Monday, February 20, 2006
Can the Remittance Industry help modernize the Economy?
(First published in The Guyana Gazette – 19th February 2006 www.guyanagazette.com)
In the Stabroek News edition of 20th January 2006, the Country Director of Grace Kennedy Remittance Services (Guyana) Ltd, Anna Lisa Fraser-Phang suggested the hastening of legislation to regulate the local money transfer industry. “The remittance industry in Guyana is simply too large and too important to the economy to be left to operate without effective regulation,” she explained. Her comments are pertinent to the current debate on the developing world’s use of migrant remittances as a source of development finance.
Yet, whether remittances are used for consumption or buying houses, or for other investments, in the case of Guyana, they stimulate demand for goods and services in the economy, and enable the country for pay for imports, repay foreign debt and improve creditworthiness. According to the World Bank, annual inflows of money transfers to Guyana were estimated at 17% of the Gross Domestic Product (GDP) or $143 million (World Bank 2004). Remittances exceed the total overseas aid and foreign direct investment in Latin America and Caribbean alone, with 75% of the total value of remittances originating from the US, Europe and London.
In the context of the remittances trade, therefore, it is vital to understand the importance of encouraging overseas-based Guyanese to invest their knowledge, skills, finances and other resources, in an effort to create economic prosperity and improve the general well-being of Guyana. The present Administration can learn from the object lessons of other developing countries where a variety of intelligent and creative approaches have been adopted. In this article, I will show how a set of practical measures including imaginativeness, can help Guyana to maximise effectively, the value of her most precious assets – human resources – abroad.
Estimates suggest that more than 500,000 Guyanese reside all over the globe - North America, Britain and Europe, with a small number residing in parts of the Caribbean. The first generation of Guyanese emigrated in the 1950s – prior to Political Independence (in 1966); and thereafter, there was an increase in the out-migration of nationals in the 1970s-1980s as the economic situation deteriorated. The early 1990s witnessed, a gradual trickling return of Guyanese, with some as `occupational’ retirees and others as `professional’ investors, although both categories were significant wealth creators. Interestingly those who left the country in the early years have been visiting and spending some of their holidays in an effort to rekindle their roots, with the hope of a permanent return one day.
Successive governments have made efforts to attract nationals from abroad with incentives ranging from tax concessions, quality housing location and promises of concessions for business investment and social entrepreneurship. Efforts to attract overseas-based Guyanese have had mixed results and valid questions have been asked on both sides of the divide. Questions such as, what can the Sate offer to expatriate citizens? Have nationals lost their patriotic spirit and replaced it with fervent commitment to their new homeland(s)? What steps should be taken to ensure that the diasporic community enjoys the benefits and privileges of their brothers and sisters at home?
Challenges and Opportunities
An international study was commissioned some years ago, to examine attitudes to migration, and the findings revealed that Guyana’s challenges were similar to other emerging democratic states especially in Asia and Africa. One example, is that the receiving country tends to benefit more in terms of `new skill entries,’ while the exporting country’s economy suffers from a loss of key labour which has a corresponding effect on various sectors of the economy. A recent study by the World Migration Group revealed that the cost and benefit of migratory trends varied according to the size of economies. Giant economies in Far East benefit hugely, but the costs for smaller, economically weaker sending countries like those in the Caribbean, including Guyana, are not sufficiently known and “factored into migration policies.”
Overseas-based Guyanese maintain contact with families, relatives and friends through `hometown’ associations (HTAs) and the remittances trade. HTAs are charities or social firms set up to promote exchanges in goods and services between migrants and nationals – there are hundreds of civic groups in America, Canada and Britain particularly. While individuals use informal and formal money transfers to send monies to family and friends, diasporic charities raise funds for just causes and `wire’ a portion of funds back home. Guyana Watch, founded in 1992 and based in Queens, New York, provides an annual medial outreach service in Guyana, whereby a group of 20-25 doctors and nurses travel to the three Counties in Guyana (Essequibo, Demerara and Berbice) and work at a clinic for one day, attending to between 2,500 and 3,000 people.
Guyanese HTAs are motivated by a practical desire to improve economic and social conditions in their hometowns, and their leaders and fund-providers argue that this strategy is also intended to reduce migration. Ironically, since these projects alone do not substantially boost development, they also do not prevent out-migration from continuing at least as a matter of choice, if no longer as a necessity. The effect of remittances as development aid is often limited however. Migrants who settle abroad and have their family join them, are likely to contribute less to development through remittances. Guyana’s history of receiving remittances has not really impacted on `initial investment as a spur to longer term economic growth, but rather than a way of life’. Poorer nationals benefit more from monies couriered to them than the immediate physical environment. The unregulated flow of funds coming into Guyana is therefore both a problem and opportunity.
Remittance flows to Africa which amount to several billion dollars per annum, contribute to poverty reduction as the authorities earmark resources for micro projects in villages, towns and suburbs. Projects include purchase of educational materials, water and sanitation requirements, support for small non-governmental organisation and `set-aside’ resources for street children and other impoverished citizens.
According to Fraser-Phang, the money transfer industry requires strict national laws, but why does it need regulating? The industry itself operates in a rather laiseez- faire manner and the level of competition is measured by the number of transfers conducted by financial institutions (such as banks and `informal’ organs such as Western Union agents) versus the number of recipients who benefit directly from the funds. In come countries, transfer agents need to require full banking licence, even when they have no intention of providing banking services. Entry barriers also include lack of access to existing payment systems, which forces new entrants into the remittance market to build their own costly proprietary transfer systems.
Some larger remittance service providers have persuaded the postal network or large banks with extensive branch networks in developing countries, to sign exclusive contracts that limit the access of competitors to these distribution networks. To address this problem, however, it will require policy co-ordination – especially harmonizing regulatory and compliance requirements between both the source and destination countries. This could prove very expensive.
A set of halfway house measures might be a useful consideration by let’s say the Ministry of Finance, although any legislation to be passed, must be done after, in the words of Fraser-Phang, "genuine consultations with the operators in the industry" rather than any imposition. The different costs structures associated with the remittance trade are important considerations; they include transfer agent’s fee, currency conversion fee and other charges associated with both the receiving agent and the recipient-customer. It is argued that with existing cost structures there may be scope for reducing average remittance costs.
For the sake of argument, if a person sends £100 per month for a period of six months, the total remittances cost for that period is estimated at 10% or £90. If on the other hand the person could send the entire £600 in one transaction, the remittance could fall to just £60 or less depending on what deal could be made with regular known providers. The difficulty is that many poor remittance senders typically do not have sufficient funds to bundle remittances. Banks and other finance institutions could play a role in alleviating such liquidity constraints and reducing the effective cost of remittances.
Impact of Remittances
In an effort to stimulate the domestic economy through the `personal inflows’ trade, the Guyana Government could introduce flexible policy measures to act as a counter-weight in the fight against money laundering and facilitation of remittance flows. Informal channels are cheaper, and informal agents work longer hours, operate in remote areas where there are no formal channels, and have often have staff to speak the language of migrant customers. Informal channels however, can be subject to abuse.
Strengthening the formal remittance infrastructure by offering the advantages of low cost, flexible hours, expanded reach and language, can induce a shift in flows from informal to the formal sector. Both sender and recipient countries should support migrants’ access to banking by providing them with identification tools. On the positive side, remittances are believed to reduce poverty, as it is often the poor who migrate and send back remittances, even though in Guyana’s case, nationals from different economic and social backgrounds tend to migrate. Yet, remittances have practical developmental potentialities. By improving the quality and flow of remittances, the following could be achieved:
• lowering transfer costs, for example, lower fees and more favourable exchange rates, reducing the risks involved in these transfers, and offering more attractive investment alternatives
• create appropriate savings services for migrants and their families internationally, for example `repatriate' foreign currency accounts; foreign currency denominated (remittances) bonds; savings certificates denominated in foreign currency • micro-finance institutions could expand their micro and small business portfolio; and
• Government and developing agencies could provide services such as training, business advice and marketing assistance for micro and small entrepreneurs to enable matching of funds for development projects.
Remittances may also help improve economic growth in Guyana, especially if they are used for financing children’s education or health expenses. Even when they are used for consumption, they can have multiplier effects in the case for high unemployment in local villages and districts in Guyana. Encouraging account-to-account remittance flows instead of cash transfers could result in increased savings by recipients (and senders) and better matching (by banks) of available savings. Improving financial opportunities in the recipient country would also encourage more investment. The Government and the private sector could also ensure that other parallel measures are in place to support investment in development-related activities such as community development projects, mortgage support, health insurance for dependents and similar allocations.
National policy makers in Guyana should keep an open mind since remittances are not public money and any harsh degree of regulation can cause senders and recipients to carry revert to `underground’ methods to carry out transactions. Remittances are personal flows, often better left to the remitters and recipients to decide how they should be spent. Efforts to tax remittances or direct them to specific investments may well prove difficult. Experience has shown in other parts of the world, that remittances are more effective in generating incomes and investment, when “they are supported by good public policy sand financial infrastructure.”
Good Practice
Another measure in which remittances can impact on Guyana’s poor in particular, is the introduction of what is described as the `Community Funds Programme’. This involves Government or the private sector match funding projects that aim to harness the productive potential of communities. In Guatemala for example, where many villages suffer from the economic crisis and high jobless rates, aggravated by falling coffee prices on the international markets, the Community Funds concept is operational.
The concept draws on the income-generating capacity of the Diaspora to establish grassroots joint ventures and investment project in the home communities to fund social, infrastructure and generally, development-oriented projects. It builds on the banking capacity of migrants as a value-added incentive to help them manage their financial resources and to channel these towards seed capital-generating small investment projects.
Guyana can pilot these initiatives in poor areas on the East and West Bank of Demerara, East Bank Berbice and the Lower Corentyne areas especially. The programme can facilitate linkages with local and national markets through business centres, and attract financial and technical support from villages and emigrants for local productive and social projects. The benefits of this programme can be thus, to: -
• Overcome the division that traditionally has isolated small producers, by aggregating their harvests and through greater volumes strengthen their price-setting power;
• Bring together local merchants to bid jointly for larger purchases and obtain better prices through strengthened bargaining power;
• Develop business training programmes; and
• Develop credit programmes with a sound basis and realistic outlook and objectives to obtain credible access to modern commercial and marketing networks.
The Community Funds Programme could be an important experiment in social engineering in which the Government and partners can provide a model for other communities experiencing high emigration rates – both internal and external of Guyana. While there is a compelling case for regulatory reform, in general, the combined use of remittances and expertise of overseas-based Guyanese represents powerful instruments of economic and social policy dynamics. This measure has the potential of possibly, alleviating or reducing the critical gap between rich and poor, especially in suburban areas and other far-flung parts of the country. It is worth pursuing now!
In the Stabroek News edition of 20th January 2006, the Country Director of Grace Kennedy Remittance Services (Guyana) Ltd, Anna Lisa Fraser-Phang suggested the hastening of legislation to regulate the local money transfer industry. “The remittance industry in Guyana is simply too large and too important to the economy to be left to operate without effective regulation,” she explained. Her comments are pertinent to the current debate on the developing world’s use of migrant remittances as a source of development finance.
Yet, whether remittances are used for consumption or buying houses, or for other investments, in the case of Guyana, they stimulate demand for goods and services in the economy, and enable the country for pay for imports, repay foreign debt and improve creditworthiness. According to the World Bank, annual inflows of money transfers to Guyana were estimated at 17% of the Gross Domestic Product (GDP) or $143 million (World Bank 2004). Remittances exceed the total overseas aid and foreign direct investment in Latin America and Caribbean alone, with 75% of the total value of remittances originating from the US, Europe and London.
In the context of the remittances trade, therefore, it is vital to understand the importance of encouraging overseas-based Guyanese to invest their knowledge, skills, finances and other resources, in an effort to create economic prosperity and improve the general well-being of Guyana. The present Administration can learn from the object lessons of other developing countries where a variety of intelligent and creative approaches have been adopted. In this article, I will show how a set of practical measures including imaginativeness, can help Guyana to maximise effectively, the value of her most precious assets – human resources – abroad.
Estimates suggest that more than 500,000 Guyanese reside all over the globe - North America, Britain and Europe, with a small number residing in parts of the Caribbean. The first generation of Guyanese emigrated in the 1950s – prior to Political Independence (in 1966); and thereafter, there was an increase in the out-migration of nationals in the 1970s-1980s as the economic situation deteriorated. The early 1990s witnessed, a gradual trickling return of Guyanese, with some as `occupational’ retirees and others as `professional’ investors, although both categories were significant wealth creators. Interestingly those who left the country in the early years have been visiting and spending some of their holidays in an effort to rekindle their roots, with the hope of a permanent return one day.
Successive governments have made efforts to attract nationals from abroad with incentives ranging from tax concessions, quality housing location and promises of concessions for business investment and social entrepreneurship. Efforts to attract overseas-based Guyanese have had mixed results and valid questions have been asked on both sides of the divide. Questions such as, what can the Sate offer to expatriate citizens? Have nationals lost their patriotic spirit and replaced it with fervent commitment to their new homeland(s)? What steps should be taken to ensure that the diasporic community enjoys the benefits and privileges of their brothers and sisters at home?
Challenges and Opportunities
An international study was commissioned some years ago, to examine attitudes to migration, and the findings revealed that Guyana’s challenges were similar to other emerging democratic states especially in Asia and Africa. One example, is that the receiving country tends to benefit more in terms of `new skill entries,’ while the exporting country’s economy suffers from a loss of key labour which has a corresponding effect on various sectors of the economy. A recent study by the World Migration Group revealed that the cost and benefit of migratory trends varied according to the size of economies. Giant economies in Far East benefit hugely, but the costs for smaller, economically weaker sending countries like those in the Caribbean, including Guyana, are not sufficiently known and “factored into migration policies.”
Overseas-based Guyanese maintain contact with families, relatives and friends through `hometown’ associations (HTAs) and the remittances trade. HTAs are charities or social firms set up to promote exchanges in goods and services between migrants and nationals – there are hundreds of civic groups in America, Canada and Britain particularly. While individuals use informal and formal money transfers to send monies to family and friends, diasporic charities raise funds for just causes and `wire’ a portion of funds back home. Guyana Watch, founded in 1992 and based in Queens, New York, provides an annual medial outreach service in Guyana, whereby a group of 20-25 doctors and nurses travel to the three Counties in Guyana (Essequibo, Demerara and Berbice) and work at a clinic for one day, attending to between 2,500 and 3,000 people.
Guyanese HTAs are motivated by a practical desire to improve economic and social conditions in their hometowns, and their leaders and fund-providers argue that this strategy is also intended to reduce migration. Ironically, since these projects alone do not substantially boost development, they also do not prevent out-migration from continuing at least as a matter of choice, if no longer as a necessity. The effect of remittances as development aid is often limited however. Migrants who settle abroad and have their family join them, are likely to contribute less to development through remittances. Guyana’s history of receiving remittances has not really impacted on `initial investment as a spur to longer term economic growth, but rather than a way of life’. Poorer nationals benefit more from monies couriered to them than the immediate physical environment. The unregulated flow of funds coming into Guyana is therefore both a problem and opportunity.
Remittance flows to Africa which amount to several billion dollars per annum, contribute to poverty reduction as the authorities earmark resources for micro projects in villages, towns and suburbs. Projects include purchase of educational materials, water and sanitation requirements, support for small non-governmental organisation and `set-aside’ resources for street children and other impoverished citizens.
According to Fraser-Phang, the money transfer industry requires strict national laws, but why does it need regulating? The industry itself operates in a rather laiseez- faire manner and the level of competition is measured by the number of transfers conducted by financial institutions (such as banks and `informal’ organs such as Western Union agents) versus the number of recipients who benefit directly from the funds. In come countries, transfer agents need to require full banking licence, even when they have no intention of providing banking services. Entry barriers also include lack of access to existing payment systems, which forces new entrants into the remittance market to build their own costly proprietary transfer systems.
Some larger remittance service providers have persuaded the postal network or large banks with extensive branch networks in developing countries, to sign exclusive contracts that limit the access of competitors to these distribution networks. To address this problem, however, it will require policy co-ordination – especially harmonizing regulatory and compliance requirements between both the source and destination countries. This could prove very expensive.
A set of halfway house measures might be a useful consideration by let’s say the Ministry of Finance, although any legislation to be passed, must be done after, in the words of Fraser-Phang, "genuine consultations with the operators in the industry" rather than any imposition. The different costs structures associated with the remittance trade are important considerations; they include transfer agent’s fee, currency conversion fee and other charges associated with both the receiving agent and the recipient-customer. It is argued that with existing cost structures there may be scope for reducing average remittance costs.
For the sake of argument, if a person sends £100 per month for a period of six months, the total remittances cost for that period is estimated at 10% or £90. If on the other hand the person could send the entire £600 in one transaction, the remittance could fall to just £60 or less depending on what deal could be made with regular known providers. The difficulty is that many poor remittance senders typically do not have sufficient funds to bundle remittances. Banks and other finance institutions could play a role in alleviating such liquidity constraints and reducing the effective cost of remittances.
Impact of Remittances
In an effort to stimulate the domestic economy through the `personal inflows’ trade, the Guyana Government could introduce flexible policy measures to act as a counter-weight in the fight against money laundering and facilitation of remittance flows. Informal channels are cheaper, and informal agents work longer hours, operate in remote areas where there are no formal channels, and have often have staff to speak the language of migrant customers. Informal channels however, can be subject to abuse.
Strengthening the formal remittance infrastructure by offering the advantages of low cost, flexible hours, expanded reach and language, can induce a shift in flows from informal to the formal sector. Both sender and recipient countries should support migrants’ access to banking by providing them with identification tools. On the positive side, remittances are believed to reduce poverty, as it is often the poor who migrate and send back remittances, even though in Guyana’s case, nationals from different economic and social backgrounds tend to migrate. Yet, remittances have practical developmental potentialities. By improving the quality and flow of remittances, the following could be achieved:
• lowering transfer costs, for example, lower fees and more favourable exchange rates, reducing the risks involved in these transfers, and offering more attractive investment alternatives
• create appropriate savings services for migrants and their families internationally, for example `repatriate' foreign currency accounts; foreign currency denominated (remittances) bonds; savings certificates denominated in foreign currency • micro-finance institutions could expand their micro and small business portfolio; and
• Government and developing agencies could provide services such as training, business advice and marketing assistance for micro and small entrepreneurs to enable matching of funds for development projects.
Remittances may also help improve economic growth in Guyana, especially if they are used for financing children’s education or health expenses. Even when they are used for consumption, they can have multiplier effects in the case for high unemployment in local villages and districts in Guyana. Encouraging account-to-account remittance flows instead of cash transfers could result in increased savings by recipients (and senders) and better matching (by banks) of available savings. Improving financial opportunities in the recipient country would also encourage more investment. The Government and the private sector could also ensure that other parallel measures are in place to support investment in development-related activities such as community development projects, mortgage support, health insurance for dependents and similar allocations.
National policy makers in Guyana should keep an open mind since remittances are not public money and any harsh degree of regulation can cause senders and recipients to carry revert to `underground’ methods to carry out transactions. Remittances are personal flows, often better left to the remitters and recipients to decide how they should be spent. Efforts to tax remittances or direct them to specific investments may well prove difficult. Experience has shown in other parts of the world, that remittances are more effective in generating incomes and investment, when “they are supported by good public policy sand financial infrastructure.”
Good Practice
Another measure in which remittances can impact on Guyana’s poor in particular, is the introduction of what is described as the `Community Funds Programme’. This involves Government or the private sector match funding projects that aim to harness the productive potential of communities. In Guatemala for example, where many villages suffer from the economic crisis and high jobless rates, aggravated by falling coffee prices on the international markets, the Community Funds concept is operational.
The concept draws on the income-generating capacity of the Diaspora to establish grassroots joint ventures and investment project in the home communities to fund social, infrastructure and generally, development-oriented projects. It builds on the banking capacity of migrants as a value-added incentive to help them manage their financial resources and to channel these towards seed capital-generating small investment projects.
Guyana can pilot these initiatives in poor areas on the East and West Bank of Demerara, East Bank Berbice and the Lower Corentyne areas especially. The programme can facilitate linkages with local and national markets through business centres, and attract financial and technical support from villages and emigrants for local productive and social projects. The benefits of this programme can be thus, to: -
• Overcome the division that traditionally has isolated small producers, by aggregating their harvests and through greater volumes strengthen their price-setting power;
• Bring together local merchants to bid jointly for larger purchases and obtain better prices through strengthened bargaining power;
• Develop business training programmes; and
• Develop credit programmes with a sound basis and realistic outlook and objectives to obtain credible access to modern commercial and marketing networks.
The Community Funds Programme could be an important experiment in social engineering in which the Government and partners can provide a model for other communities experiencing high emigration rates – both internal and external of Guyana. While there is a compelling case for regulatory reform, in general, the combined use of remittances and expertise of overseas-based Guyanese represents powerful instruments of economic and social policy dynamics. This measure has the potential of possibly, alleviating or reducing the critical gap between rich and poor, especially in suburban areas and other far-flung parts of the country. It is worth pursuing now!
© Christopher A. Johnson, February 2006
