FINANCIAL CAPITAL WITHOUT INSTITUTIONAL CONDITIONS: PAKISTAN'S DIASPORA ENGAGEMENT STRATEGY AND ITS LIMITS

Abstract

This study explained why financially the policy of engagement with Pakistan's diaspora was successful for the first year but failed institutionally thereafter. This study points out that financial capital inflows to the origin countries occur only when the condition of the institutions in the origin countries is considered to be safe enough for the diaspora investors. This study utilized the theoretical concept of brain circulation. This is based on the data presented in the Pakistan Migration Report 2024 (Shah, Shahzad, Quddus, & Qazi, 2024). There is a significant and economically important professional Pakistani diaspora. The US and UK collectively received between 24.3% and 30.9% of the total remittances received by Pakistan in the last four years (FY2019 to FY2022) with less than 0.5% of the Bureau of Emigration and Overseas Employment (BEOE) registered emigrants for Pakistan. To tap this financial potential in the diaspora investment, SBP introduced the Roshan Digital Account (RDA) in August 2020. During the first year, 58.2% of net inflows into the RDA went towards investment instruments, totaling USD 1,518 million. In FY2022-23 net flows declined to USD 1,087 million and USD 488 million was withdrawn by the diaspora investors. Diaspora capital flows out faster than they flow in when governance fails due to exchange rate misalignment, macroeconomic contraction and political instability. The RDA's experience in Pakistan is that institutional reforms can't be replaced by diaspora engagement programmes. They can only amplify it and not diminish. The paper pinpoints three structural flaws in Pakistan's diaspora engagement engagements: lack of investment instruments under the protection of government, exchange rate misalignment that encouraged informal remittance channels and a lack of non-financial diaspora engagement mechanisms, such as knowledge networks, virtual faculty programmes and less short-term governance-sensitive diaspora advisory boards. This study conclude that institutional quality is not financial product design as this is what is needed to turn Pakistan's brain drain into brain circulation.