Who Pays for Free Remittances? The Economics Behind Pakistan's New Policy

The State Bank of Pakistan (SBP) has discontinued the government-backed Telegraphic Transfer Charges Incentives Scheme (TTCIS) for remittances and has mandated the banks to cover the cost of facilitating remittance inflows from July 1, 2026. The SBP estimates the cost of attracting remittances at Rs 76 billion in FY2026 and is expected to increase to Rs 85-90 billion in FY2027. The transaction cost for senders and receivers will remain at zero. The SBP officials describe this as making workers’ remittances a “market-based product”.

The fiscal argument behind this policy intervention is sound. A Rs 76 billion recurring subsidy, which grows annually along with total remittances, conflicts with other spending priorities and sits awkwardly into a consolidation drive. Withdrawing it is justifiable on first principles: subsidies should address clear market failures, not permanently finance services that private organisations have strong incentives to offer. Banks are not simply passive intermediaries in remittance flows. They gain foreign exchange liquidity, deposit growth, trade financing opportunities and enhanced customer relationships. The subsidy was compensating banks for an activity already aligned with their commercial interest.

What makes this a true market reform is that it compels the formal banking sectors to compete directly with the informal channels on their own terms. The hawala/hundi system has always provided customers with no visible cost for remittances. Its business model is implicit rather than explicit; according to information available from market the Pak-RMB corridor reveals that hawala operators charge a 4.4 % markup over the interbank exchange rate, around Rs 3,670 on a Rs 100,000 transaction, a cost that consumers never perceive as a “fee”. In the UAE-Pakistan corridor, Hundi operators charge a low flat fee as low as 10 AED and settle domestically via person-to-person bank transfers, completely avoiding SWIFT infrastructure, correspondent banking and regulatory costs.

Accumulated cross-broader obligations within the dealer network are supposedly resolved through trade invoice revisions by operators, who are frequently small exporters themselves. Under the TTCIS, the government was absorbing the formal sector’s cost disadvantage on its behalf, effectively insulating banks from competing with an informal competitor operating on a fundamentally lower cost structure. That shield has now been removed.

The banking sector, with Rs 640 billion in profit in FY2025, has enough room to bear the cost of attracting remittances. The question is whether it has any incentive to do so competitively. For the first time, formal and informal channels compete on service quality, timeliness, traceability and digital convenience, with no explicit expense to the consumer. Pakistan’s formal remittance inflows have increased from approximately $27 billion to more than $41.5 billion in recent years, coinciding with these subsidy programs. The coming months will put to the test whether the banking sector can defend its expanded formal market on its own commercial merits without the fiscal buffer that helped win it.