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Increasing the macroeconomic impact of remittances on development Dilip Ratha Development Prospects Group World Bank Global Forum on Migration and Development Brussels July 11, 2007 Outline 1. International remittances agenda 2. Macroeconomic effects 3. Policy implications Outline 1. International remittances agenda 2. Macroeconomic effects 3. Policy implications Migration Remittances Remittances are the most tangible – and non-controversial link between migration and development The International Remittance Agenda 1. Monitoring, analysis, projection 3. Financial access 4. Capital market access 2. Retail payment systems The International Remittance Agenda 4. Capital market access Macroeconomic effects Remittances are a large source of foreign currency in many poor countries; Remittances are large, have continued to increase $ billion 325 275 225 175 FDI Private debt and portfolio equity Recorded Remittances 125 75 ODA 25 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 0 20 5 06 e -25 Remittances are large, have continued to increase ($ billion) 1995 Recorded remittances 58 2006 estimate 206 ODA 59 104 FDI 107 325 Pvt. debt & portfolio equity 126 318 Macroeconomic effects Remittances are a large source of foreign currency in many poor countries; reduce poverty; Macroeconomic effects Remittances are a large source of foreign currency in many poor countries; reduce poverty; tend to rise following crisis, natural disaster, or conflict; Macroeconomic effects Remittances are a large source of foreign currency in many poor countries; reduce poverty; tend to rise following crisis, natural disaster, or conflict; tend to be larger in poorer, smaller countries; Macroeconomic effects Remittances are a large source of foreign currency in many poor countries; reduce poverty; tend to rise following crisis, natural disaster, or conflict; tend to be larger in poorer, smaller countries; may cause currency appreciation and affect traditional exports. Policy recommendations 1. Difficult to address currency appreciation effects through sterilization techniques Policy recommendations 1. Difficult to address currency appreciation effects through sterilization techniques 2. Country risk analysis should account for remittances Remittances can help obtain and improve credit rating Lebanon Remittances Rating Rating Spread (% of GDP, excluding including reduction 2004) remittances remittances (basis pts) 14 B+ BB150 Haiti* 28 CCC B- 334 Nicaragua* 11 CCC+ B- 209 Uganda* 5 B- B 161 * Calculated using a model similar to Cantor and Packer (1995), see Ra tha, De and Mohapatra (2007) Policy recommendations 1. Difficult to address currency appreciation effects through sterilization techniques 2. Country risk analysis should account for remittances 3. Financial institutions can securitize future remittances for raising capital from international markets Securitization of future remittances can improve credit rating above investment grade Year Issuer Amount (US$ mn) Transaction rating Country rating 1998 Banco Cuscatlan 50 BBB BB 2002 Banco do Brasil 250 BBB+ BB- Remittance securitization structure Remittance senders Beneficiary Correspondent bank Local bank Foreign Local Remittance securitization structure Remittance senders Beneficiary Correspondent bank Local bank Special trustee Foreign Local Policy recommendations 1. Difficult to address currency appreciation effects through sterilization techniques 2. Country risk analysis should account for remittances 3. Financial institutions can securitize future remittances for raising capital from international markets 4. Diaspora bonds can potentially raise development financing Diaspora bonds to tap into the wealth of the diaspora Israel and India have raised nearly $40 billion financing, often in times of crisis There is scope for other countries with large diaspora abroad to issue diaspora bonds for financing development. . . . . . At a discount Discount on Israel diaspora bonds: Patriotic? 15 Percent US Treasury 10-year 13 11 9 7 5 3 Israel DCI bond 20 03 19 98 19 93 19 88 19 83 19 78 19 73 19 68 19 63 19 58 19 53 1 Policy recommendations 1. Difficult to address currency appreciation effects through sterilization techniques 2. Country risk analysis should account for remittances 3. Financial institutions can securitize future remittances for raising capital from international markets 4. Diaspora bonds can potentially raise development financing 5. Governments should not tax remittances or direct the allocation of expenditures financed by remittance Policy recommendations 1. Difficult to address currency appreciation effects through sterilization techniques 2. Country risk analysis should account for remittances 3. Financial institutions can securitize future remittances for raising capital from international markets 4. Diaspora bonds can potentially raise development financing 5. Governments should not tax remittances or direct the allocation of expenditures financed by remittances 6. Remittances are not a substitute for official aid