OFW inflows have limited effect on economy, says Paderanga

MANILA, Philippines – An economist said the record remittances sent home by Filipinos abroad has yet to result to stronger economic growth due to reduced multiplier effect as a result of benign microeconomic environment.

Cayetano Paderanga Jr., economics professors at the University of the Philippines, said in a study entitled “The Macroeconomic Impact of Remittances in the Philippines” that the multiplier effect of robust overseas Filipino workers’ remittances has been reduced by the benign macroeconomic environment.

“This benign macroeconomic environment has, unfortunately, not resulted in cascading beneficial economic changes,” he stressed.

Paderanga, a former member of the central bank’s Monetary Board, pointed out that new industries have had difficulty developing while old industries have been squeezed by the competitive shock of an open economy and the appreciation of the currency.

He attributed this to weak governance, low confidence and poor infrastructure as well as sluggish investments in the country.

“This pincer movement has caught the economy in vise, unable to grow even with increasingly available investment funds. This has reduced the multiplier effect that one would have expected from the inflow of OFW remittances,” he added.

Latest data released by the Bangko Sentral ng Pilipinas (BSP) showed that OFW remittances climbed by 5.6 percent despite the full impact of the global economic meltdown to reach a record level of $17.35 billion last year from $16.43 billion in 2008.

For the month of December alone, remittances hit a new monthly record high of $1.567 billion or 11.4 percent higher than the $1.407 billion registered in December of 2008. The amount eclipsed the previous monthly record high of $1.531 billion registered last October.

This year, the BSP sees OFW remittances growing at a faster rate of six percent.

Paderanga said the presence of OFW remittances has substantially eased the financial constraints for the Philippines and has resulted to the appreciation of the peso against the dollar.

However, he explained that the strong peso has also drastically reduced the price competitiveness of domestic products for both export and domestic consumption and has brought about a large and persistent balance of trade deficit.

“A large trade deficit brought about by the disadvantages of export price weakness and the affordability of imports has been financed by a large financial inflow of remittances,” he said.

According to him, the inflow of remittances also injected significant liquidity in the economy that the authorities have had difficulty in sterilizing.

He explained that the disappearance of exchange rate uncertainty and the increased liquidity have allowed interest rates to remain low while the stronger peso helped keep inflation low.

The BSP sees inflation ranging between 3.5 percent and 5.5 percent this year from about 3.2 percent last year. It also expects the peso to trade between P46 and P49 to $1 this year.

Economic managers through the Development Budget Coordination Committee (DBCC) sees the country’s domestic output as measured by the gross domestic product (GDP) expanding between 2.6 percent and 3.6 percent this year from 0.9 percent last year. –Lawrence Agcaoili (The Philippine Star)