Pakistan's Remittance-Driven Stagnation

How Pakistan’s Diaspora Wealth Funds Consumption but Blocks Progress

Pakistan stands at a critical juncture. A damning International Monetary Fund (IMF) governance report has exposed what many analysts have long suspected: the country’s economy operates in parallel worlds, one formal, the other hidden, and a massive river of remittances that could be the nation’s lifeline has instead become an opiate keeping a dysfunctional state afloat while preventing genuine economic transformation. The IMF Governance and Corruption Diagnostics Assessment found that Pakistan’s formal economy is only half the story, the other half existing in shadows and informal networks. Most damning, remittances rather than catalyzing development have been systematically converted into a consumption subsidy that masks structural economic collapse.

The Black Economy: A Safe Valve for Stagnation

Pakistan’s shadow economy is not just large it is fundamentally woven into everyday life, shaping the country’s employment, survival strategies, and political economy. By 2025, estimates put the informal sector at roughly 59 percent of GDP, valued at around Rs 67 trillion. This underground economy is not a side issue; it is a central feature that governs how business is conducted, how families secure livelihoods, and why reforms are persistently undermined.

The informal sector serves as both a safety net and a systemic barrier to sustained progress. It absorbs vast numbers shut out by the stagnant formal economy wholesale and retail trade accounts for nearly half of all informal employment, with manufacturing, construction, and repair trades also providing jobs outside the formal framework. In practice, most urban businesses and workers operate outside regulatory or tax structures, while in rural and border regions, informality is reinforced by geographical isolation and weak state reach.

Participation in the shadow economy is not just limited to the poor or marginalized. Traders, small business owners, industrialists, and even large landlords use well-established tactics to operate in the grey zone: under-invoicing imports, dual accounting, unreported rental income, and asset purchases through anonymous front companies. These practices are enabled by an officialdom that is often either indifferent or complicit, as institutions themselves depend on discretion and personal networks rather than transparent enforcement.

Pakistanis increasingly rely on this parallel system during economic turbulence. When the currency falls, when inflation and taxes spike, or when utilities become unaffordable, citizens deal in cash, avoid banks, channel funds abroad through hundi or hawala, or store value in gold and dollars. This ability to circumvent the formal sector relieves the worst suffering, containing public anger and unrest. However, it also ensures the state never truly knows its potential revenue base, permanently weakens fiscal capacity, and keeps the country dependent on external lifelines.

Institutional corruption flourishes in the conditions created by such vast informality. Corruption is not just tolerated but is functionally embedded in the system; arbitrary rules and uneven enforcement allow those with power or connections to thrive while depriving the state of resources needed for investment and development.

Real estate stands as the informal sector’s principal conversion chamber. In major cities, as much as 70 percent of real estate transactions are conducted in cash and recorded at values far below market rates. Untaxed and undocumented wealth thus finds a safe haven in property, further distancing investment from productive enterprise. This speculative flow has driven residential real estate to over $12 billion annually by 2024, money that could otherwise spur exports or job creation instead circulates in pursuit of safety, not growth.

The black economy, then, is both Pakistan’s lifeline and its greatest obstacle: it protects millions from destitution during crisis but guarantees that the cycle of low productivity, weak state capacity, and missed development opportunities remains unbroken.The Remittance Story: Development Dollars Converted into Consumption

Amid this ecosystem of informal wealth and distrust, remittances flow in. In 2025, Pakistan received a record $38.3 billion in worker remittances, a 27 percent jump year-on-year. These represent the sacrifices of about 10 million overseas Pakistanis, mostly in the Gulf states, Saudi Arabia, UAE, the UK, and USA. For families battered by inflation, currency devaluation, and job losses, remittances mean survival. For the state, they are essential for avoiding financial collapse.

But rather than funding long-term investment, remittances are funnelled into consumption and speculative property. In the first four months of fiscal 2026, food imports surged 31 percent to $3.08 billion, further increasing import dependence instead of developing domestic agriculture. Palm oil imports alone jumped to $1.325 billion, up 29 percent showing how overseas income quickly converts to import purchasing power.

Receiving families face a trilemma: spend on imported goods, invest in property, or hoard hard assets. Each is rational given limited options, but collectively catastrophic for national development. IMF/ADB research confirms that when conditions improve, remittances rise but are overwhelmingly directed to property, not productive businesses.

Pakistan’s $12 billion residential real estate market in 2025, projected to reach $15.92 billion by 2029, is the prime sinkhole for remittance capital. Between July and August 2025, remittance inflows of $6.4 billion helped the Karachi residential price index rise 10.5 percent, with Islamabad not far behind. Infrastructure meant for productive sectors simply fuels property speculation; plots are bought with foreign earnings and black money while factories stagnate.

The Import-Dependent Consumption Model

Pakistan’s remittance-fuelled consumption model has led to a hard structural dependence on imports, leaving the country unable to achieve meaningful or self-sustaining growth. This model is characterized by a steady flow of dollars from overseas Pakistanis, which temporarily stabilizes currency reserves and purchasing power but fails to catalyze investments that could build domestic productive capacity.

The health of Pakistan’s manufacturing sector is emblematic of this stagnation. Over recent years, manufacturing output has not just stagnated it has actively contracted. Steep declines in private investment have sapped its ability to upgrade technology, expand production, or create sustainable jobs. Both manufacturing and mining remain stuck at just above 13 percent of GDP a ratio that signals chronic neglect and decay, not stability. This stagnation has ripple effects throughout the economy, as lower industrial output reduces exports, shrinks the tax base, and erodes business confidence.

Remittances, while acting as a crucial financial lifeline for millions of families, allow policymakers to postpone the tough reforms such as overhauling tax policy, improving governance, and incentivizing productive investment that might otherwise set Pakistan on a path to genuine growth. Instead, the foreign currency generated is logged against the books to inflate reserves or fund immediate expenses, creating the illusion of stability. For several years, reserves have appeared healthy only because of regular inflows from remittances, commercial loans, and external deposits, with Pakistan frequently borrowing at steep rates to cover gaps. The risk is that, should remittances falter or debt terms worsen, the economy would face a sudden and severe crisis.

Meanwhile, exports, which once served as the main engine of growth and dollar earnings, now face a managed decline. Structural problems weak competitiveness, poor infrastructure, and a lack of value-addition have been exacerbated by global pressures and sluggish policymaking. The steep drop in rice exports in recent years is only one example of how traditional export sectors can suffer sudden reversals. Overall, exports as a percentage of GDP have plummeted since the 1990s, while imports of finished goods, energy products, and critical staples have surged unabated.

The result is a persistent and worsening trade deficit, as rising import bills outpace sluggish export growth. Food security, once a point of pride for Pakistan’s agricultural sector, is now increasingly vulnerable, with imported food staples making up a growing share of the national diet. Between 2020 and 2025, food imports as a proportion of overall imports have risen sharply, underlining a shift away from self-sufficiency toward external reliance even as remittance income temporarily props up purchasing power.

Taken together, this import-dependent consumption model is a fragile cycle, sustaining current consumption standards but locking out the long-term transformation needed for sustainable development and prosperity.State Blindness and Elite Capture

The IMF’s 2025 governance assessment is blunt: corruption is not a distortion but the foundation of Pakistan’s state. Economic elites, sugar millers, cement tycoons, real estate moguls, and import traders shape policy to protect their interests. The sugar sector is paradigmatic: owners with government posts extract subsidies or evade accountability using political and judicial connections.

Between 2023 and 2024, over PKR 5.3 trillion in assets were recovered from corruption. But the real loss is a tax system so opaque that salaried workers and formal businesses carry a disproportionate share, while elites exploit exemptions or shift wealth offshore. Remittances meanwhile prevent the political blowback that might otherwise force reform. Policymakers treat the diaspora’s sacrifice as a substitute for competent governance, not the resource demanding strategic management it truly is.

The Informal Remittance Escape Hatch

A significant share of remittances never enters the formal system at all. Hawala and hundi networks move an estimated $8 billion annually, avoiding taxation and scrutiny. By 2025, investigations showed real estate agents transferring funds into Dubai via hawala, bypassing banks and state oversight.

For migrants, informal channels promise lower costs and speed. Collectively, they further decouple remittances from domestic development, as funds go directly into foreign property or hard currency holdings instead of productive investment at home.

The Consumption-Investment Chasm

Finance ministry data reveals the core failure: consumption now constitutes 93–96 percent of GDP, while investment hovers at a paltry 12–14 percent. Healthy economies see investment above 20 percent. In Pakistan, remittance dollars drive consumption while investment languishes at the margin, leaving little for capital formation except foreign borrowing.

Remittances go to immediate needs: tuition, healthcare, daily expenses, and debt repayment. Discretionary funds flow almost entirely into property or imports. The Asian Development Bank found migrants remit more as conditions improve hoping to invest but Pakistan offers few genuine ways to do so productively.

Contrast this with Bangladesh, where remittances and savings were directed into manufacturing export zones, expanding capacity and the tax base. Pakistan permitted speculative property and imports to dominate because it failed to build trustworthy institutions.

The Psychological Signal: Escape is Rational

For young Pakistanis, the lesson is stark. At home, they face arbitrary taxes, harassment, instability, and weak courts; abroad, remittances are welcomed and families can prosper without engaging the flawed domestic system. The result is an exodus of talent, with the most capable seeking opportunity overseas, and those who remain sustaining the system only by sending funds back.

This relationship allows the state to avoid real reform, covering failure with a tide of dollars that sustains consumption, but not progress.

Breaking the Cycle: Reforms Unlikely

IMF analysts are clear on needed reforms: shrinking the black economy by simplifying taxation; creating transparent, trustworthy vehicles to invest remittances in real growth; redirecting spending from patronage to essential social and economic infrastructure. But genuine reform would threaten the interests of those who dominate policy which makes it unlikely.

The result will likely be continued slow-motion crisis: remittances arrive, the informal sector expands, real estate soaks up capital, industry and exports slide, and IMF bailouts recur. Structural reforms are postponed each time, with change only partial and temporary.

Conclusion: Survival, Not Progress

Pakistan’s present economic system amounts to surviving, not progressing. The lifeblood of remittances and black money ensures the basic engine of society keeps running: households can access food, education, and shelter, while businesses and offices continue daily operations. But this stability is deeply fragile, built not on deliberate institution-building or sustainable policy but on vast informal channels and the sacrifices of migrants abroad.

In practice, the parallel economy is a double-edged sword. By acting as a social shock absorber, it shields millions from the harsh failures of the formal sector providing resilience during inflationary surges, currency crises, or government dysfunction. Families stay afloat, schools remain open, and business does not grind to a halt. Yet, the very mechanisms that deliver survival cash-based transactions, informal trading networks, real estate speculation, and remittance inflows also entrench inertia. They discourage honest taxation, undermine state capacity, and thwart productive investment. Rather than confronting these dysfunctions, the state has learned to rely upon them, with the diaspora’s dollar remittances functioning as a regular infusion to prop up household consumption and foreign reserves.

The price of perpetual reliance on these systems is missed transformation. Survival is prioritized over development, and crisis management over institution-building. No systematic effort materializes to channel informal wealth into formal investment, or to make remittances a driver for export growth, innovation, or human capital. Instead, each year passes with temporary fixes and borrowed foreign stability. As long as the shadow economy remains tolerated and remittances serve chiefly as a consumption subsidy, Pakistan will not collapse nor will it build the foundations necessary for sustainable growth, poverty reduction, or genuine social mobility.

Ultimately, remittances have become a comfort zone rather than a catalyst. Only decisive reforms that foster transparency, enforce fair taxation, and create credible paths for productive investment can break this cycle. Without them, the “remittance trap” will define Pakistan’s future sustaining households, but never launching the country toward lasting progress.

References

1. Pakistan Remittances September 2025: $3.2B Inflows, GCC Driving Trends

2. IMF bombshell: How Pakistan’s elite captured the state

3. Informal economy to cross $500b - SDPI

4. Technical Assistance Report: IMF Governance Diagnostic—Pakistan (November 2025)

5. Pakistan’s rice exports fall 39% in four months

6. Workers remittances for July 2025 up by 7.4%

7. Saudi Arabia leads Pakistan’s August worker remittances

8. Pakistan’s Foreign Reserves: A House Of Cards

9. Pakistan’s food imports surge to $3.08 billion

10. ADB: Understanding the Drivers of Remittances to Pakistan

11. Residential Real Estate Transactions Forecast - Statista

12. Why Now Is the Time to Invest in Pakistan Real Estate

13. Pakistan’s industrial collapse: Investment plunges 46%

14. Pakistan’s manufacturing sector slump: Private investment plunges

15. Pakistan set to be increasingly dependent on imported food

16. Elite capture, corruption holding back Pakistan’s economy: IMF

17. Use of illegal remittance channels on the rise in Pakistan: Reza Baqir

18. Hawala and Terror Financing: Pakistan’s Ongoing Challenges

19. Why has hundi been a part of Pakistan’s financial system so long

20. Growth and Investment - Pakistan

21. Pakistan Investment: % of GDP | CEIC

22. Economic Growth - State Bank of Pakistan