Remittances––the transmission of money and goods to households by migrant workers for reasons of altruism, insurance and investment––have increased steadily over the years to become a substantial source of foreign exchange earnings for world economies, especially developing countries such as India, China, Mexico, the Philippines, Vietnam, and the Pacific Island Countries. For example, in 2018, remittance flows to low- and middle-income countries reached US$529 billion, more than the Gross Domestic Product (GDP) of an economy like Fiji, and substantially more than the official development aid to the region. In the same period, global remittances, including to high income countries, reached US$689 billion. Even as global growth moderates, remittances to low- and middle-income countries in 2019 are forecasted to grow and reach US$549 billion; global remittances are expected to reach US$715 billion. Not only do such remittances play a crucial role in total international capital flows but they also boost the economic growth of countries particularly where financial systems remain less developed.
Not surprisingly then, studies investigating the impact of remittances on various micro and macro-economic variables such as poverty, financial inclusion, labour supply and participation, consumption, exchange rates, foreign reserves, economic growth, financial development, health, education, investment, and entrepreneurial activity have proliferated concurrently. Studies have encompassed many regions and countries as well––such as Sub-Sahara African, Latin America, and South Asia. The results, overall, appear mixed at best. For instance, while some studies find a positive relationship between remittances and others document a negative correlation between remittances and income inequality.
Considering the growing significance of remittances in household and national incomes and its expected and substantiated pertinent implications for various micro and macro variables, more studies are clearly required to better understand relationships from at least a policy perspective. And, one region where this is aptly required is the Pacific Island Countries (PICs)—amongst the world’s leading recipients of international remittances. For example, in 2007, 2008 and 2014, according to World Bank reports, Tonga and Samoa were amongst the top 10 recipients of remittances relative to GDP. In 2017, Tonga was second only to Kyrgyzstan as the largest recipient of remittances.
However, economic growth, poverty, inequality, financial development, financial inclusion, investment, and all other micro and macro variables that remittances are expected to positively influence remain constant and major challenges in the region. For example, in Fiji, the share of population below the National Poverty Line remains high, averaging 31% over the last decade (ADB, 2018). The 2014 United Nations Development Program Report on Vulnerability and Exclusion in PICs highlights that one in four people are now living below national basic-needs poverty line; and have limited access to essential services such as education and health. Obesity, diabetes, and other non-communicable diseases are on the rise throughout the region.
Our study, using Fiji as a case, shows positive impacts of remittances on loan amount and income. That is, remittances positively influence the amount of loans that households obtain, which could be used for small business investment or consumption. Remittances are also an important source of investment in capital markets and real estate, fuelling further developments in these market segments. These investments can be used by the recipients to build collateral and access credit markets as well as capital injection for family businesses, enhancing entrepreneurship and reducing unemployment in the country. Although consumption may not be a productive investment, any remittance dollar spent by recipients creates a multiplier effect for the economy as it increases demand for services and products that may in turn lead to the need for more workers hence job creation.
Mr Matia Tuisawau and Ms Akata Taito (Reserve Bank of Fiji), Mr Miteli Cama (Fiji Bureau of Statistics), Dr Jak Kakhkharov (Flinders University), Ms Lan Nguyen and Dr Parmendra Sharma (Griffith Asia Institute).
This paper was presented at the December 2018 South Pacific Central Banks—Griffith University Research Conference and Regional Policy Dialogue in Suva. The views and opinions expressed in this study are those of the authors and do not reflect those of the Reserve Bank of Fiji or its Board. Please click here to read the full working paper, “Remittances vis-à-vis bank credit and investments in Pacific island countries: The case of Fiji“.