Incentive to attract migrants' remittances
Wednesday, 18 July 2007
Jamaluddin Ahmed
TEMPORARY incentives provide one of the means to eliminate any potential obstacles that would prevent migrants from sending their savings back home. It is argued that migrants tend to save, remit, and invest productively when the incentive structure is such that this behaviour is likely to be rewarded. For example migrants may be more likely to remit into savings account rather than for cash consumption if they have dollar denominated accounts, received higher than normal interest rates, tax and customers exemptions, low interest loans, access credit and technical support, assistance for small business development, and coverage of rural areas.
Other short team proposals to increase the amount of remittance in the country include promoting return visits, tourism, return after retirement, supplements for small businesses, and non-profits that promote development. Bangladesh, India, Pakistan and Srilanka have implemented incentives like foreign currency accounts that they pay above market interest rates and convert remittance into local currencies at premium rates. India also shelters income form certain migrant investments as long as the migrants remain outside the country. Both Egypt and Turkey have offered good exchange rates for certain migrant investments and Poland offers a good rate of exchange through tax-free stores at the airport rather than buying goods in the country where they are working.
Methods for increasing productive use of remittance: It has been suggested that remittance would be safer and used more productively if they entered the banking system before being spent. For example, additional funds entering the banking system could allow banks to increase the number and volume of loans which could earn interest and remain physically secured before they are spent. Such a proposal could be accomplished by creating a partnership between banks and wire transfer and courier service companies, channelling the money directly into an account. A partnership may not, however, be viable because of insecurity and lack of speedy transfers in the underdeveloped countries. By having the funds entered banks and using electronic transfers, the cost of transactions will decrease. This will make the remittance more efficient, decrease the pressure on exchange rate, lower inflation, reduce current account balance, and provide banks with more funds to use for loans and investments.
Securitization: This involves lending money to banks based on expected inflow of funds from remittance. Some European Investment bank tried this in Mexico. These transactions allowed banks to issue secured bonds before they had the actual money-based on the expected amount of remittances that they would enter into the system through wire transfers and then reinvest the money they did receive. A related suggestion is to encourage banks that depend on the remittances for cash flow to invest some of the funds in the countries to which the money is transferred.
Remittance Banks: Another proposal involves the creation of national and regional remittance banks to link migration with development. These banks and financial institutions could be supervised by private organisations or by public international and regional organisations such as IDA, ADB and other regional development banks. That would help identify potential investments. Migrants would deposit their remittances in the banks, which would transfer the requested percentages of remittances, directly or through investment dividends to the migrants' families. The reminder of the funds would remain in the bank and be used as leverage for international and regional funds for development projects. The funds also could go into an investment fund for local projects or be used as additional financing for small business development, along with technical support.
Remitter specified use: Remitters also could be given more control over the destination and use of their remittances, for example, savings account or particular expenditure. For instance, binational agency for economic development, created with visa fees and tax with holdings, or a private entity could make matching grants to communities who pooled their remittance dollars together for local development projects.
Structural change: This proposal would have the most significant and lasting impact of any but would also involve a longer period to achieve in the way for policy makers to encourage productive investment. This is about pursuing macro-economic policies that yield a stable and propitious investment climate and making expenditures on the infrastructure of specific communities which make investment an attractive, profitable proposition.
Business cycle and migrant remittance: Remittances are generally a less volatile, hence more dependable, source of funding than private flows and foreign direct investment. Being unilateral transfers, they do not create any future liabilities such as debt servicing or profit transfers. Furthermore, remittances are argued to have a tendency to move counter cyclically with GDP in recipient countries, as migrant workers are expected to increase their support to family members during down-cycles of economic activity back home. Migrant workers tend to increase remittance following a cyclical drop in real GDP of their home countries. In the terminology of business cycles, remittances would peak within one year after a trough in the home country output.
Seyan (2006) in his study on business cycle and workers' remittance data of 12 countries between 1976-2003 found that in the terminology of business cycles, remittances would peak within one year after a trough in the home country output. Looking at the individual country, remittance flows into some countries were counter-cyclical whereas others are pro-cyclical or acyclical.
Migrants from Bangladesh and India increase their transfers during the times of economic hardship at home whereas migrants from Morocco and Jordan increase their transfers during good time at home implying a stronger investment motive and higher risk aversion. In terms of the response time, Bangladeshi and Jordanese migrants respond to the state of economic activity in their home countries immediately whereas Indian and Moroccan migrants respond with a time lag.
(The writer is Vice President, Institute of Chartered Accountants of Bangladesh and Treasurer of Bangladesh Economic Association)
TEMPORARY incentives provide one of the means to eliminate any potential obstacles that would prevent migrants from sending their savings back home. It is argued that migrants tend to save, remit, and invest productively when the incentive structure is such that this behaviour is likely to be rewarded. For example migrants may be more likely to remit into savings account rather than for cash consumption if they have dollar denominated accounts, received higher than normal interest rates, tax and customers exemptions, low interest loans, access credit and technical support, assistance for small business development, and coverage of rural areas.
Other short team proposals to increase the amount of remittance in the country include promoting return visits, tourism, return after retirement, supplements for small businesses, and non-profits that promote development. Bangladesh, India, Pakistan and Srilanka have implemented incentives like foreign currency accounts that they pay above market interest rates and convert remittance into local currencies at premium rates. India also shelters income form certain migrant investments as long as the migrants remain outside the country. Both Egypt and Turkey have offered good exchange rates for certain migrant investments and Poland offers a good rate of exchange through tax-free stores at the airport rather than buying goods in the country where they are working.
Methods for increasing productive use of remittance: It has been suggested that remittance would be safer and used more productively if they entered the banking system before being spent. For example, additional funds entering the banking system could allow banks to increase the number and volume of loans which could earn interest and remain physically secured before they are spent. Such a proposal could be accomplished by creating a partnership between banks and wire transfer and courier service companies, channelling the money directly into an account. A partnership may not, however, be viable because of insecurity and lack of speedy transfers in the underdeveloped countries. By having the funds entered banks and using electronic transfers, the cost of transactions will decrease. This will make the remittance more efficient, decrease the pressure on exchange rate, lower inflation, reduce current account balance, and provide banks with more funds to use for loans and investments.
Securitization: This involves lending money to banks based on expected inflow of funds from remittance. Some European Investment bank tried this in Mexico. These transactions allowed banks to issue secured bonds before they had the actual money-based on the expected amount of remittances that they would enter into the system through wire transfers and then reinvest the money they did receive. A related suggestion is to encourage banks that depend on the remittances for cash flow to invest some of the funds in the countries to which the money is transferred.
Remittance Banks: Another proposal involves the creation of national and regional remittance banks to link migration with development. These banks and financial institutions could be supervised by private organisations or by public international and regional organisations such as IDA, ADB and other regional development banks. That would help identify potential investments. Migrants would deposit their remittances in the banks, which would transfer the requested percentages of remittances, directly or through investment dividends to the migrants' families. The reminder of the funds would remain in the bank and be used as leverage for international and regional funds for development projects. The funds also could go into an investment fund for local projects or be used as additional financing for small business development, along with technical support.
Remitter specified use: Remitters also could be given more control over the destination and use of their remittances, for example, savings account or particular expenditure. For instance, binational agency for economic development, created with visa fees and tax with holdings, or a private entity could make matching grants to communities who pooled their remittance dollars together for local development projects.
Structural change: This proposal would have the most significant and lasting impact of any but would also involve a longer period to achieve in the way for policy makers to encourage productive investment. This is about pursuing macro-economic policies that yield a stable and propitious investment climate and making expenditures on the infrastructure of specific communities which make investment an attractive, profitable proposition.
Business cycle and migrant remittance: Remittances are generally a less volatile, hence more dependable, source of funding than private flows and foreign direct investment. Being unilateral transfers, they do not create any future liabilities such as debt servicing or profit transfers. Furthermore, remittances are argued to have a tendency to move counter cyclically with GDP in recipient countries, as migrant workers are expected to increase their support to family members during down-cycles of economic activity back home. Migrant workers tend to increase remittance following a cyclical drop in real GDP of their home countries. In the terminology of business cycles, remittances would peak within one year after a trough in the home country output.
Seyan (2006) in his study on business cycle and workers' remittance data of 12 countries between 1976-2003 found that in the terminology of business cycles, remittances would peak within one year after a trough in the home country output. Looking at the individual country, remittance flows into some countries were counter-cyclical whereas others are pro-cyclical or acyclical.
Migrants from Bangladesh and India increase their transfers during the times of economic hardship at home whereas migrants from Morocco and Jordan increase their transfers during good time at home implying a stronger investment motive and higher risk aversion. In terms of the response time, Bangladeshi and Jordanese migrants respond to the state of economic activity in their home countries immediately whereas Indian and Moroccan migrants respond with a time lag.
(The writer is Vice President, Institute of Chartered Accountants of Bangladesh and Treasurer of Bangladesh Economic Association)