25_G15_InSight_Money

Global Issue 15

Global Insight Making Money Move Figure 1: Remittance flows to developing countries, compared to other forms of income 1991 Remittances FDI Private debt and portfolio equity ODA 1992 700 600 500 400 300 200 100 0 US$ billions Source: World Bank 2012 1993 1994 1995 1996 1997 1998 1999 2000 developing countries. And exchange controls, together with dual exchange rates, are discouraging remittances in many countries. Since 2009, the G20 has adopted a goal of reducing remittance costs to five percentage points in five years. Average remittance costs have fallen from roughly 12 per cent to around nine percent currently. But there is more work to be done, especially in many south-south corridors and some low-volume north-south corridors involving small countries. For many poor people, the only point of contact with the financial system is through sending or receiving remittances. After three or four trips to a bank or credit union, the sender or receiver often decides to open an account in that financial institution. This trend has not yet been fully harnessed by the proponents of financial inclusion for all. Promoting account-to-account transfers would help to mobilise savings and match savings and investment opportunities. Yet, the current trend, as mentioned earlier, is for many international banks to close the correspondent banking accounts of money service businesses, for compliance with stringent financial regulations. These regulations require 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 rebalancing. Remitters and recipients who opened bank accounts, would soon also be customers for housing or car loans, which would benefit both banks and their customers. Of particular significance is a need to link remittances to micro-insurance, especially health insurance for the poor. The circle of poverty is often perpetuated by debilitating illnesses that many household heads face in middle age. Health insurance for such illnesses can be easily promoted by facilitating payment of premiums by migrants using remittance channels. Besides sending remittances, diaspora members accumulate substantial savings in destination countries, estimated to be over $400 billion annually. Most of it is invested in bank deposits in destination countries earning little or no interest. These savings could be mobilised by selling diaspora bonds that offer an interest rate of three to four percent in dollar terms. Diaspora members would be interested not only in the financial returns, but also in the development projects that such bonds could finance in origin countries. Diaspora bond interest rates can be significantly lower than those on institutional bonds because diaspora members have a lower country risk perception than institutional investors. Also, the price of diaspora bonds held by a large number of small retail diaspora investors is likely to be less volatile than institutional investments. These bonds can be marketed primarily to diaspora members – but not solely. The bonds must be registered under the securities act of the destination country. For prudential debt management, bond proceeds must be invested in projects that generate adequate financial returns. Financing of international airports or high-speed trains, power generation and roads are likely to attract diaspora financing via diaspora bonds. Some countries are considering paying off higher-cost debt using diaspora bond proceeds, to reduce the interest burden. Before issuing a diaspora bond, however, consultations with the diaspora are necessary to understand their abilities and attitudes toward investing in their home countries. Dilip Ratha is lead economist and manager of the Migration and Remittances Unit at the World Bank Cash is king: banks are failing to offer wider services to recipients of remittances global thi rd quar ter 2013 www.global -br ief ing.org l 25


Global Issue 15
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