OFW remittances now more important than private loans — World Bank report

Overseas Filipino workers (OFWs) have become a very important source of finance for the Philippines, even more important than private lending.

According to a World Bank report, remittances are a more stable source of external finance than debt as the former tend to be counter-cyclical, thus serving as buffer from other financial shocks since economic downturns encourage additional workers to go abroad. Likewise, those already abroad could increase the amount of money they send to families left behind, the report noted.

For most of the 1990s, remittances exceeded official development assistance (ODA). Recent trends, including tighter restrictions on informal transfers and lower banking fees, are bound to encourage more remittances through the banking system.

The World Bank report pointed out that a positive investment climate is critical for effective utilization of workers’ remittances.

In countries with poor investment climates, remittances are more likely to be spent for survival conditions while in countries with better investment climate recipients are more likely to invest in the farms and small and medium enterprises that are key to poverty reduction.

"A positive investment climate is important for the effective utilization of all types of capital flows, including FDI, remittances, aid and debt," Nicholas Stern, World Bank chief economist and senior vice president for development economics, said in a report titled Global Development Finance 2003.

Remittances from overseas Filipino workers (OFWs) grew from $5.7 billion in 1997 to $7.4 billion the following year. In 1999, it slipped slightly to $6.8 billion and dropped further to $6 billion in 2000. It improved again in 2001 to $6.3 billion.

In the first 10 months of 2002, remittances reached $5.886 billion based on data from the Bangko Sentral ng Pilipinas (BSP). It is estimated to reach an all-time high of $7.5 billion for the whole of 2002.

Last year, South Asia received $16 billion in remittances. This is the second highest among developing country regions and equals 2.5 percent of the GDP for the region. India was the largest recipient of remittances in the developing world with $10 billion. Other major recipients included Bangladesh ($2.1 billion), Pakistan ($1.5 billion) and Sri Lanka ($1.1 billion).

Meanwhile payments on private debt last year were again larger than new loans, so net private debt flows were negative for developing countries, the World Bank report said.

"The decline in private lending was especially steep in 2001 and 2002 as the global economy struggled through a recession caused by the bursting of the equity market bubble in the major economies," Philip Suttle, lead author of the report, said.

Suttle added that debt finance for developing countries shrank with small likelihood that it would come back quickly. Over-reliance on debt has been a problem for many countries.

The author said that increased reliance on foreign direct investment (FDI) is generally positive for developing countries, since FDI investors tend to be committed for the long haul and are better able than debt holders to tolerate near-term adversity.

But he warned that investors need a positive working environment just like foreign investors.

"Both seek stable macro conditions, access to global markets, reliable infrastructure, and sound governance, including restraints on bureaucratic harassment and corruption," it added.