Syndicate content

remittance flows

Can International Remittances Be Unproductive in Recipient Countries? Not Really!

Zahid Hussain's picture
A recent Bangladesh Bank study reports that remittance sent by expatriates is mostly used for consumption and in the “non-productive” sectors in the country. The survey conducted in 2011 found 90% of remittances were used for meeting basic needs. Seventy-five percent of households receiving remittance spent those on food, 42% on loan repayment, 65% on education, 57% on treatment, 49% on marriage and 4% on running legal battles (multiple responses allowed).

Explaining the Recent Decline in Remittances in Bangladesh

Zahid Hussain's picture

Migrant workers sent $6.77 billion home to Bangladesh in July-December, down 8.41% from the same time a year ago. For the first time in recent memory, Bangladesh has experienced a decline in remittances in the first half of the fiscal year.

There are four factors that can potentially account for the decline in remittances: the stock of Bangladeshi migrants abroad, earnings per migrant worker, their average propensity to save, and their average propensity to remit money home out of those savings.

The standard refrain appears to be that the flow of remittance has declined because the stock of Bangladeshi migrants abroad is not growing like it used to. This is because of two reasons. First, Bangladesh is failing to send more workers abroad to traditional markets and exploring new markets. Only 450,000 migrants managed oversees jobs in 2013, down by more than 33% from 680,000 in 2012. Second, the number of migrant workers returning to Bangladesh has also increased because the government could not resolve problems related to the legal status of Bangladeshi migrant labors in Saudi Arabia, the United Arab Emirates and Kuwait through diplomatic channels. Unfortunately, there is no reliable time series on the annual number of migrant returnees from abroad.

Is that the full story?  I doubt it although it is generally assumed that the current migrant workers are sending money home as per their maximum capacities and have little capacity to increase the flow.

Taxing remittances is not a good idea

Sanket Mohapatra's picture

Photo: istockphoto.com
Remittances sent by migrants have become a massive financial resource flow for developing countries with over $300 billion received annually. While most governments have encouraged efforts to increase these hard-currency flows through formal channels, some are considering taxing remittances as an additional source of revenue.     

A few receiving countries already tax remittances, often through indirect means. For example, remittances sent from the US to Cuba can only be paid to recipients in Cuban Convertible pesos (CUC) or Chavitos with a tax of 20 percent for conversion of US$ to CUCs. The US government and a US senator called upon Cuba to repeal this tax when the US lifted restrictions on sending remittances to Cuba. Other countries that have a parallel market premium with an overvalued official exchange rate, e.g., Ethiopia, Pakistan, and Venezuela to name a few, also implicitly tax remittances when they require recipients to convert remittances to local currency at uncompetitive official exchange rates. Philippines used to impose a small Documentary Stamp Tax (DST) of 0.3 pesos for every 200 pesos, but this was scrapped in November (see article).

Outlook for remittance flows to developing countries: Recovery after the global financial crisis but risks lie ahead

Dilip Ratha's picture

 (Available in French and Spanish)

 

We have just released our latest outlook for remittance flows. Officially recorded remittance flows to developing countries are estimated to increase by 6 percent to $325 billion in 2010. This marks a healthy recovery from a 5.5 percent decline registered in 2009. In line with the World Bank’s outlook for the global economy, remittance flows to developing countries are expected to increase by 6.2 percent in 2011 and 8.1 percent in 2012, to reach $374 billion by 2012. (Note that the World Bank’s definition of developing countries has changed: Poland, which is estimated to have received $9.1 billion in 2010, is no longer a classified as a developing country.)

This outlook for remittance flows, however, is subject to three key risks:

  • First, the economic recovery in the major destination countries in North America and Europe is not very firm yet. There is a risk that the fiscal retrenchment being planned or implemented in some of the major destination countries might restrain aggregate demand and economic growth, and contribute to high unemployment rates, which in turn could reduce the migrants’ incomes and remittances.
     
  • Second, movements in currency exchange rates and commodity prices can pose unpredictable risks for remittance flows. While a weaker US dollar can imply larger dollar-denominated remittances from Europe, it can also increase dollar prices of assets and goods in remittance-receiving countries (such as India, Mexico and the Philippines).
     
  •  Finally, there is a risk that immigration controls imposed in response to high domestic unemployment rates will deepen and adversely affect migration and remittance flows. In general, protectionist policies that slow the movement of goods and people across borders are likely to delay an adjustment to the crisis and prolong the process of recovery. Such policies are also inconsistent with the sharp increase in demand for migrants projected in the rapidly aging societies of the North.