Remittances may cause inflation

REMITTANCES can generate inflationary pressures or cause a Dutch Disease, warned the Asian Development Bank (ADB). In a study titled “Remittances in Asia: Implications for the Fight against Poverty and the Pursuit of Economic Growth,” the Manila-based lender said remittances may have adverse consequences, having both economic and social dimensions.

“They may stifle growth by causing exchange rate to appreciate, thereby dampening trade competitiveness; raising the level of inflation; providing disincentives to work among recipients; and creating social problems such as marital conflicts and family stress,” the ADB said.

If remittances benefit more the higher income groups, money sent home can increase income inequality, the lender said.

The top five recipient-countries are India, China, Philippines, Bangladesh and Vietnam.

These countries have a combined 100 million of their nationals living abroad.

Since the onset of the current global economic crisis, the ADB said the growth of remittances to Asia has decelerated. But, remittances to Bangladesh, Pakistan and the Philippines were on the rise, which could be due to repatriation of life-long savings, the ADB said.

The lender, however, said that remittances positively affect home-country real gross domestic product (GDP) per capita growth.

“A 10-percent increase in remittances as a share of GDP leads to a 0.9 percent to 1.2 percent increase in GDP growth,” the ADB said.

An indicator of economic output, GDP is the amount of final goods and services produced in the country.

“Remittances only have a negligible effect on the overall poverty rate, but they tend to decrease the poverty gap and thereby ameliorate the depth of poverty,” the ADB said, adding that a 10-percent rise in remittances decreases the poverty gap by about 0.7 to 1.4 percent.

The ADB also said that the stability of remittance flows, which contribute significantly to private flows, can counter the effects of falling foreign direct investment, debt and equity flows during an economic downturn in the recipient country.

“The monetary inflows sent home by migrants have a favorable impact on rebalancing growth by expanding domestic demand. Such receipts also help smooth consumption and promote human capital development by increasing the capacity of households to spend on education, health and nutrition,” the ADB said.

It also fosters economic growth by spurring entrepreneurial activity, improving labor productivity, and stimulating consumption and investment demands. If they raise incomes of the poor, such flows could reduce poverty and income inequality. –DARWIN G. AMOJELAR SENIOR REPORTER, Manila Times