Overview of Main Policy Issues on Overview of Main Policy Issues on RemittancesRemittances

Presentation at the WBI Conference onPresentation at the WBI Conference onCapital Flows and Global Imbalances, Capital Flows and Global Imbalances, Paris, April 6, 2006Paris, April 6, 2006

Piroska M. NagyPiroska M. NagySenior Banker and AdviserSenior Banker and Adviser

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Main pointsMain points

I. Salient facts

II. Main policy issues regarding remittances

III. Financial sector development and remittances

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I. Salient factsI. Salient facts

• First, the definition: remittances are defined as workers remittances, employee’s compensation, and migrants transfers (World Bank and IMF 2005)

• Note that data refers to officially recorded flows, albeit unrecorded flows are believed to be just as important. Key sources: IMF WEO April 2005 and World Bank, Global Economic Prospects: Economic Implications of Remittances and Migration, November 2005

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WorldWorld’’s Top Remittance Provider Countriess Top Remittance Provider Countries

05

10152025303540

U.S.A.

Saudi

Arabia

Switzer

land

German

yLu

xembu

rgRus

sia

Spain

(In billions of US$, 2004)(In billions of US$, 2004)

New emerging players

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Main remittance recipient regionsMain remittance recipient regions

05

1015202530354045

East A

sia &

Pacific

LatA

m & C

ar.Sou

th A

sia

Europ

e & C

entra

l A.

North

Africa

Middle

East

Sub-S

ah. A

frica

(In billions of US$, 2004)(In billions of US$, 2004)

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Main remittance recipient countries Main remittance recipient countries by volume (US$ bn, 2004)by volume (US$ bn, 2004)

0 5 10 15 20 25

France

Spain

Belgium

Germany

UK

Vietnam

Egypt

Bangladesh

Brazil

Pakistan

Serbia

Morocco

Philippines

Mexico

China

India

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Main remittance recipient countries Main remittance recipient countries by share of GDP (2004)by share of GDP (2004)

0 5 10 15 20 25 30 35

Lebanon

Domin. Rep.

Philippines

Honduras

El Salvador

Serbia & M.

Jamaica

Jordan

Bosnia & H.

Haiti

Leshoto

Moldova

Tonga

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Remittances are growing faster than Remittances are growing faster than private capital & ODAprivate capital & ODA

020406080

100120140160180

Remittances FDI Private debt& equity

ODA

1995

2004

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More factsMore facts

In addition to North-South, increasing importance of South-South corridors, accounting for between 30%-45% of flows (China, Russia, Malaysia)

Informal remittances can be very large (see graph)

Remittances are likely to grow further because of age asymmetry between developing and mature economies 0

10

20

30

40

50

60

70

80

90

100

Domin. Rep

.Arm

enia

MoldovaBan

glades

hUgan

da

InformalFormal

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Remittance transfer costs can be highRemittance transfer costs can be high

Total costs (fees + X spread) can be very high:

– Weak competition

– Exclusivity arrangements

– Lack of transparency

– Lack of technology support and payments systems

– Burdensome regulations0%

2%

4%

6%

8%

10%

12%

14%

16%

Bosnia

& HTurke

yPolan

dSerb

ia & M

Phillippines India

Indonesia

Thailand

China

(In % of amount sent)

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II. Main policy aspects of remittancesII. Main policy aspects of remittances

Understand the size and nature of flows

Macroeconomic impact of remittance flows

Government policies affecting remittance flows

What policies can contribute to reducing the cost of remittance transfers?

Regulatory framework

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Understand the size and nature of remittance Understand the size and nature of remittance flowsflows

Estimate total flows to include estimated informal flows –an instrument is polling (Latin America)

Improve official data collection – recommendations by an international working group

Geographic and demographic characteristics of corridors –both recipient and sender country

Motivation of sender: family support, start-up business capital accumulation, replacing state-provided social safety net (BiH), or possibly ML

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Macroeconomic impact of remittance flowsMacroeconomic impact of remittance flowsGrowth: no statistically significant long-term impact. However, remittances are proven to alleviate credit constraints and thus can stimulate economic growth.

Often most stable and counter-cyclical source of foreign exchange. As such, it helps

– Countries cope with external shocks– Country credit ratings and thus savings in interest (estimated spread reduction of

about 150 to 330 basis points)

Dutch disease (REER appreciation/property price increase): yes, but interestingly not leading to permanent erosion of competitiveness. Why?

– Remittances are private transfers that do not lead to wasteful spending/corruption– No exchange/REER volatility given its stability– Evolves over time allowing for economic agents to adjust

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Macroeconomic impact of remittance flowsMacroeconomic impact of remittance flowsRemittance securitization can help raise external financing

Poverty: strong positive impact, including reducing vulnerability to economic shocks. No impact on inequality

Money laundering – probably not a major risk but needs to be monitored

Financial development (see later in detail)

Brain drain?

Impact on fiscal accounts in sender countries. Various studies have shown that the impact is small.

– US: irregular immigrants impose net cost (education)– UK, New Zealand: net positive impact – Sweden: short term net cost longer term positive net benefits; – Germany: can be positive if the gov. selects for skills. – Special issue: impact on gov. financed pension schemes: positive in Germany and

Spain

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Key government policies affecting remittancesKey government policies affecting remittances

Remittance-receiving countries

Competition (US example)

Regulatory framework – need for light touch (see later)

Relaxation of exchange capital controls very powerful– Unification of exchange rates (Bangladesh, reducing the informal

hundi business)– Relaxation exchange & capital controls:

a. Legal to hold forex deposits (large impact in Africa & South Asia)b. Eliminating exchange controls quadrupled remittance inflows in the

Philippines the same year

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Other important government policiesOther important government policies

Generally no tax (abolishment of such tax in Vietnam, 1997, boosted formal flows)

Travel & customs privileges for returns and M of goods (Turkey, Vietnam, Tunisia, Pakistan)

Allowing domestic banks to operate overseas (including microfinance institutions)

ID cards for migrants, regardless of legal status, which is recognized by sender country banks. E.g. matricula consular Mexico;Tunesian carte consulaire.

Support to hometown associations and matching grants to engage migrants in the development of home local communities.

Loans/pension schemes/bonds targeted at diaspora

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Policies in remittance sender countriesPolicies in remittance sender countries

Only a few have active remittance-supporting policies

Immigration policies

Greater competition in money market transfers

ID arrangements to help access

Support to migrant associations

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Lessons from the decline in transfer costs in the Lessons from the decline in transfer costs in the USUS--Mexico corridorMexico corridor

Cost of sending $300 declined by 60% from $26 to $11 between 1999-2005:

Competition is greatest factor:– Ending exclusivity contracts– More bank entry

ID cards (matricula consular)

Public sector support and increasing awareness (Mexican -US governments, IADB)

Result: officially recorded remittances almost tripled from US$6.6 billion to US$19 billion

Source: World Bank 2005

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Regulatory framework Regulatory framework -- main issues main issues

Remittance flows are an important source of external funds for many countries

Part of such flows may go through informal remittance systems

Informal remittance providers may pose a risk of misuse for money laundering (ML) and the financing of terrorism (FT)

Source: IMF paper on remittance regulation: http://www.imf.org/external/np/pp/eng/2005/021705.htm

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Need to address ML/FT risksNeed to address ML/FT risks

The FATF special recommendation for a regulatory framework

Bring informal providers into formal arena

Do not impede flows nor drive remittance underground

Correct weaknesses in formal sector and raise competitiveness to attract a bigger share of remittance flows

Improve information and data on remittance flows and systems

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Options for regulatory frameworkOptions for regulatory frameworkRegistration or licensing? Depends on domestic circumstances and regulatory practices

Registration raises few barriers and thus may encourage participation but requires ex post resources for monitoring

Licensing may discourage participation, but requires less monitoring and protects integrity

Oversight should be flexible and commensurate with risk of misuse

Remittance providers should be consulted before regulations/ requirements are introduced

Requirements should be clear and simple

Prudential requirements seem unnecessary proportionate to risks

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III. Remittances and financial sector III. Remittances and financial sector developmentdevelopment

Capturing remittances by the financial sector is important for a number of reasons:• Helps reduce informal flows thus address ML/TF

concerns

• Helps private sector development when remittances are considered as part of recipient’s income and can back loans such as mortgages, education, start-up of business

• Banks’ cross-selling of bank products open access to clients who otherwise would not have it due to low income levels (”banking the un-banked”)

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Formalized remittance flows with competition among banks can reduce transfer costs

Steady flow of remittances can be used to obtain medium and long-term funding either by borrowing directly or through capital markets via issuing “remittance securitization bonds”

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To what extent remittances are To what extent remittances are ““bankedbanked”” today?today?

The subject is being discovered

Depends on region– Latin America

– South Asia

– Former centrally planned economies – an example of nascent corridors

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Serbia and Montenegro Serbia and Montenegro

Annual remittance flows are almost as much as the total stock of bank deposits

There is a big potential to keep a larger share of remittances in the banking sector

0500

1,0001,5002,0002,5003,0003,5004,0004,500

Serbia-Montenegro

Bank deposits2004Change in dep,2004Remittanceflows, net

(millions of US$)(millions of US$)

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Moldova Moldova

Similarly, big potential for banking remittances flows

0

100

200

300

400

500

600

700

Moldova

Bank deposits2004Change in dep,2004Remittanceflows, net

(millions of US$)(millions of US$)

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TajikistanTajikistan

Annual remittance flows are multiple of total bank deposit stocks

Tremendous potential to “bank” remittance flows0

50

100

150

200

250

300

350

Tajikistan

Bank deposits2004Change in dep,2004Remittanceflows, net

(millions of US$)(millions of US$)

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What remittanceWhat remittance--based bank products are on offer in the based bank products are on offer in the nascent nascent ““transition countrytransition country”” corridors?corridors?

Results of a bank survey on remittances in the region:

– Banks and money transfer companies are involved in South Eastern Europe, but only banks in former Soviet Union countries

– Products are typically limited to checking accounts or money transfer without opening an account. Very limited securitisation of future receivables, including some remittances

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RemittanceRemittance--related productsrelated products

Technical innovations for easy transfer and access

Remittance-based products

Remittance-backed funding: a way for banks to borrow by using as collateral the future flow of remittances

– Allows funding of banks

– Helps maturity lengthening

– Gives incentives to banks to reach out and bring more informal remittances under the formal sector

– With involvement by an IFI, use of funds can be “earmarked” for development purposes

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2 types of remittance-backed funding:

(a) Direct loans to banks. IFI Bank to lend directly to a bank and secure the loan by assigning the flow of remittances from abroad (e.g. through an off-shore trust)

(b) Securitized remittance bonds in the local and international capital markets. In LatAm, 40 remittance securitizations in a an amount of US$6.5 billion (Mexico, Brazil, El Salvador, Peru)

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Task Force on best/good practice in remittance transfersTask Force on best/good practice in remittance transfers

5 General Principles:

1. Transparency and consumer protection

2. Improvements in payments systems to increase the efficiency of transfers

3. Key features of the appropriate legal and regulatory environment for remittances

4. Market structure and the importance of competition

5. Appropriate governance and risk management practices in the remittance industry.

It also addresses the issue of roles and responsibilities of both remittance providers and the public authorities, including central banks.

Consultative Report has been published and available at http://www.bis.org/publ/cpss73.htm.

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Overview of Main Policy Issues on Overview of Main Policy Issues on RemittancesRemittances

Presentation at the WBI Conference onPresentation at the WBI Conference onCapital Flows and Global Imbalances, Capital Flows and Global Imbalances, Paris, April 6, 2006Paris, April 6, 2006

Piroska M. NagyPiroska M. Nagy