confirm the counter-cyclical mechanism of remittances with Pakistani output. In particular, our results indicate that remittance flows to Pakistan are mainly due to the economic conditions in the receiving economy.