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Offshore staff help forex kitty boom

D. Murali

CHENNAI, April 3

IF all our migrant workers slogging offshore don't end up in jails for visa problems but keep sending in remittances, we would need less external debt. This much can be surmised from a new report from the World Bank, titled Global Development Finance 2003. For, it notes: "Foreign direct investment and migrant workers sending part of their pay check back home have become more important sources of finance for developing countries than private lending."

Our forex reserves were ballooning for no obvious reason till somebody surmised that it is because of `invisibles' such as remittances. And now the World Bank has confirmed that.

Though recent reports talk of inflows slowing down into the forex kitty, the basic source of buoyancy in invisible receipts, during the last few months, was private transfer — that is predominantly inward remittance from migrant workers. The aggregate invisibles surplus in 1992-2002, for instance, was nearly 250 per cent higher than that during 1981-91 and this made good the steep rise in trade deficit.

What are the implications? One, private debt has taken a backseat, says the big Bank. Thus, in 2002, debt repayments overtook new loans, "so private debt flows were a net negative for developing countries".

Two, the lower volatility of foreign direct investment (FDI) and remittances augurs for a more stable environment, because these countries "have learned to live with less external debt".

Mr Philip Suttle, lead author of the report predicts that debt finance for developing countries has shrunk and "won't come back quickly". And there is room for `cautious optimism' that capital flows to developing countries will be less volatile in the future.

"This would be good for growth and for poor people." While banks and bond-holders are, as usual, cautious of holding debt claims on developing countries, non-financial corporations recognise that a growing number of developing countries "offer the potential for growth", according to the report.

The preference for FDI investments hinged on their being committed for the long haul, though its stability cannot be taken for granted. Which is why "many governments that previously borrowed abroad are instead borrowing domestically, on shorter maturities". This move reduces forex risk, though on the flip side there are the risks of "interest rate fluctuations and the reluctance of local investors to roll over exposures at times of stress," states the report.

This shift can usher in "a sound investment climate" says Mr Nicholas Stern, World Bank Chief Economist. "Nine-tenths of investment in developing countries comes from domestic sources."

Interestingly, domestic investors' needs are similar to those of foreign investors in the following respects, he notes: "Both seek stable macro conditions, access to global markets, reliable infrastructure, and sound governance, including restraints on bureaucratic harassment and corruption."

When the investment climate is right, those who receive the foreign remittances are more likely to invest in "farms and small and medium enterprises that are key to poverty reduction". Otherwise, remittances are more likely to be spent on just "getting by".

And there are more virtues to remittances: One, they are `a more stable source' of external finance than debt. Two, they tend to be `counter-cyclical, buffering other shocks' — this happens because "economic downturns encourage additional workers to migrate abroad and those already abroad increase the amount of money they send to families left behind".

Three, for most of the 1990s, `remittances have exceeded official development assistance'. And four, remittances through the banking system are likely to continue to rise.

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