Remittances Statistical Accuracy and Financial Benefits Anna Prokhorova

Remittances: Statistical Accuracy and Financial Benefits Anna Prokhorova, World Bank, Mi. RPAL Coordinator for Russia Almaty, Kazakhstan October 31 –November 1, 2013

Outline 1. 2. 3. 4. 5. 6. Global and regional outlook of remittances flows Methodology and sources of data Cost of remittances General Principles of International Remittances System Financial literacy factor Remittances in Mi. RPAL countries

1. Global and regional trends in remittances flows World Bank estimates

Migration and Remittance Flows: Recent Trends and Outlook, 2013 -2016 $550 billion remittance flows may reach worldwide in 2013 and over $700 billion by 2016. ¡ $414 billion remittance flows to developing countries are expected to reach in 2013 (up 6. 3 percent over 2012), and $540 billion by 2016. ¡ $ 43 billion remittance flows estimated for 2013 to the developing countries of Europe and Central Asia (ECA) region, thus projected to have increased by 10. 8 percent ¡

Top-10 remittance recipients in the world Top 10 recipients of remittances. US$ billion, 2013 e Top 10 recipients of remittances. % of GDP, 2012

2. Measuring Remittances www. imf. org

Methodology ¡ Remittances – cross-border person-to-person payments of relatively low value. ¡ Remittances = “compensation of employees” + “personal transfers” (Balance of Payment Manual 6 th edition) ¡ “Compensation of employees” refers to the income of border, seasonal, and other short-term workers who work in an economy where they are not resident, and to the income of resident workers who are employed by a nonresident entity. ¡ “Personal transfers” are defined independently of the source  of income  of the sending  household,  the relationship  between the households,  and the purpose for which the  transfer is made.

Sources of data International Transaction Reporting System (ITRS) Bank reporting MTOs Post offices Findings of household surveys Indirect sources (e. g. migration data) Bilateral data Modeling

3. Cost of Remittances www. remittanceprices. worldbank. org

Cost effectiveness ¡ ¡ US $16 bln a year can be saved up if cutting remittances prices by at least 5 percentage points 5 x 5 Objective was endorsed in July 2008, at L’Aquila summit, by G 8 in order “to achieve in particular the objective of a reduction of the global average cost of transferring remittances from 10% to 5% in 5 years”

Global Average Total Cost for sending USD 200

Distribution of Average Total Costs (% of corridors)

Total average cost in G 8 countries, Q 3, 2013

Cost by remittance service provider (RSP) RSP TYPE Commercial banks COST OF TRANSFER*, % 12, 86 MTOs 7, 36 Post offices 5, 44 Global average 8, 93 *Average cost of sending USD 200 or the local currency equivalent, Q 3, 2013 • In about 79% of the countries surveyed, commercial banks and to a lesser extent international MTOs are considered the most relevant RSPs; the role of NBFIs and mobile phone providers is still very limited. • RSPs require a license in 66% of the countries. • Survey results show that cash and current account transfers are regarded as the most relevant payment instruments for both sending and receiving remittances. • In only 56% of the countries RSPs are required to disclose all transaction details before the transaction itself is performed.

4. General Principles for International Remittances Services World Bank/Bank of International Settlements

5. Financial literacy factor Based on World Bank research

The Impact of Financial Literacy Training for Migrants (2012) ¡ ¡ Results of a randomized experiment designed to measure the impact of providing financial literacy training to migrants in New Zealand Australia – countries which had recently launched a remittance cost comparison website (www. sendmoneypacific. org) for sending money to the Pacific Islands. The case for providing financial literacy training for migrants needs to rest on other criteria than the financial savings from cheaper remittances, such as the improvements in their capabilities from being more informed customers, and the potential savings from other aspects of financial management, such as choice of debt levels and instruments. Experimenting further with adding additional content on budgeting, saving, and debt management seem fruitful areas for policy refinement in this area. No big changes in ultimate outcomes – migrants avoid switching to more expensive or less transparent remittance channels, but do not change the amount or frequency of remitting.

Who You Train Matters: Identifying Complementary Effects of Financial Education on Migrant Households (2012) ¡ ¡ ¡ A survey conducted in Indonesia among the migrant worker and the migrant worker’s household. The study finds strong and statistically significant impacts of financial literacy training given to both the migrant and her family on savings behaviors and outcomes, in contrast to much of the existing literature. The study also finds that the same treatment group is less likely to have taken out a loan in the past six months. The training does not change either frequency or the amount of remittances received, but does change how household use this money. They are more likely to keep financial records, and as a result of these knowledge and behavior changes, accumulate more savings and rely less on loans.

6. Migration and Remittances in ECA region Mi. RPAL countries http: //peoplemov. in/ http: //www. torre. nl/remittances/

Top 10 remittances recipients in Europe and Central Asia region (ECA) Top 10 ECA countries receiving remittances. US$ billion, 2013 e Top 10 ECA countries receiving remittances, share of GDP, %, 2012

Cost of sending remittances to Mi. RPAL countries ¡ ¡ It is important to note that Russia has a unique environment where cross border remittances are mostly conducted in the same currency and possible additional cost associated with a currency exchange are not known. The Russian market also benefits from relatively low fees charged by the providers when compared to the other G 8 countries.

Remittance data in Mi. RPAL countries ¡ ¡ ¡ Cholpon-Ata, Sept 10 -11 2012, eight countries Methodology: BPM 6 (Armenia, Belarus, Russia, Ukraine in 2012) Sources of data: ITRS (all), official statistics, administrative sources (5 countries), household surveys (TJ, AR, ML), interviews (Russia, Kazakhstan) Reasons of data discrepancies: respondents coverage (local RSPs), different thresholds, different exchange rates, geographical coverage Next steps: Kyrgyz Republic remittance module to be included in household survey, Kazakhstan and Moldova to introduce BPM 6 in 2014

Impact of Remittances: Armenia case ¡ ¡ ¡ ¡ In Armenia remittances contribute to economic growth (Granger causality test) and the cycle of remittances’ activity coincides with GDP cycle. Results of econometric analysis showed, that in the short run remittances have positive impact on economic growth in Armenia. In the long run the impact is negative. Moral hazard: households receiving remittances tend not to work. Regression analysis shows that growth of remittances reduces employment in Armenia; Reduction of workforce: because the growth of remittances is mostly due to migration in previous years, which is the evidence of workforce reduction, particularly - of high-quality workforce; Occurrence of Dutch disease: remittances contribute to occurrence of Dutch disease: increase of the real effective exchange rate reduces competitiveness and export; There are investments, but they are not productive: according to the Survey in Armenia only 12% of households are engaged in business. The main part of remittances at the peak of economic growth was focused on housing development; Risk of creating a trap for economic policy.

Indicators to capture remittances impact on development Channels used to transfer money (transferred through regular channels like banks, MTOs) ¡ Use of remittances – -improving living conditions, -education -health -invested/saved Sources of data – Household surveys ¡

Thank you! aprokhorova@worldbank. org