Managing Remittances Inflows with Foreign Exchange Intervention
IMF Working Papers, September 6, 2024
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- Managing Remittances Inflows with Foreign Exchange Intervention
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Bibliographic details
- Authors: Maria-Angels Oliva, Nika Khinashvili
- Published: September 6, 2024
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400285677.001
Summary
- In a 157 emerging markets and developing countries sample, remittances continue to grow fast, outpacing other financial inflows (as a share of GDP), particularly in Asia.
- Foreign exchange interventions (FXIs) have often been the authorities’ go-to tool to manage the short-term effects of these remittance inflows when alternative policy instruments are lacking.
- FXIs are described as quick, temporary solutions that often may hinder the development of the recipient country’s financial sector and may not support financial stability over the medium term.
- The analysis suggests FXIs act as an insurance tool that, by mitigating FX volatility, protect remittance recipients and tradable sectors from FX risks, encouraging:
- less bank deposits (consistent with more spending), and
- lower buffers in the banking sector.
- These costs add to other direct FXI-related costs already identified in the literature.
- The development of private sector market risk management tools should support longer-term structural reforms required to increase the absorptive capacity of additional FX inflows.
Key findings and mechanisms
- Sample size: 157 emerging markets and developing countries.
- Geographic emphasis: particularly pronounced effects in Asia.
- Remittances growth: remittances grow fast and outpace other financial inflows as a share of GDP.
- FXI role:
- Used to manage short-term effects of remittance inflows.
- Mitigates foreign exchange volatility.
- Acts as an insurance-like mechanism for remittance recipients and tradable sectors.
- Financial sector effects:
- FXIs are associated with reduced bank deposits and lower banking-sector buffers.
- Potentially hinder the development of the recipient country’s financial sector.
- Stability implications:
- FXIs may not support financial stability over the medium term.
- Costs from FXIs compound with other direct FXI-related costs discussed in existing literature.
Policy implications and recommendations
- Relying primarily on FXIs to manage remittance inflows carries short-term benefits but medium-term costs for financial sector development and stability.
- Priority policy directions:
- Develop private sector market risk management tools.
- Pursue longer-term structural reforms to increase the absorptive capacity of additional FX inflows.
- Where possible, consider alternatives to FXIs to avoid discouraging bank deposits and eroding banking-sector buffers.
Publication and metadata
- Authors: Maria-Angels Oliva, Nika Khinashvili
- Publication date: September 6, 2024
- Series: Working Paper No. 2024/191
- Volume: 2024
- Issue: 191
- Pages: 45
- DOI: https://doi.org/10.5089/9798400285677.001
- Stock No: WPIEA2024191
- ISBN: 9798400285677
- ISSN: 1018-5941
- Subject keywords: Balance of payments, Bank deposits, Commercial banks, Financial institutions, Financial services, Foreign direct investment, Foreign exchange, Remittances
- Geographic keywords: Africa, Asia and Pacific, Eastern Europe, Middle East, Western Hemisphere
Source: Maria-Angels Oliva and Nika Khinashvili, "Managing Remittances Inflows with Foreign Exchange Intervention", IMF Working Papers 2024, 191 (2024).
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