THE MACROECONOMIC IMPACT OF REMITTANCES IN GHANA

THE MACROECONOMIC IMPACT OF
REMITTANCES IN GHANA







DR. E.K.Y. ADDISON
DIRECTOR OF RESEARCH, BANK OF GHANA

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THE MACROECONOMIC IMPACT OF REMITTANCES1


Abstract
This paper presents Balance of Payments (BOP) estimates of private unrequited
transfers (remittances) for Ghana. It shows that the level of private unrequited
transfers increased significantly from US$201.9 million in 1990 to US$1,017.2?
million in 2003. Total transfers have increased from just over US$410 million to
US$1,408.4 million over the same period reflecting mainly the increase in private
unrequited transfers. The study also found that private transfers are much
bigger and more stable than Official Development Assistance (ODA) and Foreign
Direct Investment (FDI) over the period 1990 - 2003. Also remittances have
been increasing more than proportionately compared to GDP and exports
earnings. A new reporting format introduced in 2004 has led to a significant
improvement in the balance of Payments estimation of remittance flows into the
Ghanaian economy.













Presentation by
Dr. E.K.Y. Addison
Director of Research Department
Bank Of Ghana September 3, 2004









1 We acknowledge the input and work from the Balance of Payments office and Special Studies Office of
the Research department.
? Provisional

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TABLE OF CONTENT

ABSTRACT....................................................................................................................... 2
1.0 INTRODUCTION ...................................................................................................5
SECTION II ...................................................................................................................... 7
2.0 WHY DO MIGRANTS REMIT? ..................................................................................7
2.1 ALTRUISTIC MOTIVE.............................................................................................7
2.2 SELF- INTEREST MOTIVE .......................................................................................7
2.3 IMPLICIT FAMILY CONTRACT I: LOAN REPAYMENT………………………………………………7
2.4 IMPLICIT FAMILY CONTRACT II: CO-INSURANCE .........................................................8
2.5 LINK BETWEEN THEORY AND STATISTICS ..................................................................8
SECTION III..................................................................................................................... 9
3.0 MEASUREMENT AND CONCEPTS...............................................................................9
3.1 METHODOLOGICAL ISSUES IN ACCOUNTING FOR TRANSFERS IN GHANA’ B.O.P.................10
3.2 SIZE OF REMITTANCE FLOWS................................................................................11
3.2.1 VOLATILITY AND CORRELATION ANALYSIS .............................................................14
3.2.2 REGIONAL DISTRIBUTION OF RECEIPTS ................................................................15
3.3. PAYMENT SYSTEMS, COSTS AND DISTRIBUTION MECHANISM ......................................17
3.3.1. PAYMENT SYSTEMS ........................................................................................17
3.3.2. COSTS AND DISTRIBUTION MECHANISMS.............................................................17
SECTION IV ................................................................................................................... 20
4.0 MACROECONOMIC IMPACT OF REMITTANCES ............................................................20
4.1. PRODUCTIVE USES OF REMITTANCES .....................................................................21
SECTION V..................................................................................................................... 23
5.0 POLICY OPPORTUNITIES, QUESTIONS AND CONCLUSIONS............................................23
REFERENCES................................................................................................................ 25
APPENDIX 1................................................................................................................... 27
UNREQUITED TRANSFERS....................................................................................27
APPENDIX: 2.................................................................................................................. 30

LIST OF TABLES
TABLE 1. PRIVATE, OFFICIAL AND TOTAL UNREQUITED TRANSFERS..................................11
(US$ MILLION) 1983 - 2003 ....................................................................................11
TABLE 2: SOURCES OF PRIVATE INWARD REMITTANCES RECEIPTS .....................................16
(US$’ MILLION): MARCH-JUNE 2004 ..........................................................................16
TABLE 3. MARKET SHARE OF BANKS AND NON-BANK FINANCIAL HOUSES IN REMITTANCES:
(US$’MILLION): MARCH-JUNE 2004............................................................................17
TABLE 4: FOREIGN TRANSFERS CHARGES, JUNE 2003 - JAN 2004 .....................................18


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LIST OF FIGURES
FIGURE 1. PLOT OF PRIVATE (PUT), OFFICIAL (OUT) AND TOTAL UNREQUITED TRANSFERS
(TUT): 1983-2003 ................................................................................................12
FIGURE 2: GRAPH OF OFFICIAL DEVELOPMENT ASSISTANCE, FOREIGN DIRECT
INVESTMENT AND PRIVATE UNREQUITED TRANSFERS AS PERCENTAGE OF GDP………… …11
FIGURE 3 : REMITTANCE AS A PERCENTAGE OF KEY MACROECONOMIC VARIABLES (1990-
2003)…………………………………………………………………………………………………………………………13
FIGURE 4.SOURCES OF PRIVATE INWARD REMITTANCES (MARCH-JUNE …………..…16



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1.0 Introduction

Recent papers in development economics and finance have began to assign an
important role to remittances as key ingredients in the growth prospects of
developing nations and having a potential y positive impact as a development
tool for developing countries.

Remittances are generally defined as that portion of migrants’ earnings sent from
the migration destination to the place of origin. Although they can also be sent in
kind, the term “remittances” is usually limited to refer to monetary and other
cash transfers transmitted by migrant workers to their families and communities
back home. Remittances reflect the local labour working in the global economy
and have been shown to explain partly the connection between growth and
integration with the world economy. Remittances improve the integration of
countries into the global economy.

Remittances have for several generations been an important means of support
for family members remaining at home. As migration continue to increase, the
corresponding growth of remittances has come to constitute a critical flow of
foreign currency into many developing countries and Africa in particular. Policy
makers in developing countries have started to streamline financial systems,
removing controls and creating incentives, with the aim of attracting remittances
especially through official channels.

Recent global estimates show that, migrants’ remittance flows have assumed a
significant prominence. In the developing world, remittances now surpass Official
Development Assistance (ODA) receipts (Ratha, 2003). Official development
Assistance transfers to developing countries in 2001 stood at about US$52.3
billion (The World Bank, 2004). This figure compares with global remittance flow
of about US$77.0 billion the same year, up from US$51.1 billion in 1995 (The
World Bank, 2004).

This paper presents Balance of Payments (BOP) estimates of private unrequited
transfers (remittance figures) for Ghana and addresses part of the information
gaps on the size of remittance flows. It shows that the level of private
unrequited transfers increased significantly from US$201.9 million in 1990 to
US$1,017.2? million in 2003. Total transfers have increased from just over
US$410 million to US$1,408.4 million over the same period reflecting mainly an
increase in private unrequited transfers. Private unrequited transfers are
estimated to be bigger and more stable than ODA2 and FDI flows into Ghana
since 1990. Also positive, though relatively weak, correlation was found between
remittances and ODA on one hand, and between remittances and FDI on the

? Provisional
2 ODA in this study is defined as official inflows made up of Grants, project loans and programme loans

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other hand, over the period 1990 to 2003. To assess the importance of
remittances in the Ghanaian economy, the size of remittances relative to key
macroeconomic variables were examined.

The recorded private remittance figures according to some analyst reflects only
the “tip of the iceberg” since they do not include remittances sent through
informal channels such as hand carriage, families, money couriers or network of
informal transfer agents. Based on our estimates the reported figures could
represent only about half the actual total. At least as much is transmitted
through informal and unrecorded channels which make it impossible to measure
the precise amount.

However, despite such glaring evidence on the extent of the flow of remittances,
gaps still remain in our understanding of how remittances are or can be used to
promote development, especially given that existing policy incentives are not
generally considered as having been very effective in channelling remittances
towards development (Black, 2003). The appreciation of remittances as a
development tool is recent and several questions on how best to capture their
development impact remain.

Section two of this paper presents theoretical explanations on remittances
focusing on the motives for remittances as well as the macroeconomic
determinants of remittances and the link between the theory and statistics.
Section three follows with a discussion of measurement and concepts and the
difficulties encountered in official estimates. Section four presents the various
channels of macroeconomic impact. Section five presents conclusion and policy
issues.


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Section II


2.0 Why Do Migrants Remit?

The literature on remittances has come up with several theories to explain the
motives behind migrants’ decisions to send funds (cash and goods) to their
relations back home3. According to Solimano, 2003, the analytical literature on
the motives behind remittances can be summarized in four approaches. These
motives include (i) The Altruistic Motive, (ii) The Self-Interest Motive, (iii) Implicit
Family Contract I: Loan Repayment and (iv) Implicit Family Contract II: Co-
Insurance.

2.1 Altruistic Motive
The altruism or livelihoods school of thought considers remitting to be an
obligation to the household. Remittances are sent out of affection and
responsibility towards the family. It has been argued in the poverty literature
that the major reason why people migrate to other countries is due to poverty.
According to the altruistic model, sending remittances yields a satisfaction to the
migrant out of a concern for the welfare of his family4.

2.2 Self- Interest Motive

An opposite motivation is to assume that the migrant is mainly motivated by an
economic and financial self-interest, when sending remittances to the home
country. The argument behind this theory is that, at every point in time, the
successful migrant in the foreign country saves. Then, the need arises on how
(in which assets) and where (in which country) to accumulate wealth. An obvious
place to invest, at least part of his assets, is in the home country by buying
property, land, financial assets, and so on. These assets may earn a higher rate
of return than assets in the host country although their risk profile can also be
greater. In turn, the family can administer, during the emigration period, those
assets for the migrant, thus acting as a trusted agent.

2.3 Implicit Family Contract I: Loan Repayment.

The literature has also considered the discussion on the remittance process from
the family perspective rather than the individual. In other words, Economic
theory has developed explanations of the remittances process that take the
family–rather than the individual– as the main unit of analysis5. According to the
theory, families tend to develop an implicit contract among those who choose to

3 This section relies extensively on Solimano, (2003)
4 The altruistic model predicts that remittances would tend to decrease over time (Stark 1991)
5 For an in-depth discussion, See Poirine (1997) and Brown (1997) .

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live abroad, the migrant, and those who stay at home. The implicit contract has
an inter-temporal dimension, which could last for various years or even decades,
as a time horizon.

The contract combines elements of investment and repayment. In the loan
repayment theory the family invest in the education of the migrant and usually
finances the costs of migrating (travel and subsistence costs in the host country).
This is the loan (investment) element of the theory. The repayment part comes
after the migrant settles in the foreign country and his income profile starts rising
over time and is in a condition to start repaying the loan (principal and interests)
back to the family in the form of remittances. This implicitly implies that the
family invests in a higher yield “asset”(the migrant) who earns a higher income
level in the foreign country than other family members that live and work at
home. The amount to be remitted will however, depend among other things, on
the income profile of the migrant.

2.4 Implicit Family Contract II: Co-Insurance

A variant of the theory of remittances as an implicit family contract between the
migrant and those at home relies on the notion of risk diversification. Assuming
that economic risks between the sending and foreign country are not positively
correlated then it becomes a convenient strategy for the family as a whole, to
send some of its members abroad (often the most educated) to diversify
economic risks. The migrant, then, can help to support his family in bad times at
home. Conversely, for the migrant, having a family in the home country is
insurance as bad times can also occur in the foreign country. In this model,
migration becomes a co-insurance strategy with remittances playing the role of
an insurance claim. As in any contract there is a potential problem of
enforcement (e.g. ensuring that the terms of the contract, are respected by the
parties). However, we can expect enforcement to be simpler, in principle, due to
the fact that these are implicit family contracts, helped by considerations of
family trust and altruism (a feature often absent in legally sanctioned contracts).

2.5 Link Between Theory and Statistics

The theories underlying the motives for remittances transfers suggest that it is
only in the Altruistic case that there is a no “quid pro quo”. Transfers are made
purely out of concern for the family and fits into the standard definition of
transfers in the BOP sense. The other motives behind transfers suggest that
there may be a quid pro quo as in the case of the implicit family contract,
although this may not be immediate or binding. It is safe to conclude that theory
raises additional difficulties for definition and measurements, which is the subject
of the next section.


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Section III

3.0 Measurement And Concepts

Remittances belong to the group of items classified as Transfers in the Balance
of payments (BOP). Transfers are defined in the fifth edition of the balance of
payments manual (BPM5) as offsetting entries for real resources or financial
items provided, without a quid pro quo, by one economy to another. In other
words, whenever an economy does not receive or provide recompense in the
form of real resources or financial items for goods, services or financial items
supplied to or received from another economy, it constitutes a transfer for the
purposes of balance of payments accounting.

The BPM5 identifies two types of transfers: current transfers and capital
transfers. Current transfers are recorded in the current account while capital
transfers are recorded in the capital account component of the capital and
financial account.

Current Transfers are classified according to the sector of the compiling
economy, into two main categories: general government and other sectors.
General government transfers comprise international co-operation, which covers
current transfers, in cash or in kind between governments and international
organizations.

Current transfers between other private sectors of the economy and non-
residents comprise those occurring between individuals, between non-
governmental institutions or organizations (or between the two groups) or
between non-resident government institutions and individuals or non-
governmental institutions. In addition, there is the category of workers
remittances. Workers remittances covers current transfers by migrants who are
employed in other economies and considered resident there. This category of
transfers often involves related persons is the aspect of transfers that is the
subject of this paper.

Standard measures on remittances are based on three items in BOP reports (as
contained in IMF Balance of Payments Statistical Yearbooks). The manual are
normally captured in the form:
“Workers remittances” (money sent by workers residing abroad for more than
one year);
“Compensations of employees” (gross earnings of foreigners residing abroad for
less than a year; and
“Migrant transfer”(net worth of migrants moving from one country to another).



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3.1 Methodological Issues in Accounting for Transfers in Ghana’ B.O.P

Estimates on transfers in the B.O.P were based on statistics compiled on
Exchange Control Forms in Ghana. Prior to the liberalization of the Ghanaian
economy, transfers through official channels were easily monitored and data on
which portion constituted private transfers was disaggregated fairly accurately.
The distortions in the economy with inappropriate exchange rates, however,
meant that very little of actual transfers into the Ghanaian economy went
through official channels. As the economy became more liberalized, certain
reporting requirements were relaxed, leading to the gradual loss of information
on this variable for the accounts.

Despite the difficulties in reporting, General Government transfers continue to be
measurable, especially when they are related to the budget, and when they are
effected through the Bank of Ghana. Private sector transfers on the other hand
were not easy to measure, and for some time the Bank of Ghana resorted to
making estimates of private sector transfers on the basis of some observed
relationships to the Gross Domestic Product (GDP).

After the liberalization of the financial sector in 1987/90, reporting requirements
were put into place that required financial institutions to report on inward
transfers into Ghana. Initially these survey reports were directed at the banks.
There has been a proliferation in the number of financial agents involved in
remittances (See Table 4 in Appendix 2 for list of reporting institutions). However
increases in the value of transfers and increases in the number of institutions
licensed to carry out transfers made it necessary to widen the survey to include
non-bank financial institutions. The Bank of Ghana therefore, put in place a
reporting format for the banks, and other licensed non-bank financial institutions
to report the quantum of transfers as part of their prudential reports to the
Banking Supervision Department of the Bank of Ghana.

Further refinements have been carried out since January 2004 on the reporting
format to offer a breakdown and identify sources of the transfers. Statistics are
provided on a monthly basis, and the aggregation of such flows from all the
institutions provides an estimate of inward unrequited transfers. It is important
to note that for the purpose of compiling the BOP, all flows recognised as
transfers must be unrequited; the flows must be without a quid pro quo in
economic value. Some of the difficulties associated with the BOP estimates on
remittances include the difficulty of disaggregating inflows to separate those
flows that are for economic value from those that are unrequited e.g. export
proceeds.

The main source of data for this item in the BOP was derived from the banks and
non-bank financial institutions, which operate money transfer schemes, and level

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