Increasing the macroeconomic impact of remittances on development

Dilip RathaDevelopment Prospects GroupWorld Bank

G-8 Outreach Meeting on RemittancesBerlinNovember 28-30, 2007

Outline

1. International remittances agenda

2. Macroeconomic effects

3. Policy implications

Outline

1. International remittances agenda

2. Macroeconomic effects of remittances

3. Policy implications

Migration Remittances

Remittances provide a tangible and non-controversial link between migration and development

1. Monitoring, analysis, projection

2. Retail payment systems

3. Financial access

4. Capital market access

The International Remittance Agenda

4. Capital market access

The International Remittance Agenda

Macroeconomic effects

Remittances are a large source of foreign currency in many poor countries;

-25

25

75

125

175

225

275

325

375$ billion Private debt

and portfolio equity

FDI

ODA

RecordedRemittances

Remittances are large, have continued to increase

Remittances are large, have continued to increase($ billion) 1995 2007

estimateRecorded remittances 58 240

ODA* 59 100

FDI* 105 368

Pvt. debt & portfolio equity 122 387*

* 2006

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;

27.025.7 25.0

17.0

12.5

8.97.2 7.0 7.0 6.8

Top recipients of remittances, 2007 (estimated)

$ billion

Top recipients of remittances, 2006

36 3632

27 26 25 24 23 22 20

% of GDP (estimated)

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 recommendations1. Difficult to address currency appreciation effects

through sterilization techniques

Policy recommendations1. 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

Remittances (% of GDP,

2004)

Rating excluding

remittances

Rating including

remittances

Spread reduction

(basis pts)

Lebanon 14 B+ BB- 150

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 recommendations1. 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 senders

Remittance securitization structure

Correspondent bank

Beneficiary

Local bank

LocalForeign

Remittance senders

Remittance securitization structure

Correspondent bank

Beneficiary

Local bank

LocalForeign

Special trustee

Policy recommendations1. 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

1

3

5

7

9

11

13

15 PercentUS Treasury 10-year

Israel DCI bond

Discount on Israel diaspora bonds: Patriotic?

Policy recommendations1. 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 recommendations1. 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