Workers Remittances in Mediterranean Partner Countries: The EIB’s work program Pedro J. F. de Lima Development Economics Advisory Service European Investment Bank Migration and Development Conference Washington DC, 24 May 2007

Workers ’ Remittances: a lever for economic development EIB’s operational targets  Contribute to reduce remittances’ transfer costs, by promoting competition and disseminating information  Increased use of formal transfer channels, in particular through increased population access to banking services  Remittances as a tool for improved financial sector funding conditions

Remittances in Mediterranean Partner Countries (MPC) and EIB support  EIB has long standing relationship with Mediterranean countries  In Barcelona in 2002 the EIB received a new mandate (FEMIP) …  increase in finance (EUR2 billion per year), technical assistance, policy dialogue.  priority on private sector development

 … reinforced in 2004 with the introduction of a special FEMIP envelope to enhance private sector lending (extended risk-sharing operations) and the creation of Trust Fund to support initiatives in priority sectors  For the period, FEMIP mandate renewed at EUR 8.7 billion by the European Council to finance private sector, regional integration and socio-economic infrastructures. Remittances in Mediterranean Partner Countries (MPC) and EIB support

 In this context, the EIB launched a major study on remittances.  Purpose of study was to determine ways to improve the efficiency of workers ’ remittances in Mediterranean countries  Eight Mediterranean countries targeted: Algeria, Morocco, Tunisia, Egypt, Jordan, Lebanon, Syria, and Turkey Study on improving the efficiency of workers ’ remittances in MPCs

Study on improving the efficiency of workers ’ remittances in MPCs: Objectives The study aimed to determine:  The origin of flows  The channels of transmission of remittances and associated costs  The impact of market imperfections in host and recipient countries on costs  The use of funds in recipient countries and impediments to their efficient allocation

Study on improving the efficiency of workers’ remittances in MPCs: Methodology

Considerable economic importance to MPC ’ s

Considerable economic importance to MPCs: remittances larger than FDI and ODA combined

Considerable economic importance to MPCs, but not uniformly across the region  Remittances as % of GDP (2005), MPC countries

Not as stable as in other parts of the world: oil dependence and renewed migration flows  Remittances in USD dollars

Remittances in MPC: diversity of sources …  In Algeria, Morocco, Tunisia and Turkey, remittances from the EU account for 85-90% of total  For Egypt, Jordan, Lebanon, and Syria, Golf countries are the main source (EU accounting for 5- 10% of remittances)

...but little variation regarding use  Use of remittances in Mediterranean countries follows a pattern similar to that of other areas  Consumption is by far the largest item (50%)  Health and education are another important use (18%)  Housing investment has some significance (14%)  Business investment appears to be relatively limited in most countries. Egypt and Tunisia appear exceptional (15 to 18%)

Improving the efficiency of workers ’ remittances in Mediterranean countries  Market imperfections and information deficiencies  Exclusivity contracts for MTOs in post offices  Lack of transparency on transfer costs (particularly as regards exchange rate fees);  Inadequate information regarding available transfer mechanisms and associated costs, speed and reliability;  Inadequate payment systems and limited usage of bank accounts in Mediterranean countries.  Accessibility to banking accounts for emigrants residing in the EU is also limited and banking products are not sufficiently tailored for remitters, with few exceptions.  Imperfections result in high transactions costs, which could exceed 16 percent of capital sent.

Costs and flows per migrant not too dissimilar across corridors … Spain- Morocco Germany- Turkey Germany- Lebanon France- Algeria Cost % Total remittance $ /migrant/year

… but large differences as regards use of banking sector Spain- Morocco Germany- Turkey Germany- Lebanon France- Algeria Main formal channel Banks/MTOBanksMainly MTO % Informal Total remittance $/migrant/year through banks  Relatively efficient GER-TK channel, much less GER-LE or FR-AL

What factors might explain these outcomes?  Scale effects: Insufficient number of migrants to justify efficient banking network in host country (GER-LE vs GER- TK)  Size of illegal immigration – (MO-ES vs TK-GER)  Regulatory restrictions and exchange controls - (TK vs MO or AL)  Recent emigration waves vs. established immigrant populations  Underdeveloped financial systems in countries of origin

The FEMIP-EIB contribution Promote efficiency and interconnection of payment systems Disseminate information, promote best practices Reduce transfer costs Channel remittances to formal sector; increase access to banking

Information dissemination and promotion of best practices

The FEMIP-EIB contribution Banking and financial sectors strengthening Remittances contributing to improve funding of financial institutions Financial development leading to economic growth

Securitization of remittances flows  Remittances as collateral for the issuance of bonds/notes (future flow securitization): banks transfer the foreign currency flows to an SPV set-up in a well-established financial centre. Risk to international investors gets reduced:  Willingness to pay issues are settled  Transfer and convertibility risks are mitigated

Securitization of remittances flows  Particularly appealing for countries with sub- investment ratings  In 2005, five SPVs issued more than 4 billion USD in Turkey securitized by diversified payment rights : Technically, securitisation encompasses a number of financial transfers (SWIFT transfers MT-100, MT-102, MT-102+, MT-103, MT-103+…, corresponding to transactions such as cash-against-goods, cash-against- document transactions, letter of credit transactions, cheques, as well as workers’ remittances)

EIB support to first remittance securitization operation in Lebanon Lebanon: a good candidate.  Large and stable remittance flows  Economy with sky-high public debt levels (200% of GDP)  low sovereign rating (B3/B-)/high T&C risks  Deep and relatively sophisticated financial sector with a supportive regulatory environment (securitization law); however, heavy exposure to government debt

 EIB support: 1.Catalytic role: bringing together the different players required to setup the deal 2.Buyer of SPV notes (50% of 100 million EUR) 3.TA support – first SPV seen as a public good, replicable by subsequent SPVs EIB support to first remittance securitization operation in Lebanon

 Some difficulties: 1.Delicate political environment 2.SPV is relatively small => operation costs (which are mostly fixed) are relatively large 3.SPV rating? Enhancing mechanisms?  First SPV expected by end-2007 EIB support to first remittance securitization operation in Lebanon

 For copies of the report and updated information, check:  Or contact Pedro J. F. de Lima Workers Remittances in MPCs: The role of the EIB