The Impacts of Remittances on Foreign Reserves of Pakistan: Does Pakistan Suffer from Dutch Disease?

Abstract

Dwindling and oscillating foreign exchange reserves in Pakistan despite huge inflows in the form of remittances, exports earnings, foreign direct investment and foreign aid has been vexatious for researchers and policy makers. Thus, the main objective of this study is to investigate the impacts of remittances and other foreign financial flows over the foreign exchange reserves of Pakistan. For this purpose, the time series data from 1976 to 2022 taken from WDI has been analyzed by applying ARDL bound test. The findings of the study suggest that remittances, exports, GDP and FDI contribute in the foreign reserves positively and significantly. However, imports and external debt servicing affect negatively and significantly to the foreign reserves of Pakistan. Based on the findings of the study, it is concluded that there is no Dutch disease in case of Pakistan and foreign reserves are maintained for precautionary motive. The study recommends that government should focus to develop such mechanism and policies that augments the remittances inflows through formal sector and increase the exports, FDI and GDP growth rate and decrease the imports, external debt servicing and external debt burden of the country.