The Role of Remittances and Other Macroeconomic Variables in Economic Growth: Evidence from Pakistan

Abstract

This study investigates the role of workers' remittances and other macroeconomic variables in determining Pakistan's economic performance over the period 1980–2022. Remittances have emerged as a significant and relatively stable source of external finance for Pakistan, often exceeding foreign direct investment and official development assistance. However, the long-run growth impact of remittances remains debated due to concerns regarding consumption-led spending, inflationary pressures, and dependency effects. Using annual time-series data (1980–2022) obtained from the World Development Indicators (World Bank), State Bank of Pakistan, and Pakistan Bureau of Statistics, this study models real output (log of real GDP) as a function of remittances, investment, foreign direct investment (FDI), inflation, trade openness, financial development, and government expenditure. The empirical results indicate the presence of a long-run equilibrium relationship between real GDP and the explanatory variables. Remittances positively contribute to long-run output, particularly when supported by financial development and productive investment. Inflation exerts a negative impact on output, while investment and FDI play significant positive roles. The study concludes that remittances can enhance sustainable economic performance in Pakistan if supported by sound macroeconomic policies, financial inclusion, and reforms aimed at channelling inflows toward productive sectors.

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