This paper examines the volatility of remittance flows to Pakistan using the ARCH model. We find overall remittances to be stable, whereas those from the Middle East and North America are relatively volatile, owing to fluctuations in the output of the host economies and the migrants' profile. Remittances from Europe are the least volatile and do not vary as a result of shocks to the host or home economy. Remittances to Pakistan, especially those from Europe, can thus be used as a stable source of foreign exchange flows.Remittances, Volatility, ARCH, Pakistan

Farid Makhlouf

Mazhar Yasin mughal

English

Research Papers in Economics

     
 
 
  
  
Volume 31, Issue 1 
  
Volatility of Remittances to Pakistan: What do the Data Tell? 
  
 
 
Mazhar Yasin mughal  
CATT Université de Pau et des Pays de l''Adour, France 
Farid Makhlouf  
CATT Université de Pau et des Pays de l''Adour, France
Abstract 
This paper examines the volatility of remittance flows to Pakistan using the ARCH model. We find overall remittances 
to be stable, whereas those from the Middle East and North America are relatively volatile, owing to fluctuations in the 
output of the host economies and the migrants' profile. Remittances from Europe are the least volatile and do not vary 
as a result of shocks to the host or home economy. Remittances to Pakistan, especially those from Europe, can thus 
be used as a stable source of foreign exchange flows. 
The authors are grateful to the anonymous referee for his valuable comments. We also thank Aqil Sajjad, Carin Headrik and Barassou Diawara 
for their assistance. We acknowledge State Bank of Pakistan's help in providing the latest remittances data. 
Citation: Mazhar Yasin mughal and Farid Makhlouf, (2011) ''Volatility of Remittances to Pakistan: What do the Data Tell?'', Economics 
Bulletin, Vol. 31 no.1 pp. 605-612. 
Submitted: Aug 13 2010.   Published: February 17, 2011. 
 
       1 
 
1.  Introduction 
 
Formal  remittances  to  developing  countries  have  boomed  in  the  recent  times,  overtaking 
other  financial  flows  and  becoming  the  economic  lifeline  of  many  developing  countries. 
Pakistan is one of them, being among the top ten remittance receiving countries. Remittances, 
being the highest foreign financial inflows (figure 1), hold great importance for the country, 
and sharp variations in remittance receipts can be a worry to the country's policymakers.  
 
Figure 1: Financial inflows to Pakistan 
0
2
4
6
8
10
12
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
%
 
o
f
 
G
D
P
Workers' remittances and compensation of employees, received (% of GDP)
Foreign direct investment, net inflows (% of GDP)
Official development assistance and official aid (% of GDP)
 
 Source: WB Online ‘World Development Indicators’   
 
Remittances are generally presented in the literature as a stable source of foreign exchange 
flows, much less responsive to business cycles and economic shocks than the FDI and foreign 
portfolios (see for example Chami, Hakura and Montiel, 2009; Ratha and Mohapatra, 2007; 
Bugamelli and Paterno, 2009; Ratha 2003). This low volatility can help an economy avoid 
sharp swings and their consequent effects on the monetary and fiscal policies as well as on 
public welfare (Grabel, 2008). 
The volatility of remittances is contingent upon various macroeconomic factors, including the 
output fluctuations in the home and host countries, the bilateral exchange rate and the over all 
socioeconomic  conditions  of  the  home  and  host  countries  (particularly  inflation, 
unemployment and socio-political stability). It can determine the consumption patterns and 
saving  propensity  of  the  remittance  receiving  households,  thereby  impacting  the  national 
output, both in the immediate and in the long run. 
 
To what extent this is true needs to be empirically determined. The question is of substantial 
import  to  Pakistan,  as  the  government  is  seeking  higher  remittances  under  the  recently 
launched  Pakistan  Remittance  Initiative  (PRI).  This  study  is  an  attempt  at  analyzing  this 
aspect  of  remittance  inflows.  We  consider  remittances  from  the  three  major  remittance 
sending regions, namely North America, the Middle East and Europe
1. Secondly, we look 
into the possible causes of this volatility, and how different Diasporas might be contributing 
                                                 
1 These regions account for over 90% of the over 7 million Pakistanis overseas and a similar proportion of 
remittance receipts. Moreover, the three regions together account for the bulk of Pakistan’s foreign trade.   2 
to it. In the end, we examine the challenges and opportunities this volatility presents. We 
study the volatility of aggregate and region-wise remittances to Pakistan using the ARCH 
model, which is presented in section 2 along with the data. Section 3 presents the model's 
main findings. We discuss some possible explanations of these results. The paper ends with 
some conclusions and policy recommendations. 
 
2.  Methodology and data description 
 
Remittances, whether meant for helping the family members, investment or philanthropic 
causes, react to the economic and social changes occurring in the home and host economies. 
These can be in response to shocks which can be natural (earthquakes, floods), economic 
(foreign exchange, balance of payment or debt crisis), or political (instability, war etc). In the 
time period under study, Pakistan suffered from the consequence of the deadly earthquake in 
October 2005. In its wake, remittances to the country rose to contribute in the rehabilitation 
of  the  affected  households.  The  flow  of  formal  remittance  inflows  also  jumped  in  the 
immediate aftermath of the tragic events of Sep 11 2001.
2     
 
This behaviour of remittances means that their variations vary with time, and should thus be 
clustered  in  small  and  large  groups.  Periods  of  high  volatility  (shown  in  red  in  figure  2 
below) are followed by periods of relative calm. We examine this volatility of the variance of 
remittances using the Autoregressive Conditional Heteroskedastic (ARCH) model, proposed 
by  Engle  (1982).  ARCH  and  GARCH  models  are  especially  suited  for  the  analysis  of 
volatility of economic variables (Engle, 2001). For that, however, we first need to check for 
the non-stationarity and non-linearity of the series under examination.  
Remittance  inflows  to  Pakistan,  just  like  many  other  economic  time  series,  show  non-
stationarity  in  levels,  but  are  stationary  in  their  first  differences.  The  differenced  series 
expectedly  show  higher  variability,  indicating  that  variance  must  be  changing  with  time. 
Moreover, for all the four time series studied, the value of kurtosis is higher than 3, implying 
that the normality assumption has to be rejected, and therefore, ARCH effects should be 
present.   
Our model can be expressed as: 





+ =
=
-
2
1 1 0
2
N(0,1) ~
t t
t
t t t
y
y
a a s
e
e s
           
Where  t y    represents  the  growth  rate  of  remittances,  0 a    stands  for  minimum  constant 
volatility, and  
1 a : is the variance related to the squares of the previous values of the process { } t y . 
 
Data for remittances are taken from the State Bank of Pakistan and span from July 1996 to 
June 2010. Therefore our dataset is composed of 168 monthly observations for the aggregate 
as well as regional remittance series. Regional series are constructed by grouping country-
wise remittances with respect to three geographical regions: North America (consisting of 
Canada and the US), the Middle East (consisting of the six Gulf Cooperation Council (GCC) 
                                                 
2 Formal remittances from the US more than doubled in the financial year 2001-02. This sharp rise was probably 
due to the increased scrutiny of money transfers from the US and curbs on informal remittance channels.   3 
countries: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) and 
Europe (consisting of the UK and Western European countries). The home and host GDP 
figures are taken from the World Bank World Development Indicators, while international oil 
prices  (used  in  section  3)  have  been  taken  from  the  website  of  l’Institut  national  de  la 
statistique et des études économiques (Insee) France. 
 
Summary statistics (shown in Table 1) show that remittances from Europe have the lowest 
standard  deviation  in  contrast  to  those  from  the  Middle  East,  which  exhibit  the  highest 
standard deviation. This gives an initial idea of the pattern of variation in the remittance 
flows.  
 
Table I : Summary statistics 
  Mean  Median  Minimum  Maximum  Std. Dev. 
 World  0.012  0.002  -0.703  0.790  0.188 
 Europe  0.010  0.010  -0.422  0.537  0.188 
North_America  0.014  0.018  -0.821  1.022  0.228 
Middle East  0.012  0.005  -0.953  0.947  0.247 
 
 
Similarly, figure 2 shows a highly fluctuating curve for the Middle East and North America 
as compared to that of Europe. 
Figure 2: Growth in remittances by region 
 
Gulf
Time
G
r
o
w
t
h
 
R
a
t
e
1998 2002 2006 2010
-
1
.
0
0
.
0
0
.
5
1
.
0
Europe
Time
G
r
o
w
t
h
 
R
a
t
e
1998 2002 2006 2010
-
0
.
6
-
0
.
2
0
.
2
0
.
6
North America
Time
G
r
o
w
t
h
 
R
a
t
e
1998 2002 2006 2010
-
0
.
5
0
.
0
0
.
5
1
.
0
World
Time
G
r
o
w
t
h
 
R
a
t
e
1998 2002 2006 2010
-
0
.
5
0
.
0
0
.
5
 
 Source: State Bank of Pakistan and authors’ calculations 
 
In the next section, we take a closer look at the patterns of volatility.  
     4 
 
 
3.  Results and discussion 
 
Results (given in table 2) indicate that remittances to Pakistan exhibit low volatility. In other 
words, remittances to Pakistan do not vary widely as a result of exogenous shocks.  This may 
partly have to do with the diverse nature of host economies (more on it later).  
 
Table II: ARCH (1) model (Variance equation) 
  Gulf  North 
.America 
Europe  World 
0 a   0.034 
(13.632)*** 
0.029 
(6.925)*** 
0.050 
(6.878)*** 
0.02 
(12.41)*** 
1 a   0.453 
(3.212)** 
0.533 
(3.911)*** 
0.169 
(1.143) 
0.269 
(2.43)* 
Jarque Bera Test 
p-value 
2.2e-16  8.887e-13  0.6454  1.377e-14 
Box-Ljung test 
p-value 
0.9837  0.5808  0.8746  0.8793 
T statistic in parentheses  
***, ** and * significant at 1%, 5% and 10% respectively 
 
Among  the  three  regions  studied,  remittances  from  the  Middle  East  exhibit  the  highest 
volatility.  This  difference  in  the  behaviour  of  remittances  from  the  Gulf  countries  could 
mainly be attributed to two factors: 
The nature of host economies: In contrast to the economies of the other two regions, the 
economies of Gulf countries are based on the exports of oil and natural gas. Hence, oil prices, 
which have been highly volatile in the past, are probably related to the boom or bust in these 
countries. Higher oil prices ultimately lead to higher labour demand, which attracts low-cost 
labour from abroad, including from the neighbouring Pakistan. 
The  nature  of  migration:  Migration  from  Pakistan  to  the  Gulf  countries  is  mostly  of 
temporary nature, as given the volatile nature of growth, the governments of these countries 
promote  only  transient  labour  influx.  Much  of  the  Pakistani  labour  force  in  the  Gulf 
comprises of semi or unskilled workers who come on short term, often non-renewable work 
contracts and work in construction, services and other booming sectors (Gilani 2008). They 
often come from poor, rural backgrounds and save a high proportion of their salaries, sending 
their savings back home with little delay, as their remittances serve as the mainstay of their 
families.  
As a result, higher oil prices should contribute to higher remittance transfers to Pakistan (their 
series show a positive and significant correlation of 0.3 and 0.27 at levels and one-month lag 
respectively).    
 
Remittances from Europe, on the other hand, appear to be the least volatile, even though the 
coefficient of volatility is statistically insignificant. An explanation for this behaviour may lie   5 
in  the  nature  of  migration  to  the  region,  particularly  to  the  United  Kingdom.  Pakistani 
migrants to the region are mainly permanent immigrants (typically settled in the country for 
several decades), who often send money home to assist the extended families. Such financial 
support is usually stable, and rises in the hour of need but falls back to its historic trend once 
the  economic  shock  has  been  absorbed.  The  European  Pakistani  community  is  a  mix  of 
professional and low-skilled immigrants, which apparently does not have an investor profile. 
This can not be said for the North American migrant community however. This Diaspora, 
like  the  one  in  Europe,  comprises  of  permanent  migrants,  but  mostly  consists  of  highly 
educated  individuals,  including  doctors,  engineers,  programmers  etc.
3  The  comparatively 
higher volatility of their remittances may be due to different remitting behaviour associated 
with  the  host  or  home  country’s  economic  progress.  Table  3  shows  the  Ordinary  Least 
Squares  estimates  of  logs  of  region-wise  remittances  regressed  alternatively  with  the 
remitting regions and Pakistan’s output. Remittances from the US and Canada are highly 
correlated, both with their national as well as Pakistan's GDP.  
 
Table III:  Region-wise remittances and regional and Pakistani GDP 
Remittances dependant variable  
GULF   North, America  Europe  
    GULF   Pakistan  
North, 
America  Pakistan   Europe   Pakistan  
Constant 
-8.052 
(-2.706)** 
-3.78 
(-1.941)* 
-19.269 
(-7.664)*** 
-10.153 
(7.131)*** 
-2.741 
-1.424 
-0.051 
(-0.045) 
GDP 
1.21 
(5.027)*** 
1.009 
(5.494)*** 
1.561 
(9.657)*** 
1.431 
(10.66)*** 
0.512 
(4.1)*** 
0.491 
(4.609)*** 
T statistic in parentheses  
***, ** and * significant at 1%, 5% and 10% respectively 
 
This  points  to  the  investor  profile  of  the  Pakistanis  in  North  America.  Being  the  most 
qualified and the highest earning group among the country's overseas communities, North 
American Pakistanis are best place to take advantage of the new investment opportunities in 
their  country  of  origin.  Therefore,  they  send  more  money  in  periods  of  high  growth. 
Anecdotal evidence suggests high proportions of remittances from North America going into 
real estate, construction and stock market boom during the high growth period from 2003 to 
2006. 
The correlation of remittances with official exchange rate also point in the same direction 
(results not shown), as the North American remittances appear to be the ones most strongly 
associated with exchange rate fluctuations.      
  
The findings of Table 3 also support our hypothesis regarding the remittances from Europe, 
as they show low correlation with either the regional or the Pakistani annual output. These 
remittances appear to be more or less altruist, sent regardless of the level of growth in the 
host or the home country. 
 
                                                 
3 The 2005 American Community Survey undertaken by the US Census Bureau shows that among the male 
Pakistani population aged 25 years and over, 60.9% had bachelor's degrees or higher while the American 
average for the same category was 28.5% (Oda, 2009). In contrast, tertiary enrolment rate in Pakistan is hardly 5 
percent.   6 
A related explanation for this divergent behaviour of remittances may be the more volatile 
nature of economic growth of the US and Canada as compared to the anaemic growth rates 
prevalent in Europe during the studied period.  
En passant, it can be noted that the relatively low volatility of Pakistani remittances is thanks 
to this diversity of economic conditions in which the overseas Pakistanis find themselves. 
While the high oil price driven remittances from the Gulf states help the country cope with 
the deterioration in current balance caused due to rising oil import bill and lower remittances 
from  North  America,  the  remittances  from  Europe  remain  steady  and  keep  the  over  all 
volatility in check.   
 
4.  Concluding remarks 
 
So what message does this study bring ? One good news is that the remittances to Pakistan 
are relatively stable. This, as the analysis showed, is mainly due to the diverse economic 
conditions of the sending countries and the varied socioeconomic profile of the Pakistani 
Diaspora. An across the board increase in remittance flows under the PRI should therefore 
not worry the country’s economic managers on this account. Remittances from the United 
Kingdom  and  other  Western  European  countries  have  shown  little  volatility  so  far,  and 
additional receipts from the region should in fact improve the country’s economic stability. 
So the government can indeed rely on remittances as a stable source of foreign exchange 
inflow. The country can benefit from this stable nature of remittances by securitizing them 
and  thereby  improving  its  sovereign  credit  rating.  Rising  remittances  may  continue  their 
salutary impact on the inequality and poverty in the country (Mughal and Diawara, 2010), but 
could  pose  the  economic  managers  additional  difficulty  on  the  macroeconomic  front  by 
exasperating the Dutch disease from which the country’s economy already suffers (Makhlouf 
and Mughal, 2010). However, more research is needed on the macro and microeconomic 
determinants  of  remittances  in  order  to  establish  the  main  motivations  of  the  Pakistani 
migrants behind such different patterns of remittance flows analyzed in this paper. To sum 
up,  given  some  deft  handling,  remittances  should  continue  playing  a  positive  role  in 
Pakistan’s economic progress.     
  
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Volatility of Remittances to Pakistan: What do the Data Tell?

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