Study on improving the efficiency of workers’ remittances in Mediterranean countries

With a few qualifications, the potential beneficial impact of workers’ remittances on the development of recipient countries is now widely accepted. However, there is evidence in the existing literature that workers’ remittances are generally hampered by high transfer
costs and that the efficiency of their use in recipient countries is constrained.

The European Investment Bank has asked ECORYS to analyze the remittance market between Europe and eight Mediterranean Partner Countries (MPCs)1, and, to come up with concrete recommendations for improving the efficiency of remittance flows.

With this aim in mind, the study has been conducted in two stages. The first stage has been dedicated at taking stock of the existing situation, notably regarding:

• The origin of remittance flows for each MPC.
• The channels of transmission of remittances (banks, post offices, money transfer operators, informal networks) and associated costs.
• The impact of market imperfections in host and recipient countries on costs.
• The use of funds in recipient countries and impediments to their efficient allocation.

The second stage of the study provides recommendations based on the analysis and addresses which priority issues are needed to improve the efficiency of remittance flows
between Europe and MPCs and how priority actions can feasibly be implemented.

While impediments to efficient remittance flows and ensuing recommendations tend to be corridor specific (i.e. country to country), the following general conclusions from the analysis stage of the study can be drawn:

• Remittances are of considerable economic importance to MPCs, although more for some countries than others. Remittances through formal channels to individual MPCs
can vary between 2 to over 20 percent of GDP.

• The EU is by far the main source of remittance flows to Turkey, Morocco, Algeria, and Tunisia. In other MPC countries, the majority of remittance flows come from outside the EU.

• Inward flows are not as stable as perhaps could be expected in a number of countries in the region, as some MPCs receive a substantial share of their remittance flows from oil exporting countries and flows are thus dependent on oil market conditions. In other countries, inward flows have been impacted by changes in the number of new migrants.

• The channels of transmission predominantly go through the informal sector, with the notable exception of the German-Turkish corridor, which relies heavily on Turkish banks operating out of Germany. Money Transfer Operators (MTOs) are often a dominant formal channel, despite higher costs, because they provide speed, reliability, do not require an account, and usually have good distribution networks.

• A number of market imperfections and information deficiencies have been identified. These include exclusivity contracts for MTOs in post offices; lack of transparency on transfer costs (particularly as regards exchange rate fees); inadequate information regarding available transfer mechanisms and associated costs, speed and reliability; and inadequate payment systems and limited usage of bank accounts in Mediterranean countries. Accessibility to banking accounts for emigrants residing in the EU is also limited and banking products are not sufficiently tailored for remitters, with few exceptions. These imperfections have resulted in high transactions costs, which vary widely according to transfer operator and corridor, but can exceed 16 percent of capital sent.

• In terms of use of funds in recipient countries, it appears that remittances are primarily aimed at consumption, and can enhance education, health and housing conditions. Little evidence is found of remittances being used for immediate productive investment, although some interesting examples exist.

In order to improve the efficiency of workers remittances it is necessary to both remove existing impediments identified throughout this study to lower transactions costs, and at the same time devise means to maximise the developmental impact of remittances. With this aim in mind, a number of recommendations have emerged, both of general nature and more specifically related to the various corridors:

• Payment systems in MPCs need to be improved and links with EU countries need to be strengthened in order to reduce transaction costs and provide better services. MPC governments and the EU should take the intitiative to develop an effective mass payments system, including determining funding and technical assistance requirements.

• The banking system is an effective way for channeling remittances into productive investments. Banking services specifically targeted at migrants—including mortgage products, remittance-tailored bank accounts, and investments funds—should be encouraged to attract remittance funds through the banking sector.

• Banks in MPCs and the EU should try to forge alliances with a view to reducing transaction costs and attracting remittances. Alternatively banking services could be linked to post office networks, when the latter enjoy a dominant network market position. Exclusivity contracts for MTOs in post offices should be removed to open the sector up to competition.

• Migrant access to bank accounts in the EU should be improved by recognizing simple ID cards issued by embassies.

• Banks and communication companies in the EU and MPCs need to start developing new technologies for remitting funds (i.e. telephone or internet transfers), similar to those that have already taken off in Asia.

• MPCs banks that receive substantial amounts of remittance flows should be encouraged to tap international capital markets by issuing remittance-backed bonds. This would not only mobilize additional foreign savings that can be used for productive investments, but reduce banks’ financing costs and contribute to financial market development.

• In relatively capital-rich MPCs, where remittance-backed savings may be underutilized, the pooling of resources domestically through local associations should be envisaged. The purpose would be to pool resources to finance local infrastructure projects (the absence of which may impede productive regional investments), as well as local entrepreneurial activities and productive investments. Local infrastructure projects could be enhanced by matching government or donor funds.

• While local pooling schemes tend to be small in scale, larger cooperative pooling schemes could also be devised, whereby the NGOs (i.e. diaspora organizations) in host and recipient countries could help pool resources and work with banks and multilateral organizations to finance projects and develop financial services to the remittance industry.

• MPC governments, in conjunction with the EU, could help sponsor the transfer of knowledge and know-how of migrants and help establish and recognize diaspora organizations in order to stimulate business development.

• The development of a think tank to deal with remittance issues (i.e. policies, products and efficiency) should be considered.

• A website to improve information transparency on transactions costs should be developed. Preferably the website should be managed by migrant organisations themselves.

• Where present, capital controls should be removed to provide an incentive for migrants to remitt additional funds.

• Incentives schemes—including special training schemes for migrants to open small businesses back home, special import privileges, and offering premium interest rates on remittance funds—have been met with varying degrees of success. They could be envisaged to complement other instruments described above.

Strengthening the remittance links between the EU and MPCs is only a part of improving the efficiency of the remittance market for MPCs; additional efforts for strengthening remittance flows from other parts of the world will also be required for MPCs to reap the economic benefits of improved remittance flows and utilization.

1 Turkey, Morocco, Tunisia, Algeria, Egypt, Lebanon, Jordan, and Syria.