Increasing the macroeconomic impact of remittances on development

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

Remittances are large, have continued to increase FDI Private debt and portfolio equity Recorded Remittances ODA

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

Macroeconomic effects Ÿ Remittances are a large source of foreign currency in many poor countries; Ÿ reduce poverty; Ÿ tend to rise following crisis, natural disaster, or conflict;

Macroeconomic effects Ÿ Remittances are a large source of foreign currency in many poor countries; Ÿ reduce poverty; Ÿ tend to rise following crisis, natural disaster, or conflict; Ÿ tend to be larger in poorer, smaller countries;

Macroeconomic effects Ÿ Remittances are a large source of foreign currency in many poor countries; Ÿ reduce poverty; Ÿ tend to rise following crisis, natural disaster, or conflict; Ÿ tend to be larger in poorer, smaller countries; Ÿ 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 Spread (% of GDP, excluding including reduction 2004) remittances (basis pts) 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 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 Ÿ Israel and India have raised nearly $40 billion financing, often in times of crisis Ÿ There is scope for other countries with large diaspora abroad to issue diaspora bonds for financing development. . . Ÿ. . . At a discount

Discount on Israel diaspora bonds: Patriotic? US Treasury 10 -year Israel DCI bond

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