ECO802: The Influence of Remittances on a Nation's Balance of Payments

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ECO802 INTERNATIONAL FINANCE
AND BANKING
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Table of Contents
Executive summary.........................................................................................................................3
Introduction......................................................................................................................................4
Balance of payment.........................................................................................................................5
Finding.............................................................................................................................................7
Conclusion.......................................................................................................................................9
Recommendation...........................................................................................................................10
References......................................................................................................................................11
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Executive summary
In this report, the balance of payment will be discussed and how remittances create an impact on
the balance of payment of a country. The features of the balance of payment will be discussed
with the viewpoint of a country. Remittances will be discussed briefly and how remittances are
helpful in the development of a nation. The remittances are alleviating the poverty of a country
through the fulfillment of basic human needs such as food security, clothing, and shelter. The
remittances are also improving the lifestyle of an individual and households through the use of
remittances. There is always a negative aspect behind positive; remittance charges are higher
than any other money transfer so this is a main drawback of remittances. India is the largest
remittance receiver from the entire world because of population and migration. Peoples are
continuously migrating from India to get a better lifestyle, and this increase remittance of India.
Indian economy is also significantly getting benefit from remittances, economic development of
India is continuous increases.
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Introduction
A remittance is a process of transferring money to the home country from outside the home
country. Remittances are an important part for any country because remittances are helping in
the improvement of the balance of payment like – a worker of London is working in unities
states and he want to send his earning to home than he sends his money in dollars which is
increase foreign exchange reserve for British. Remittances are also an Important for development
of a country, most of the peoples are migrating from developing nation to developed nations for
better lifestyle but when they send money to home than they increase the foreign reserve for the
home country, government use that reserve to pay their debt and in an investment like –
infrastructure. If a government have enough reserve to pay their debt then its reduce burden on
that government because when a country took a large amount of debt from another country than
the country must interfere in diplomatic ways and forced to work according to their terms.
Remittances are also an important part of international capital inflows and it’s more beneficial
for developing nations and countries which are exporting labor to outside countries. The cost of
transferring remittances are significantly increasing but not at increasing speed but still cost of
transferring remittances is high. There are a lot of countries which is sent labors outside the
country to increase remittances which is beneficial for them because there are not enough
resources in the country to keep the balance of payment stable so they use this policy to increase
remittances.
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Balance of payment
The balance of payment is defined as a record of all the monetary transactions including trade
and financial transactions which is made by the resident of a country. Basically, the balance of
payment has three components the current account, the capital account and the financial
accountant (Obstfeld, 2012). The capital account records all the monetary transactions of a
country with another country in trade of goods and services cross border investment earning and
transfer of payments in a specific time period. The current account is considered as half of the
balance of payment and the rest of considering as the financial account and the capital account.
The current account includes many things such as import and export of goods and services,
payment of foreign investment, payment received from foreign and reserve of the central bank.
The current account of a country may be surplus and deficit it's depending on the spending of a
country. The exports of a country are considered as a credit balance, on the other hand, imports
are considered as debits. A positive capital account indicates a good financial position of a
country where a negative capital account balance is to show poor financial condition of a country
(Cappellin, 2016). There a lot of factors that affect the capital account balance of a country
factors such as recession and boom in the economy. The financial account is an indicator of asset
ownership whether asset decrease or increases on the international stage. Ownership can be from
an individual, business and government. The Financial account is including many things such as
securities such as stock or bond, commodities, and investment. The current account of the
balance of payment is indicating the inflow and outflow of goods or services and investment
from a country (Jiang et. al., 2015). Trade account is show trade aspects of a country, how much
a country trade or do investment with the rest of the world.
The balance of payment of a country shows whether a country has enough reserve to pay their
outstanding imports and the balance of payment also show whether a country produces enough to
meet there level of growth. A negative (deficit) balance of payment shows a country is importing
more goods or services than exporting and on the other hand a positive (surplus) balance of
payment show a country is exporting more goods or services than they importing. There are such
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instances where a country borrows to pay its exports; in that case, a country also sells its assets to
pay the debt.
These are some features of the balance of payment
 The Balance of payment records all the monetary transaction between a country and the
rest of the world in a systematic way
 The balance of payment records all the transactions for a specific time period like – a
year or quarter but mostly a balance of payment statement is made on a single year
transaction.
 The balance of record is considering both visible and invisible transactions.
 The balance of payment is made on a double entry system of accounting which is
recorded a transaction on the credit side and debit side but all the receipts of a country are
recorded on credit side and all the payments of a country are recorded on the debit side of
the statement (Ismaili-Muharremi, 2015).
 If receipts of a country are equal to payments of a country than the balance of payments
is considered as an equilibrium but when payments are more than receipts than the
balance of payment is the deficit and if receipts are more than payments than the balance
of payment of a country is on surplus
 The balance of payments must be matched at the end of the statement
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Finding
 New technology is introducing every day in financial markets but still transferring
remittances is extremely expansive still now days. The cost of transferring remittances is
around $14 but various financial institutions charges average cost around $200 which is far
costly.
 Migrant workers are playing an important role in the global economy through transferring of
remittances to home which increases development of the home country (Ratha, 2013).In
many cases, remittances comprise of interest payments and due amounts and hence this
makes it necessary to for the Government to stress on remittances and outline strategies,
policies and laws to be adopted in the Balance of Payment policies.
 The author lays emphasis on a different segment of remittances mentioning that they take
place people of different countries and migrants who have migrated in search for better job
opportunities and lifestyle. Remittances from a major component of the current transfers and
capital transfers, both. Before going into detail it’s necessary to understand the concept of
residence (Bettin et. al., 2012). A person leaving his/her country for a period of less than the
year for employment purposes and plans to move to and fro from the country is still the
resident of the country where his/her residence lies. But when he/she leaves the country
permanently and plans to live in another country, he has said to have migrated. This
distinction helps to understand the difference in capital and current remittances. For e.g.
Employee compensation is compensations received by non-residents from residents and
forms part of current transfers, whereas Migrants' transfers are transfers made by people
planning to stay there for a long time and are components of capital transfers.
 The author points out the fact that the data on the remittances being a component of the
Balance of Payment is compiled and segregated by the same Statistics Department which is
responsible for the accounting of every other component. Such data is then assimilated and
segregated and sent to the IMF, which would present it along with other countries' data
(Adarkwa, 2015). Although data is compiled and presented in a consistent manner, it may
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contain errors and lead to inaccurate results. Data around economies may apply different
concepts and methodologies. There also have been cases where countries don't even report
the data to IMF and therefore data aggregation and comparison becomes difficult. Another
problem faced by the authorities is classification and definition variances in different regions
and thus leading to confusion and inaccuracy.
 The author found out that the current framework suffers from many limitations and new
definitions and classifications are needed to be introduced to bring about consistency and
uniformity. Data compilers and data analysts have pointed out that these previous distinctions
are not practically implementable and analytically desirable. A household earns income from
different sources and after a stage, it becomes infeasible and difficult whether income
transferred are a wage income or other income and hence making it difficult to ascertain if
the income is current or capital.
 A major area of interest for data compilers have been bilateral data of remittance as it they
may face limitations when compiling data regarding this as partner country assistance is
required in the process. The net income of the country is the income left with the residents
after deducting expenses and reflects the economy's true purchasing power.
 The author concludes by saying that, although efforts are given to resolve consistency issues,
it has been difficult to accurately compile data in a timely fashion. Even with an improved
understanding of the concepts and definitions challenges in this area will always arise and
need to be resolved.
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Conclusion
In this entire study on balance of payment, firstly a brief executive summary was written
followed by an introduction of the balance of payment and remittances. The activity first defines
the balance of payment and different components of balance of payment such as capital account,
current account and financial account of a country then after there was a discussion on current
account deficit and current account surplus followed by characteristics of the balance of
payment. The activity second is defined what remittances make an impact on the balance of
payment. The remittances play an important role in the balance of payment of a country. There
are many developing nations which aredepending on remittances to increase foreign
reserves.Remittances are also helpful in reducing poverty at the individual level or household
level so a country can also reduce the level of poverty through remittances.
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Recommendation
 According to the research and the papers published and submitted by the authors, many
reforms are required in the area of data collection and presentation regarding Balance of
Payments by governing authorities and statistics departments. Major issue would be to
bring consistency and uniformity in the data collection process which would mean clarity
of concepts and definitions associated with various components of the Balance of
Payments. This could be done by forming a survey committee and conduct nationwide
surveys which would help in understanding the usage/coinage of terms used in different
economies and hence align different meanings into a single term and educate authorities
of different economies and to bring into practice new terms and help in making the data
consistent.
 To tackle this inconsistency and confusion, the IMF uses data mining tools such as
metadata for aligning differences, data sources and compilation practices to bring
uniformity and completeness to data. Data may be compared on a cross-country basis and
compiled and communicated by taking one country as a base and other countries' data on
a relative basis to make data more relevant and comparable ((Nyblade and O’Mahony,
2014).). There also one compilation guideline textbook published by IMF guiding
countries on how the data as to be presented and compiled and sent to the IMF. The
textbook was primarily written as a reference book as a part of training courses in the
Balance of Payment methodology, yet it proved to be a good source for self-study and
correction purposes.
 As per the Author's research, after witnessing all the previous problems, the IMF decided
to introduce new concepts and definitions to bring uniformity and resolve current issues
faced by the IMF. IMF Committee on Balance of Payments Statistics and an advisory
group was established to carry out the process smoothly and efficiently. The major
concern of the committee was to improve the accessibility and clarity of data in
remittances in the balance of payments, national accounts, and international trade
frameworks. Basically, 4 categories of remittances were formed and concepts "migrants",
"transfers" and reporting of bilateral flows were eliminated. Old items from the Balance
of Payments and new categories were formed /created. E.g. Creation of a new item,
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"Total Remittances" which would include all household items obtained from working
abroad. Standard categories have been cut down and new categories might entail
asymmetries between transacting countries due to sector allocation.
 It’s important to reduce cost of transferring remittances across the world a government of
country should launch subsidies and policies to bring down remittances transferring cost.
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References
 Obstfeld, M., (2012). Financial flows, financial crises. and global imbalances. Journal of
International Money and Finance. 31(3). pp.469-480.
 Cappellini, R., (2016). Investments, balance of payment equilibrium and a new industrial
policy in Europe.
 Jiang, F., Assad, I. &Okonkwo, A.P., Google LLC, (2015). Reserving account balance
for concurrent payments in a secure offline payment system. U.S. Patent Application
14/226.798.
 Ismaili-Muharremi, T., (2015). Approaches Affecting Current Account in the Balance of
Payments. Academic Journal of Interdisciplinary Studies. 4(3 S1). p.417.
 Ratha, D., (2013). The impact of remittances on economic growth and poverty
reduction. Policy Brief. 8(1). pp.1-13.
 Nyblade, B. &O’Mahony, A., (2014). Migrants’ remittances and home country elections:
Cross-national and subnational evidence. Studies in Comparative International
Development, 49(1). pp.44-66.
 McKay, A. &Deshingkar, P., (2014). Internal remittances and poverty: Further evidence
from Africa and Asia. Migrating out of Poverty Working Paper. 12.
 Bettin, G., Lucchetti, R. &Zazzaro, A., (2012). Financial development and remittances:
Micro-econometric evidence. Economics Letters. 115(2). pp.184-186.
 Adarkwa, M.A., (2015). Impact of remittances on economic growth: Evidence from
selected West African countries (Cameroon, Cape Verde, Nigeria, and Senegal). African
Human Mobility Review. 1(2).pp.178-202.
 Benmamoun, M. &Lehnert, K., (2013. Financing growth: comparing the effects of FDI,
ODA, and international remittances. Journal of Economic Development. 38(2). p.43.
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