THE IMPACT OF FOREIGN REMITTANCE INFLOWS ON DOMESTIC INVESTMENT IN PAKISTAN: THE MODERATING EFFECT OF INSTITUTIONAL QUALITY AND FINANCIAL DEVELOPMENT

Abstract

The main aim of the study to investigate the impact of foreign remittance inflows (P_REM) on domestic investment (DI) in Pakistan: the moderating effect of institutional quality and financial development (FD). This study used the data from 1996 to 2024 and employed the FMOLS and co integration techniques to analyze the data. This study found that the personal remittances inflow, financial development, and political stability (PS) have positive and noteworthy effect on DI. Furthermore, the interaction variable of the financial development and remittances inflows has optimistic and noteworthy effect on domestic investment. This means that FD significantly influences the remittance inflow to enhance the domestic investment. Moreover, the interaction variable of the political stability and remittances inflows has optimistic and noteworthy effect on DI. This means that political stability significantly influence the remittance inflow to eenhance the domestic investment. Therefore, this study concluded that remittance inflow has the significance direct effect on DI in Pakistan. Furthermore, the P_REM has the more strong effect on domestic investment in the presence of PS and FD. This recommended that remittance inflows are beneficial in boosting local investment, resulting in better political stability. In other words, improved political stability reinforces remittances' favourable influence in boosting investment. One conclusion is that improved political stability may generate incentives for remittance receivers to shift their spending habits toward investment. As a result, policy measures to strengthen political stability are critical for amplifying the benefits of remittances.

Keywords: Financial development; political stability; remittances; investment.