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Increasing the macroeconomic impact of remittances on development Dilip Ratha Development Prospects Group World Bank G-8 Outreach Meeting on Remittances Berlin November 28-30, 2007. Outline. International remittances agenda Macroeconomic effects Policy implications. Outline.

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  1. Increasing the macroeconomic impact of remittances on developmentDilip RathaDevelopment Prospects GroupWorld BankG-8 Outreach Meeting on RemittancesBerlinNovember 28-30, 2007

  2. Outline • International remittances agenda • Macroeconomic effects • Policy implications

  3. Outline • International remittances agenda • Macroeconomic effects of remittances • Policy implications

  4. The International Remittance Agenda

  5. The International Remittance Agenda

  6. Macroeconomic effects • Remittances are a large source of foreign currency in many poor countries;

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

  8. Remittances are large, have continued to increase * 2006

  9. Macroeconomic effects • Remittances are a large source of foreign currency in many poor countries; • reduce poverty;

  10. 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;

  11. 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;

  12. Top recipients of remittances, 2007 (estimated) $ billion

  13. Top recipients of remittances, 2006 % of GDP (estimated)

  14. 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.

  15. Policy recommendations • Difficult to address currency appreciation effects through sterilization techniques

  16. Policy recommendations • Difficult to address currency appreciation effects through sterilization techniques • Country risk analysis should account for remittances

  17. Remittances can help obtain and improve credit rating * Calculated using a model similar to Cantor and Packer (1995), see Ra tha, De and Mohapatra (2007)

  18. Policy recommendations • Difficult to address currency appreciation effects through sterilization techniques • Country risk analysis should account for remittances • Financial institutions can securitize future remittances for raising capital from international markets

  19. Securitization of future remittances can improve credit rating above investment grade

  20. Remittance securitization structure Remittance senders Beneficiary Correspondent bank Local bank Foreign Local

  21. Remittance securitization structure Remittance senders Beneficiary Correspondent bank Local bank Special trustee Foreign Local

  22. Policy recommendations • Difficult to address currency appreciation effects through sterilization techniques • Country risk analysis should account for remittances • Financial institutions can securitize future remittances for raising capital from international markets • Diaspora bonds can potentially raise development financing

  23. 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

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

  25. Policy recommendations • Difficult to address currency appreciation effects through sterilization techniques • Country risk analysis should account for remittances • Financial institutions can securitize future remittances for raising capital from international markets • Diaspora bonds can potentially raise development financing • Governments should not tax remittances or direct the allocation of expenditures financed by remittance

  26. Policy recommendations • Difficult to address currency appreciation effects through sterilization techniques • Country risk analysis should account for remittances • Financial institutions can securitize future remittances for raising capital from international markets • Diaspora bonds can potentially raise development financing • Governments should not tax remittances or direct the allocation of expenditures financed by remittances • Remittances are not a substitute for official aid

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