FMM(06)(INF)5

INFORMATION DOCUMENT FOR DELEGATES

REPORT ON A WORKSHOP ON FOREIGN REMITTANCES AND DEVELOPMENT IN THE SADC REGION

Maseru- Lesotho, 29 – 30 June 2006

Paper for the Commonwealth Secretariat*

Commonwealth Secretariat Marlborough House London SW1Y 5HX August 2006 _______________

*This Report was prepared for the Commonwealth Secretariat by the Rapporteur for the Workshop, Ms Motšeoa Masheane of Lesotho Ministry of Finance and Development Planning, Department of Treasury.

Commonwealth Secretariat ________________________________________

Commonwealth Finance Ministers Meeting

Cinnamon Grand Hotel, Colombo, Sri Lanka, 12-14 September 2006 ________________________________________

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Table of Contents

Page 1. BACKGROUND……………………………………………………… 2 2. PREAMBLE………………………………………………………….. 4 3. SUMMARY OF PROCEEDINGS - OPENING SESSION……………. 5 4. PAPER PRESENTATIONS AND DISCUSSIONS …………………. 4

1 Profile of Money Remittances in the SADC Region- sources, destinations, volumes, trends, channels, instruments, uses and challenges………………………………. 4

2. Findings from a recent survey of remittances in the SADC Region and the policy implications…………………….. 5

3. Remittances recording and statistics - a brief overview………… 6

4. Using remittances to leverage external borrowing through

securitization and its feasibility in the SADC context…………. 7

5. Government Policies to facilitate flow of remittances…………. 7

6. Reasons why migrants make remittances and prefer informal to formal remittances channels…………………………………. 8

7. Uses of formally and informally channeled remittances and

their relative development effects………………………………. 9

8. Catalogue of policy measures for influencing the volumes, channels, and uses of remittances and their applicability in the context of the SADC region…………………………………. 9

5. CONCLUSION AND WAY FORWARD……………………………... 10

6. CLOSURE………………………………………………………………. 11

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BACKGROUND

A two day workshop on “Foreign Remittances and Development in the SADC Region” was held at Victoria Hotel, in Maseru Lesotho from 29 – 30 June 2006. Organized by Commonwealth Secretariat in collaboration with FinMark Trust (with financial contribution from African Development Bank), the workshop drew participants from SADC member states and was also well attended with representatives from multilateral (particularly, pan-African) institutions. Countries represented at this workshop were Lesotho, Botswana, Malawi, Mozambique, Swaziland, Zambia, Tanzania, Madagascar, South Africa, and Zimbabwe. UN Economic Commission for Africa (UNECA), Southern African Development Community (SADC), International Organization for Migration (IOM), African Development Bank (ADB), and DfID Southern Africa were institutions represented at this workshop. The papers presented were contributed by resource persons from the Commonwealth Secretariat, African Economic Research Consortium (AERC), Southern African Migration Project (SAMP), National Treasury, South Africa and FinMark Trust/Genesis Analytics. 2. As listed below, the papers were divided into two thematic areas with day one of the program focusing on SADC Region-Specific Data, Information and Statistics on Remittances and the last day discussing Implications of Global Remittances, Experiences/Practices for Remittances Policy in the SADC Region. 29th June 2006 - SADC Region-Specific Data, Information and Statistics on Remittances

1. Profile of Money Remittances in the SADC Region - sources, destinations, volumes, trends, channels, instruments, uses and challenges by Sarah Truen, Genesis Analytics, South Africa.

2. Findings from a recent survey of remittances in the SADC Region and the policy

implications by Professor Sally Peberdy, SAMP, University of Witwatersrand, South Africa.

3. Remittances recording and statistics- a brief overview by Prof. Matthew

Odedokun, Commonwealth Secretariat, London.

4. Using remittances to leverage external borrowing through securitization and its feasibility in the SADC context by Vincent Williams, SAMP, South Africa.

5. Government Policies to facilitate flow of remittances by Raadhika Sookoo,

National Treasury, South Africa. 30th June 2009 - Implications of Global Remittances, Experiences/Practices for Remittances Policy in the SADC Region

6. Reasons why migrants make remittances and prefer informal to formal remittances channels by Vincent Williams, Southern African Migration Project (SAMP,) South Africa.

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7. Uses of formally and informally channeled remittances and their relative development effects by Professor Olu Ajakaiye, AERC, Nairobi.

8. Catalogue of policy measures for influencing the volumes, channels, and uses of

remittances and their applicability in the context of the SADC region by Prof. Matthew Odedokun, Commonwealth Secretariat, London.

PREAMBLE 3. The overarching theme of the workshop has two aspects; the volume, formalization of channels and recording of remittances on one hand and the macro and micro economic impacts of foreign remittances in the SADC region on the other. 4. It is generally acknowledged that foreign remittances, whether channeled through formal or informal modes from host countries to receiving countries, contribute positively towards the economic development both at the household level and country level, although remittances through formal channels are more amenable to policy interventions and are generally believed to have greater developmental impacts. For various reasons, however, it is also observed that majority of migrant workers prefer informal to formal channels. Available evidence indicates that reasonably accessible and affordable formal means of transmitting remittances to home countries can significantly change remitters spending patterns, which are presently more consumption-oriented, than geared to investment (often, though contentiously, regarded as being more conducive to development than consumption). With most migrant workers preferring informal to formal channels, policy makers have a challenging responsibility of promoting the use of formal modes. By way of acknowledging this challenge, this issue, among many others discussed at the workshop, generated much interest resulting in the recommendations for way forward regarding strategies that can be employed to lure migrant workers into embracing formal remittance channels. 5. Presentations and discussions also focused on negative and positive developmental effects of remittances and an array of policy measures, not only to influence remittance channels but also to enhance proper utilization of the proceeds (by reducing the negative impacts and promoting the positive ones). SUMMARY OF PROCEEDINGS Day One Opening Session 6. On behalf of the Honourable Minister of Finance and Development Planning, Dr. Thahane, the Deputy Governor of Central Bank of Lesotho, Dr. M. Senaoana welcomed participants to Lesotho and thanked the organizers of the workshop for the sterling preparations made ahead of the workshop, and in particular for holding the workshop in the Mountain Kingdom- Lesotho. He shared with participants the historical background attached to migrant remittances in Lesotho. With main reference to Basotho migrant mineworkers in South Africa, he recognized both the positive and devastating effects of migrant labour both at the social and economic level. On the social side, he mentioned that Basotho mineworkers

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used to spend their prime life in South Africa due to the inflexible nature of the contracts in the past. Effectively, home visits could only be made at the end of the contract whose duration was normally two years. From the economic point of view, they were able to provide for their families despite the unpalatable conditions. At the macro economic level, while South Africa is contributing towards the reduction of unemployment in Lesotho through the employment of mineworkers, it also means that this significant labour force, which constitutes about 60 per cent of the total labour force in the country, is not available domestically to directly contribute towards the development of Lesotho. Zeroing in on the purpose of the workshop, Dr. Senaoana highlighted the importance of strategic management of remittances flows. He emphasized that given the effect of remittances on, among others, the balance of payments, foreign exchange reserves, GDP and GNP, it is crucial that proper remittances records and statistics be available for reference by policy makers to make rational economic decisions. 7. Prof. M. Odedokun, Adviser, Economic Affairs Division of Commonwealth Secretariat, mentioned that it was through Dr. Thahane’s invitation that this workshop was hosted in Lesotho and he thanked the Ministry of Finance and Development Planning for their hospitality. Aligning himself with Dr. Senaoana, he also thanked participants and resource persons for having spared time from their busy schedules to attend the two day workshop. He gave background information on Commonwealth Secretariat highlighting its objectives and goals. He presented the following as the objectives of the workshop:

• Creating a forum for policymakers and international experts on migration and remittances to brainstorm on problems confronting migration and remittances within the SADC region (as well as migration from and remittances to the region) and to proffer solutions to the problems.

• Building the capacity of policymakers on migration and remittances in the region

in policy formulation as well as in recording of remittance flows, including designing and carrying out remittance surveys and development of the institutional framework for identifying remittance flows.

• To share with the policymakers best and innovative practices from outside Africa

on how to make remittances promote development of the recipient countries.

• To promote existing collaborative arrangements, bilateral and otherwise, on remittances.

8. He pleaded with participants to attentively and constructively underscore both the positive and negative aspects of remittances. He advised that concerted efforts must be directed towards increasing the positives associated with remittances. Drawing from other countries’ experiences at the regional level and internationally, he emphasized the need to devise appropriate means to arrest the negatives inherent in foreign remittances.

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PAPER PRESENTATIONS AND DISCUSSION

Sections that follow present summaries of paper presentations. Each summary is followed by a sample of the questions raised and responses given. Paper 1: Profile of Money Remittances in the SADC Region - sources, destinations,

volumes, trends, channels, instruments, uses and challenges 9. Referring to research studies conducted by Genesis Analytics in Botswana, Lesotho, Malawi, Mozambique, South Africa and Swaziland in the past, the paper presented the remittances statistical data on issues ranging from patterns of migration, destinations of migrant workers, volumes of income sent home, remittance channels, uses of remittances and challenges involved. The paper showed that South Africa is the principal country receiving migrant workers mainly from Lesotho, Mozambique and Zimbabwe. It further noted that the economic growth in Botswana recently has also fuelled a number of emigrants, placing the country second after South Africa as a significant migrant recipient country. The findings also showed that the majority of remittances are sent through informal channels (taxi drivers and friends). Among the formal remittance channels, the post office appeared to be the most popular method used, constituting 32 per cent of the total remittances. 10. The paper also discussed barriers to formalization. Exchange controls, anti-money laundering (AML) legislations and immigration issues were identified as factors which individually and collectively account for migrant workers’ continued use of informal remittance channels. Regulatory framework relating to these issues focused mainly on South Africa. Discussion of the paper and matters arising 11. Questions, comments, or remarks raised and the responses follow:

• Comment: On remittance flows, a participant remarked that the presentation only addressed problems related to host countries and ignored recipient countries. Response: One of the studies made in the past included Zimbabwe as a recipient country the findings of which indicated that a number of people lost money through informal remittance channels.

• Comment: Another participant remarked that the regulatory framework discussed in the paper is from the South African point of view only. Response: The objective of the research was to study the regulatory framework in South Africa only.

• Comment: Another remark was that the anti money laundering and anti terrorism financing regulations sometimes have a negative social effect as they are too stringent and make it impossible for remitters to send money home. Response: It must be appreciated that governing regulations are meant to protect the financial system against money laundering.

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Paper 2: Findings from a recent survey of remittances in the SADC Region and the policy implications

12. This paper presented a survey conducted by Southern African Migration Project (SAMP). Countries included in the study were Lesotho, Mozambique, Swaziland and Zimbabwe, these being the primary countries from which South Africa draws foreign labor. The objectives of this study were to:

• Describe cross border migrants including their work, migration history and remittances behavior.

• Examine methods used to transfer remittances in cash and goods. • Assess the importance of remittances to migrant sending household economy. • Identify impact of migration on migrant sending households and communities.

13. The findings of the survey showed that except in Zimbabwe, the mining sector in South Africa accounts for the highest percentage of migrant workers. Notably, Zimbabwe dominated the rest of the other countries in supplying South Africa with professional workers. The study also identified wage work, remittances in cash and goods, informal sector, farm income, formal sector business and pension/disability grants as the main sources of migrant household income. Overall, informal means of channeling both cash and non-cash remittances were found to be popular amongst migrant workers in each country, this constituting 73 per cent of a sample of 5,812 migrant workers. Preference for the method used was found to be mainly influenced by ease of access, related costs and reliability. The study also found the remittances’ economic impact to be more on consumption than “developmental” aspects. Discussion of the paper and matters arising 14. The paper evoked very interesting discussions and a number of questions.

• Comment/Question: Is it feasible for SADC member countries to develop a common framework to record remittances and compile remittance statistics both for formal and informal remittances? Response: Acknowledging challenges inherent in this exercise, especially relating to informal remittances, participants agreed that harmonized measurement instruments would be useful in this regard.

• Comment: How to integrate remittance surveys into household surveys? • Comment: There is the need for further regular research and surveys as formal

methods of recording will not capture informal remittances Response: The above two points were well received as informal remittances are not profiled and there are peculiarly challenging issues when it comes to handling surveys.

• Comment/Question: How is it possible to ensure households can maximize the benefits of remittances? Response: Governments must ensure that the remittance transfer costs are minimal. Educational awareness to spending households is also essential to enable households manage remittance in a much strategic manner.

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Paper 3: Remittances recording and statistics- a brief overview 15. Central Bank’s balance of payments (BOP) statistics and remittance sample surveys were identified as the main sources of remittances data. The paper observed that BOP statistics remain the best source of data for international comparisons despite not being inclusive as only formally channeled remittances are captured in the data. It further argued that although potentially more useful in understanding characteristics of remittances at the micro level, sample surveys are more often than not fraught with methodological problems. Discussion of the paper and matters arising 16. The following were questions/comments relating to the paper:

• Question/comment: What are the challenges faced in compiling BOP statistics on remittances and how can they be overcome? Response: Not all remittance money is captured by BOP statistics in the SADC region as informal remittances are not covered. This is why complementary data collection methods such as surveys are important in compiling remittance information.

• Question: What are the challenges faced in carrying out remittances surveys and how can they be overcome? Response: SADC has the challenge of devising common instruments and methodologies of carrying out surveys of this nature to promote compatibility and comparability of data collected to build reliable time series for the purpose of analysis.

• Question: How frequent should remittances survey be? Once every 5 years or 10 years? Response: To support budget preparation and budget implementation, the shorter period (every 5 years) is preferred. The quality of statistical data over this period is also better. .

• Question: How can international development partners come in by way of capacity building for carrying out remittances surveys? Response: This question was deferred as it touched on areas are to be discussed on the second day.

• Question: Should there be uniformity, and to what extent, in terms of format, frequency etc within SADC countries in reporting outcome of remittances surveys? Response: Reference must be made to SADC harmonization protocols. However, uniformity may be difficult given the peculiarities in SADC member states. Issues relating to capacity and logistics may be major bottlenecks.

• Question: Would it be feasible to integrate such surveys with the standard household surveys? Response: This question was not addressed.

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Paper 4: Using remittances to leverage external borrowing through securitization and its feasibility in the SADC context

17. The paper explains the technicality and mechanism of using anticipated inflow of remittances, like many other forms of anticipated future foreign exchange receipts, in enhancing a country’s credit rating in international capital markets through securitization of the future receipts and thereby be able to access the capital markets and borrow from there at lower costs. He mentioned that many developing countries depend on debt to achieve national goals. This being the case, there is always the need to borrow money at lower cost. The cost of borrowing funds is influenced by the country’s credit rating which, in turn, is determined by the value of foreign reserves and the ability to service debt. In this regard, therefore, migrant remittances qualifying as foreign earnings can be used as a means of securitization. For this to be possible however, the following, among others, must prevail:

• For recording remittances data, formal channels must be used. • There must be complementary reviews of regulatory frameworks, policies and

laws. Discussion of the paper and matters arising 18. Discussions of the paper centered on the following questions which were presented as part of the paper:

• Question: Is it ethical? Response: The ethicality of using private money such as remittance money for securitisation purposes is debatable especially taking into account the inherent political risks. To avoid exposing lenders to unreasonable degree of risks where remittances are used for securitization purposes, it is advisable to direct such funds to neutral offshore bodies where risk is relatively low.

• Question: What policy interventions would be required? • Question: Who would be the key players? Government, financial institutions,

migrants themselves? • Question: How to include diaspora organizations?

Responses: The last three questions were not addressed due to time constraints. Paper 5: Government Policies to facilitate flow of remittances 19. From the South African point of view, the paper discussed the positive impact that policy interventions could have on remittances in alleviating poverty. It argued that to enhance economic development, the financial sector must be efficient and accessible to all. To be inclusive and accessible, the paper noted that specially designed investment vehicles for the low income market must be introduced. It concluded by recognizing the importance of having appropriate governance and regulatory infrastructures in the financial sector primarily for customer protection.

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Discussion of the paper and matters arising 20. The following questions and comments were raised:

• Comment: Bank services in South Africa still remain very costly with unreasonable levels of bank charges. Response: It is hoped that increased competition will help in lowering service costs

• Comment: Why has South Africa forced Western Union out of business given that it was more accessible? Response: The decision to close Western Union was a legal one following West Union’s breach of standing regulations.

Day 2 Paper 6: Reasons why migrants make remittances and prefer informal to formal

remittances channels 21. In line with many authors, the paper identified the ability to compile data and information as a main benefit of formal remittance channels. Once recorded in national statistics, this data forms the basis upon which policy makers build appropriate policy interventions. Non-existence of formal channels, lack of access where formal channels exist, costs and trust were identified as factors which largely affect the decision to formally or informally channel remittances. The paper observed that informal channels still remain more widely used than the formal channels. The paper also stated family transfers, investment transfers and collective transfers as the common purposes of remittances. The paper mentioned that it is important to distinguish between the benefits of remittances by understanding their purpose and distribution so as not to lead to contrasting policy objectives. Discussion of the paper and matters arising 22. The paper presented the following questions:

• Question: How to promote formalization? Response: It was observed that generally, three factors determine the extent of formalization. These include affordability, appropriateness of the channel used both to the remitter and the recipient, and accessibility of the channel in question.

• Question: Can and should consumption patterns be influenced? Response: Governments, through policies, can influence the use of remittances between consumption and development. For example, establishing formal financial institutions which can accommodate low income earners like remitters strengthen the savings culture.

• Question: Promoting investment of remittances? • Question: Capturing remittances for development?

Responses: The last two questions were not addressed due to time constraints.

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Paper 7: Uses of formally and informally channelled remittances and their relative

development effects 23. As background, the paper discussed issues that give rise to migration and the impact of migration both on the country of origin and the destination. Focusing on remittances, it again noted that informal remittance channels are more popular than formal ones. It categorized remittances into personal deposits or investment, intra-family transfer, pension and social security transfers, charitable donations, collective investments in development, and taxes or levies. These remittances are mainly used for consumption, subsistence production and investment purposes. The paper advised governments to devise policies that can enhance and sustain the positive developmental impact of remittances on the economy. These policies must be aimed at creating financial infrastructure for remittances and encouraging investments. Discussion of the paper and matters arising 24. The paper stimulated intense discussions. Some questions and issues raised are as follow:

• Question: The role of governments in making formal financial institutions accessible to all? Response: It was noted that much as governments do not have direct control on prices set by banks, at least they can introduce means of leveling the playing field.

• Question: The role of SADC in promoting the use of formal channels.

Response: It was recognized that policy interventions are not taken seriously in most cases and as a result their implementation tend to be cursory. To reverse this, SADC member states must transparently share information and jointly observe the policies made by effectively translating them into actions.

• Question: Do countries have enough information to make policies to expand the financial institutions’ net to include remittance flows? Response: The private sectors’ concern would be the profitability of the remittances business. Generally, information is not available to empirically test this aspect.

Paper 8: Catalogue of policy measures for influencing the volumes, channels, and uses

of remittances and their applicability in the context of the SADC region 25. This paper explored in detail policy measures that can be adopted to promote use of formal remittance channels. It also addressed measures which can potentially increase awareness and appreciation of utilising remittances for developmental projects. The paper presented a number of case studies on “best practices” from both within and outside Africa in support of the proposed strategies under the two main broad areas. Recognizing that there are many stakeholders involved in the remittance subject matter, the paper further discussed the feasibility of the proposed strategies in the SADC region’s context.

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Discussion of the paper and matters arising 26. Due to time constraints, the presentation offered a number of take-away questions to participants to think about. These included the following:

• Question: Whether migration should be encouraged as a way of boosting remittances?

• Question: Whether it is possible for host countries to reform their banking systems to facilitate the flow of remittances to receiving countries?

• Question: How can credit unions and micro-finance institutions actively contribute towards opening up the formal channels for remittance transactions in the SADC region?

• Question: What measures should be introduced by policy makers in the region to capacitate credit unions and micro-finance institutions to facilitate remittance transactions?

• Question: Whether organizations like OECD should have a unit dedicated to monitoring of remittances flow to developing countries in the same manner that it has created the Development Assistance Committee (DAC) for monitoring official resource transfers (especially, ODA) to developing countries, bearing in mind that remittance flows even surpass ODA flows in importance or magnitude?

• Question: What innovative strategies can be developed by receiving countries to encourage use of remittances for development effects?

CONCLUSION AND WAY FORWARD

27. At the end of the workshop, participants were in concurrence that remittance awareness must be heightened in SADC member states for policy makers to devise interventions capable of contributing significantly towards poverty reduction. The following were put forward as issues and areas that need further attention to pave the way forward for better management of remittances:

1. Regional bodies like SADC must visibly play an active and advisory role in support of remittance related issues. There is a need to engage more with SADC to discuss the linkage between SADC protocols and migrant remittances.

2. The micro and macro economic impact of remittances deserves prime attention

to enable policy makers to formulate appropriate strategies geared towards enhancing management of remittance flows.

3. Qualitative and quantitative remittance data sources must be in place for policy

makers to be able to conduct analysis that may lead to the formulation of appropriate remittance regulations.

4. Formal remittance channels are disfavored mainly because they are more

expensive compared to informal ones. Incentive mechanisms have to be introduced to stimulate transparency and competition so as to make the formal channels more accessible.

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5. To maximize potential benefits to remitters, consumer financial literacy must also be considered to enable remitters to make informed economic investment decisions.

6. The role of the Development Bank of Southern Africa as an operational arm of

SADC, must also be more pronounced.

CLOSURE 28. Closing the workshop, Prof. Odedokun heartily thanked participants for the fruitful and interactive deliberations during the course of the workshop. He further asked members to share the report of the workshop with policy makers to ensure that the views exchanged and recommendations made are given due attention.