1. 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

2. Outline 1. International remittances agenda 2. Macroeconomic effects 3. Policy implications

3. Outline 1. International remittances agenda 2. Macroeconomic effects of remittances 3. Policy implications

4. MigrationRemittances Remittances provide a tangible and non-controversial link between migration and development

5. 1. Monitoring, analysis, projection 2. Retail payment systems 3. Financial access 4. Capital market access The International Remittance Agenda

6. 4. Capital market access The International Remittance Agenda

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

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

9. ($ billion) 1995 2007 estimate Recorded remittances58240 ODA*59100 FDI*105368 Pvt. debt & portfolio equity122387* * 2006

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

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;

12. Remittances tend to rise following crisis, natural disaster, or conflict Remittances as % of private consumption Source: Global Economic Prospects 2006

13. 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;

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

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

16. 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.

17. Policy recommendations 1. Difficult to address currency appreciation effects through sterilization techniques

18. Policy recommendations 1. Difficult to address currency appreciation effects through sterilization techniques 2. Country risk analysis should account for remittances

19. Remittances can help obtain and improve credit rating Remittances (% of GDP, 2004) Rating excluding remittances Rating including remittances Spread reduction (basis pts) Lebanon14B+BB-150 Haiti*28CCCB-334 Nicaragua*11CCC+B-209 Uganda*5B-B161 * Calculated using a model similar to Cantor and Packer (1995), see Ra tha, De and Mohapatra (2007)

20. 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

21. Securitization of future remittances can improve credit rating above investment grade YearIssuer Amount (US$ mn) Transaction rating Country rating 1998Banco Cuscatlan50BBBBB 2002Banco do Brasil250BBB+BB-

22. Remittance senders Remittance securitization structure Correspondent bank Beneficiary Local bank LocalForeign

23. Remittance senders Remittance securitization structure Correspondent bank Beneficiary Local bank LocalForeign Special trustee

24. 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

25. 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

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

27. 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

28. 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