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leveraging diaspora finances

LEVERAGING DIASPORA FINANCES FOR PRIVATE CAPITAL MOBILIZATION

Why in the News LEVERAGING DIASPORA FINANCES?

The World Bank recently released an annual report “Migration and Development Brief: Leveraging Diaspora Finances for Private Capital Mobilization” in leveraging diaspora finances.

Key Findings of the report:

  • India ($125 bn), Mexico, China, Philippines, and Egypt topped the list of remittance recipients in 2023, raking in billions.
  • The United States remained the biggest source of these flows.
  • Low- and middle-income countries (LMICs) received a total of $669 billion in remittances, growing by 3.8% in 2023.
  • Stable job markets in advanced economies and the Gulf Cooperation Council (GCC) countries helped migrants’ ability to send money home.
  • Remittances to the Middle East and North Africa declined for the second consecutive year.
  • Europe and Central Asia also saw a slight dip after a surge in 2022.
  • The report warns of potential real income decline for migrants in 2024 due to inflation and slow economic growth.
  • Remittances continued to be the premier source of external finance for LMICs during 2023, relative to FDI and official development assistance.
  • Remittances’ growth in South Asia is projected to be the highest ($89 billion) among LMICs in 2024, attributable entirely to remittance flows to India.
  • The report emphasizes the potential of leveraging remittances for development finance, particularly through diaspora bonds. The report explores using diaspora bonds to tap into migrant savings abroad, offering a stable source of funds for development.

Remittances Flow in India:

  • Largest Recipient of the Remittance in the World: India received an estimated $125 billion in remittances in 2023 but the share of remittances in the economy was only 3.4 %.
  • Source Countries: Remittances from the US, UK, and Singapore (High-skilled migrants) collectively account for 36 % of total remittances. UAE is the second-largest source of remittances to India after the US, accounting for 18% of the total.

Significance of Remittances for Developing Countries in LEVERAGING DIASPORA FINANCES:

Economic Impact:

  • Poverty Reduction: Remittances directly improve household income, contributing significantly to poverty reduction, especially in rural areas. Studies show a positive correlation between remittance inflows and poverty reduction in developing countries.
  • Consumption and Investment: Remittances boost domestic demand, stimulating local economies through increased consumption and investment in housing, education, and small businesses. This can create a multiplier effect, leading to further economic growth.
  • Foreign Exchange Reserves: Remittances provide a stable source of foreign exchange, crucial for financing imports, maintaining exchange rate stability, and managing external debt. This bolsters the macroeconomic stability of developing countries.
  • Human Capital Development: Remittances are often used for investments in education and healthcare, improving human capital and long-term economic prospects. This creates a skilled workforce, attracting further investment and economic diversification.
  • Improve Country Creditworthiness: Due to their large size relative to other sources of foreign exchange, counter-cyclical nature and indirect contribution to public finances, remittances can also help improve a country’s sovereign ratings and its ability to repay debt.
  • Economic Growth: The remittances received by households enable increased savings, and demand in the economy, resulting in increased revenues for the government that can be channeled for the development.
  • Funding Fiscal Deficit: Developing countries lacking access to international capital markets tend to depend on remittances as a major source of external financing and provide critical support to Balance of Payment.

Social Impact in LEVERAGING DIASPORA FINANCES:

  • Improved Living Standards: Remittances contribute to better living standards by enabling access to basic necessities like food,shelter, and healthcare. This improves overall well-being and quality of life in recipient households.
  • Education and Healthcare: Investments in education and healthcare using remittances lead to improved social indicators like literacy rates, life expectancy, and child mortality rates. This creates a healthier and more educated population, contributing to long-term development.
  • Gender Empowerment: Remittances often reach women in households, giving them greater control over financial resources and decision-making power. This can lead to increased gender equality and social development.
  • Diaspora Engagement: Remittances foster stronger ties between migrants and their home countries, encouraging engagement in development activities and knowledge transfer. This creates a valuable social network for knowledge sharing and development initiatives.

Concerns associated with Remittance:

  • High Transaction Costs: High fees associated with remittance transfers can erode the actual benefit reaching recipients. Promoting lower-cost channels like digital technologies and regulations can address this issue.
  • Over-reliance: Overdependence on remittances can make developing countries vulnerable to external shocks affecting migrant-sending countries. Diversifying the economy and promoting domestic sources of income is crucial.
  • Financial Inclusion: Integrating remittance recipients into formal financial systems can maximise the developmental impact of these flows. This can be achieved through financial literacy programs and access to microfinance services.
  • Diaspora Bonds: Leveraging diaspora savings through innovative mechanisms like diaspora bonds can attract long-term investments for development projects. This requires efficient and transparent management of such schemes.
  • High Inflation and low growth: Decline in real income for migrants in 2024 in the face of global inflation and low growth prospects.
  • Volatile nature of Non-Resident Deposits: Unlike remittances, they can be volatile and highly sensitive to international interest rate movements, thus not considered appropriate for financing long-term development projects.

Ways to mobilize diaspora finances:

  • Resurgent India Bonds (RIBs): Introduced in 2013, offering infrastructure-focused investment options.
  • Sovereign Gold Bonds (SGBs): Attractive alternative to physical gold, launched in 2015.
  • Pravasi Bhartiya Savings Scheme (PBSB): Matches NRI remittances with government contributions for infrastructure project.
  • Mahatma Gandhi Pravasi Suraksha Yojna (MGPSY): Provides health insurance coverage to NRIs.
  • Tax Benefits: Several tax incentives exist for NRI investments in India, including infrastructure bonds, real estate, and startups.
  • Established the Ministry of Overseas Indian Affairs (MOIA) to engage with the diaspora and encourage their participation in India’s development.
  • Launched the Know Your Diaspora (KYD) initiative to gather data and map the skills and resources of the diaspora community.
  • Introduced the Startup India initiative to attract investments from NRIs in Indian startups.
  • Partnered with financial institutions to offer NRI-specific investment products and services.
  • Increased awareness campaigns to highlight investment opportunities in India.

Way Forward:

  • Simplifying regulations and streamlining processes for diaspora investments.
  • Ensuring transparency and accountability in project selection and fund management.
  • Tailoring offerings to cater to diverse preferences and risk appetites within the diaspora.
  • Leveraging technology to facilitate seamless and cost-effective transactions.

Conclusion:

Remittances play a vital role in the economic and social development of developing countries. While challenges exist, maximizing their positive impact requires strategic policies to reduce transaction costs, promote financial inclusion, and encourage investments in key sectors. Engaging the diaspora meaningfully through innovative partnerships can further contribute to sustainable development.

Source: World Bank