Costs and benefits of remittances
Tuesday, 17 July 2007
Jamaluddin Ahmed FCA in the second of a three-part article
COST of remittances are unpredictable. When remittance funds are spent on consumer goods, demand is increased, generating inflationary pressure and pushing up wages level. Flows thereof then result in little or no investments in capital generating activities. High import content of consumption demand increases dependency on imports and exacerbates balance of payment problem, replacing other source of income and, thereby, increasing dependency, eroding good working habits, and heightening potential negative effects of return migration. Remittance funds, spent on unproductive or personal investment -- for example, real estate, housing etc., create envy and resentment and induce consumption spending among the non-migrants.
Increasing the benefits and decreasing the costs of remittance to development: It is argued that as the length of stay in host country increases, there is resulting decrease in the average amount of remittances sent per worker and if the short term migrants tend to remit more than long-term migrants, then the use of remittances has serious implications for the developments of labour sending country. Government of labour-sending countries attempts to use incentive programmes to attract these funds and encourage their investment in home countries. Researchers who view remittances as a potential source of financing also have made proposals that help senders and recipients channel remittances toward investment and development projects, ranging from reducing the costs of transmitting remittances, to creating an environment and infrastructure in the home countries that encourages and rewards investment and development. It is argued that migrants found to have made the best use of remittances were educated and sophisticated, had bank accounts, and came from countries with a long tradition of savings. Further, it has been written that over bureaucratic plans to encourage remittances and their investment lead migrants to spend the remittances through unofficial means, the opposite of the intent.
Official and unofficial remittance: It is the expectation that remittances should be channelled through banking system which practically is not the case. A World Bank study (2005) conducted to estimate the official and unofficial remittances found that official remittance of Bangladesh in 1984 was much lower than unofficial figure when the comparative figures for India showed an opposite result i.e. official figure is much higher than unofficial one. In case of Pakistan, the unofficial remittance was lower in 1988 but in 1997 the unofficial figure showed a three times bigger amount than the official one. Nepal and Sri Lanka demonstrated continued higher official remittance than unofficial one. Increasing official remittance of Bangladesh and utilising that in productive sectors and SME development should be the strategy for future.
Factors in attracting official remittances: These include stable political environment, low rates of inflation, low black market exchange rate or unitary exchange rates, currency devaluations, increase in domestic interest rates and secured means of transferring remittances and national banking services in the country of employment. In addition, the factors in the remittance-receiving country can be more influential than many of the special programme created by the governments, and these policy measures to capture and influence the use of remittances have been considered relatively ineffective when viewed in relation to the total volume of remittances. As a whole, the effect of migrant's remittances on developments will probably be determined by many of the same factors that shape the decisions of foreign investors and developments generally -- a stable political environment, sensible macro economic policies, investment in human capital, and the availability of institutional mechanism for instrument in activities with attractive rate of return.
Some countries tried to increase flows through co-operative agreements between labour sending and receiving countries through such means as deducting a certain percentage of earning requiring their transfer back to their country of origin. The mandatory remittance policies have been found effective in labour flows organised through bilateral official channels when governments have direct access to control over the migrants earnings. Examples of countries where workers are required to remit a significant percentage of their earnings include The Philippines, China, and Korea.
Decreased transmittal costs: Another means of increasing flows through official channel is by decreasing costs of sending remittances remitting money back to ones' home country through wire transfers, money orders. Such costs are not cheap in many countries with migrants spending up to 15% of the remittance to send it and loosing up to additional 10% in the currency exchange. Therefore, due to transfer costs, the amount of money available to the recipient could be as much as 20 to 25 percent less than the available funds. To overcome the problems, proposals can include opening branches of the national banks in the countries where the migrants are working --by expanding bank branches or, at least, money receivers to more rural areas and by working to form partnership between national and foreign banks, postal services, and money transfer and exchange agencies. Standard exchange rates also could be set, and banks in the remittance-receiving countries could work with wire transfer and courier service companies to ensure that remittance go directly into savings account. In addition, since money transfer businesses profit either with high-volume small-profit services or low volume high profit services. The wire transfer money order, and courier companies might be writing to reduce their fees for guaranteed volume of business.
(The writer is Vice President, Institute of Chartered Accountants of Bangladesh and Treasurer of Bangladesh Economic Association.)
COST of remittances are unpredictable. When remittance funds are spent on consumer goods, demand is increased, generating inflationary pressure and pushing up wages level. Flows thereof then result in little or no investments in capital generating activities. High import content of consumption demand increases dependency on imports and exacerbates balance of payment problem, replacing other source of income and, thereby, increasing dependency, eroding good working habits, and heightening potential negative effects of return migration. Remittance funds, spent on unproductive or personal investment -- for example, real estate, housing etc., create envy and resentment and induce consumption spending among the non-migrants.
Increasing the benefits and decreasing the costs of remittance to development: It is argued that as the length of stay in host country increases, there is resulting decrease in the average amount of remittances sent per worker and if the short term migrants tend to remit more than long-term migrants, then the use of remittances has serious implications for the developments of labour sending country. Government of labour-sending countries attempts to use incentive programmes to attract these funds and encourage their investment in home countries. Researchers who view remittances as a potential source of financing also have made proposals that help senders and recipients channel remittances toward investment and development projects, ranging from reducing the costs of transmitting remittances, to creating an environment and infrastructure in the home countries that encourages and rewards investment and development. It is argued that migrants found to have made the best use of remittances were educated and sophisticated, had bank accounts, and came from countries with a long tradition of savings. Further, it has been written that over bureaucratic plans to encourage remittances and their investment lead migrants to spend the remittances through unofficial means, the opposite of the intent.
Official and unofficial remittance: It is the expectation that remittances should be channelled through banking system which practically is not the case. A World Bank study (2005) conducted to estimate the official and unofficial remittances found that official remittance of Bangladesh in 1984 was much lower than unofficial figure when the comparative figures for India showed an opposite result i.e. official figure is much higher than unofficial one. In case of Pakistan, the unofficial remittance was lower in 1988 but in 1997 the unofficial figure showed a three times bigger amount than the official one. Nepal and Sri Lanka demonstrated continued higher official remittance than unofficial one. Increasing official remittance of Bangladesh and utilising that in productive sectors and SME development should be the strategy for future.
Factors in attracting official remittances: These include stable political environment, low rates of inflation, low black market exchange rate or unitary exchange rates, currency devaluations, increase in domestic interest rates and secured means of transferring remittances and national banking services in the country of employment. In addition, the factors in the remittance-receiving country can be more influential than many of the special programme created by the governments, and these policy measures to capture and influence the use of remittances have been considered relatively ineffective when viewed in relation to the total volume of remittances. As a whole, the effect of migrant's remittances on developments will probably be determined by many of the same factors that shape the decisions of foreign investors and developments generally -- a stable political environment, sensible macro economic policies, investment in human capital, and the availability of institutional mechanism for instrument in activities with attractive rate of return.
Some countries tried to increase flows through co-operative agreements between labour sending and receiving countries through such means as deducting a certain percentage of earning requiring their transfer back to their country of origin. The mandatory remittance policies have been found effective in labour flows organised through bilateral official channels when governments have direct access to control over the migrants earnings. Examples of countries where workers are required to remit a significant percentage of their earnings include The Philippines, China, and Korea.
Decreased transmittal costs: Another means of increasing flows through official channel is by decreasing costs of sending remittances remitting money back to ones' home country through wire transfers, money orders. Such costs are not cheap in many countries with migrants spending up to 15% of the remittance to send it and loosing up to additional 10% in the currency exchange. Therefore, due to transfer costs, the amount of money available to the recipient could be as much as 20 to 25 percent less than the available funds. To overcome the problems, proposals can include opening branches of the national banks in the countries where the migrants are working --by expanding bank branches or, at least, money receivers to more rural areas and by working to form partnership between national and foreign banks, postal services, and money transfer and exchange agencies. Standard exchange rates also could be set, and banks in the remittance-receiving countries could work with wire transfer and courier service companies to ensure that remittance go directly into savings account. In addition, since money transfer businesses profit either with high-volume small-profit services or low volume high profit services. The wire transfer money order, and courier companies might be writing to reduce their fees for guaranteed volume of business.
(The writer is Vice President, Institute of Chartered Accountants of Bangladesh and Treasurer of Bangladesh Economic Association.)