Remittances Flows &Trends (The Egyptian Case )

Remittances Flows &Trends

(The Egyptian Case)

Heba Nassar

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IntroductionI-Country context:

Throughout most of the 1990s, Egypt succeeded in implementing a stabilization program that managed to slow down inflation, reduced trade barriers, and initiated a privatization program . Consequently, economic performance improved over the 1990s.

2000/01” the stagnation of the economic reform process aggravated by a slowdown in the international economy and the impact of 9/11 attacks.

Economic reforms” Floating of Egyptian pound, customs reform, tax reform and a more market-oriented macroeconomic policy. These reforms helped improve economic performance; higher real GDP growth ( 6.7% in 2005/06), higher GDP per capita (US$1,324) and tangible rise in foreign exchange reserves. By 2006, the pound has grown in value by 15% towards the dollar. This has initiated new confidence in the economy (remittances).

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The share of private sector, one-half of total investment, while the share of holding companies 20%, while the share of government and economic entities declined.

Strong increase in non-oil merchandise exports (up by 36.9%), as well as oil exports (by 47.7%).

Foreign debt and debt service remain low, with most debt long-term and concessional.

The government extended subsidies, especially in energy sector. During the period 2001/02-2004/05, subsidies represented 17% of total government expenditures

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Introduction

I-Country context:

Although Egypt is doing well in improving certain social and economic indicators, progress still needs to be made in many other areas.

Poverty and Job creation remain major problems to be solved.

(A) Unemployment : Officially estimated at 9.5% in 2006. Almost 60% of the unemployed in Egypt are new entrants to

the labor force. Unemployment rate among secondary school graduates is the

highest (20.4 %) followed by university graduates (14.4%). Female unemployment rate was 23% in 2006.

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Introduction

I-Country context:

(A) Unemployment : Several factors contributed to this difficult situation in the labor market Structural imbalances and inefficient policy on the supply and demand side, mismatch between labor market requirements and educational output.Layoffs are partly responsible for the relatively high rate of unemployment, despite national efforts at job creation. The private sector is still not large enough to absorb new entrants into the labor force. Egypt's growing population which may exceed 100 million people by 2020 continues to place a burden on limited resources.

Migration may be viewed as an outlet for growing labor force.

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(B) Poverty : The incidence of poverty has increased from 16.7 percent in 2000 to 19.6 percent in 2004. It increased more significantly in rural Upper and rural Lower Egypt Poverty increase was driven by the decline in average per capita expenditure between 2000 and 2005 in all regions and in overall Egypt. At the national level, real per capita expenditure declined from LE 2798 in 1999/2000 to LE 2604 in 2004/2005.

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II-Word on Remittances:

Remittances are defined as the money transmitted from one place to another and is believed to be the most massive transfer generated by migration. Although remittances can also be sent in-kind, the term “remittances”, usually refers to cash transfers.

Major countries receiving workers remittances

include Mexico, Turkey, Egypt, Brazil, India, Morocco, Pakistan, Bangladesh, El Salvador, Jordan and Yemen.

Total remittances accounted for around 0.39 percent of world GDP between 1994 and 2004 higher than official development assistance (ODA).

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II-Word on Remittances:

Unknown aspects: Remittances transferred through informal

operators or hand carried by travelers, Evolution of remittances across the life

cycle of individual migrants , a U shape Net impact of remittances on labor

markets between job destruction and job creation

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III-Macroeconomic and Micro Effects of Remittances :

III.1. A- Major Source of External Finance To Developing Countries:

The growing importance of remittances as a source of foreign exchange is reflected in the fact that remittance growth has outpaced private capital flows and official development assistance (ODA) over the last decade.

Recorded remittance receipts were equivalent to about 6.7% of

developing countries’ imports and 7.5% of domestic investment in 2004

.

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III.2. Improving Households Living Conditions, through:Remittances can be a mean for improving household living conditions through:

A. Poverty Reduction:

Remittances affect poverty either directly through increasing the income of the recipient or indirectly through their effects on growth, inflation, exchange rates, and access to capital.

B. Household Consumption Smoothing:

Poor households markets are vulnerable to severe declines in income from adverse shocks, and they may be forced to forgo income-generating but risky strategies. Studies of how remittances respond to adverse household shocks generally support the view that remittances provide some insurance.

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Remittances can be a mean for improving household living conditions through:

Raising Domestic Incomes:Indirectly affect household income through changes to the labor supply of those remaining behind; relaxation of working capital constraints that expand income from entrepreneurial or farming activities; and multiplier effects on household income.

. Encouraging Investments in Human Capital (Health& Education):Most research identified expenditure on health , education and housing as main expenditure areas for household with migrants..

. Encouraging entrepreneurship:There has been a marked shift from the belief that migrants are unlikely to establish new business enterprises in their countries of origin to the view that migration encourages entrepreneurship.

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V- Remittances of Egyptian Migrants

1- Macroeconomic considerations: Egypt ranks third to sixth , among the countries

which receive the highest amount of remittances from migrants abroad in the last 15 years

Remittances of Egyptians abroad amounted US$ 5034.2 million, making of GDP and resulting in 4.8% of GDP.

USA and Saudi Arabia are the main sources, which count for more than half the remittances flows to Egypt

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The trend of remittances of Egyptian migrants can be distinguished over the following phases:

Phase I (1974-1984), remittances tended to increase at a high rate (30.8% annually), with the exception for 1981. This increase reflected the increase in oil prices and thus increase in the demand of Egyptian workers in oil Arab countries.

Phase 2 (1985-1989):Since the mid eighties, oil prices tend to decrease and so oil revenues. As a consequence the demand for Egyptian workers tended to slow down and an inflow of return migrants emerge. Remittances fluctuated showing a decreasing trend. (-3.6% annually). Restrictive measures reduced the number of projects and thus the number of employment opportunities. Gulf countries imposed taxes on immigrants.

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Phase 3 (1990-2001):With the exception of the years 1992 and 1993, the data show a stable, but slightly decreasing trend in remittances. The decline is attributed to the fall in oil prices in the Gulf countries that represent the major destinations for temporary Egyptian migrants. Poor exchange rates and general economic conditions in Egypt. Remittances declined during (1992-2001) at –8% annually.

Phase 4: (2000/2001-2005/2006)Remittances of Egyptian migrants have increased during the period (2000/01-2005/06) from 2843 million dollars in 2000/01 to 5034 million dollars in 2005/06. The value of remittances increased at 12.1% annually. Most of this increase took place in the last two years (2004-2006) due to improvement and stability of the value of the Egyptian pound & upsurge in oil prices .

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Remittances 2000/01-2005/06- US$ million

0

1000

2000

3000

4000

5000

6000

2000

/ 01

2001

/ 02

2002

/ 03

2003

/ 04

2004

/ 05

2005

/ 06

Remittances

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IV. Remittances and macro-indicators (2000/01-2005/06):

A comparison was made between remittances and all sources of foreign exchange

Exports, Suez Canal dues, FDI, travel and tourism receipts, petroleum exports, official transfers

Remittances after Suez Canal dues are the most stable sources of external sources with the exception of Suez Canal dues, followed by travel and tourism receipts, exports of goods, official transfers, petroleum exports and FDI over 1992-2006

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IV-A- Relative importance of Egyptian Exports of Goods with respect to exports:

0

50

100

150

1993/94 2000/2001 2002/2003 2004/2005

Remittances as % of Exports

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IV-A- Relative importance of Egyptian Exports of Goods with respect to exports:

The importance of remittances as a source of external financing versus exports of goods tends to decline. This is due to the tremendous increase in the Egyptian exports in the last two years in addition to the increase in the price of oil in year 2006-2007, the reform measures adopted in the tariff system and the Quiz impact on export to the United States of America

Exports increase more rapidly. Total exports increased at 21.1% annually during (2000/01-2005/06), remittances increased at 12.1% annually.

Exports of goods became a more stable source of external financing than remittances during (2000/01-2005/06).

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Remittances growth compared to export growth rate (2001/02-

2005/06)

0.0%10.0%20.0%30.0%40.0%50.0%

2001/02 2002/03 2003/04 2004/05 2005/06

Exports of Goods Remittances

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IV-B Petroleum Exports:Petroleum exports are considered the largest single commodity exports and one of the four main sources of foreign currency flows to Egypt.

While remittances were around double the value of petroleum exports in 1993/94, they became less than half the value of petroleum exports in 2005/2006.

The value of petroleum exports increased at 31.2% annually during (2000/01-2005/06), more than 2.5 the annual growth rate of the remittances.

However, it is found that remittances were a more stable source of external financing comparing to petroleum exports.

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0

50

100

150

200

1993/94 2002/2003

Remittances as % of Petroleum Exports

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Remittances growth compared to petroleum exports growth rate (2001/02-2005/06)

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

2001/02 2002/03 2003/04 2004/05 2005/06

Petroleum Exports Remittances

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IV.C Suez Canal Dues:The value of remittances exceed that of Suez Canal dues during the period (1993/94-2005/06).

The importance of remittances as a source of external financing via a vis Suez Canal dues tended to decrease during (1999/2000-2003/2004).

In the last two years and as a result of the upsurge in the value of remittances, the importance of remittances vis a vis Suez Canal dues tended again to increase.

Suez Canal dues are the most stable source of external financing. However, Suez Canal Dues tend to decrease at a decreasing rate in the last two years

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0

100

200

300

1993/94 2003/2004

Remittances as % of Suez Canal Dues

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Remittances growth comparing to Suez Canal Dues growth rate (2001/02- 005/06)

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

2001/02 2002/03 2003/04 2004/05 2005/06

Suez Cana Dues Remittances

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0

100

200

300

1993/94 2003/2004

Remittances as % of Suez Canal Dues

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IV-D- Tourism Revenues:Remittances used to be a more important source of external financing than tourism receipts in the last decade.

In the last two years, due to the upsurge in recorded remittances and the fluctuations in tourism revenues the ratio of remittances to tourism revenues tend to increase from 54.8% in 2003/2004 to 69.6% in 2005/2006.

During (2000/01-2005/06), the growth rate of tourism receipts (10.9%) was slightly higher than that of remittances.

Tourism receipts are one of the most unstable sources of external financing, as they are strongly connected to regional political circumstances

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0

50

100

150

200

1993/94 1999/2000 2003/2004 2005/2006

Remittances as % of Tourism Receipts

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Remittances growth comparing to Tourism Receipts growth rate (2001/02-2005/06)

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

2001/02 2002/03 2003/04 2004/05 2005/06

Tourism Receipts Remittances

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IV.E. Net official Transfers:Remittances’ value was more than fourfold the value of net official transfers in 1993/1994. This gap barely changed until 1999/2000.

Remittances as % of net official transfers decreased to slightly more than threefold in 2003/04.

In the last two years, it increased to around nine fold the value of net official transfers

During (2000/01-2005/06), the net official transfers decreased at an increasing rate

The value of net official transfers is obviously unstable and was subject to a lot of fluctuations during a relatively short period of time (2000/01-2005/06).

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0

200

400

600

800

1000

1993/94 1999/2000 2003/2004 2005/2006

Remittances as % of Net Official Transfers

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Remittances growth comparing to Net Official Transfers growth rate (2001/02-2005/06)

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

2001/02 2002/03 2003/04 2004/05 2005/06

Net official Transfers Remittances

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IV-F: Foreign Direct Investment:Remittances as a percentage of FDI were increasing up till 2003/2004. Remittances were more than double the FDI inflows in 1999/2000, increased to more than sevenfold the FDI inflows in 2003/2004.

During (2000/01-2003/04), the annual growth rate of FDI witnessed a lot of fluctuations. FDI decreased at 7.2% annually during this period while remittances increased at 1.8% annually.

The value of FDI is obviously unstable and was subject to a lot of fluctuations during only 3 years while remittances growth was far more stable specially during these three years.

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0

200

400

600

800

1993/94 1999/2000 2000/2001 2003/2004

Remittances as % of FDI

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Remittances growth comparing to FDI growth rate (2001/02-2003/04)

-60.0%-40.0%-20.0%

0.0%

20.0%40.0%60.0%

2001/02 2002/03 2003/04

FDI inflow s Remittances

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V-G- Remittances as % of GDP (2000/01-2005/06):In Egypt, remittances tend to be an increasing percentage of GDP.

Analyzing the relative importance of remittances of Egyptian migrants as % of GDP, Investment, Overall Balance and Net International Reserves. It is indicated that on average the value of remittances were during the last decade around: 4.5% of GDP, 24.9% of total investments and 19.5% of net international reserves, quite a significant share of major macro variables indicating its relative importance as a major source for foreign exchange.

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Remittances as % of GDP

0.0%1.0%2.0%3.0%4.0%5.0%6.0%

2000/2001 2001/2002 2002/2003 2003/2004 2004/2005 2005/2006

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2- Micro-level considerations: How Remittances are Spent in Egypt? “Improving Households Living Conditions and poverty alleviation”

The Effects of International Remittances on Poverty, Inequality, and Development in rural Egypt, was examined by Adams, Jr.,1991in rural Egypt, The study is based on a survey of 1,000 households conducted in 1986/87 in three villages in Minya Governorate.

International remittances are shown to have a small but positive effect on poverty. The number of households living in poverty declined by 9.8 percent when predicted per capita household income included remittances.

A large part of these funds are used for daily expenses such as food, clothing and health care. A small percentage of remittances are used for savings and “productive investments”, i.e. for activities, which can generate income and employment.

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Using the set of data of the Social Capital Survey in Egypt 2004, the sample was divided into two groups of households. The first group receives remittances and the second group does not receive remittances.

First a Standard of Living Index is constructed as a broader measure of living conditions. Second in an attempt to assess the relationship between social capital, the study has designed a social capital index. Finally a basic needs index was constructed to address the availability of resources to cover the five main basic needs, shelter, nutrition, housing, health and education.

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“

Social Capital index” trust towards community, community participation, political participation, given a weight of (4)2-satisfaction with life and conditions, given a weight of (2)3-involvement with children in the community,

Standard of Living Index per capita in come. per capita expenditures, an

index of economic security/vulnerability, an index of housing conditions, and an index of affordability of basic need

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Households, who receive remittances have a relatively higher mean for standard of living (30.05 vs 28.51) and basic need index (6.6 vs. 6.014) than the households, who do not receive remittances.

The social capital index for households, who receive remittances is lower than the value of index for households, who do not receive remittances (0.58vs.0.61). Our interpretation for that is that because these households are better off their involvement with the community is not so much needed.

Remittances can form a safety net for households, as poverty incidence is far lower for households, who receive remittances than households, who do not receive remittances (10.78 vs. 20.67).

Households, who receive remittances have less difficulties in spending on food (88.82%) vs. households who do receive remittances (81.13%).

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The ratio of households, who have an income sufficient to cover their emergencies is higher among households receiving remittances than among other households(60.27% vs.58.81%).

Migration has a positive impact on receiving services such as educational and medical services.

Households, who receive remittances do not resort to financial aid as a coping strategy for difficulties as much as the other group of households.

In comparison to households, who do not receive remittances, financial reasons, such as high costs of education, health services and increase in prices, are not the main causes for worries for households, who receive remittances. They worry relatively more for employment opportunities.

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The relative percentage of households, who have an income sufficient to cope during emergency is higher for households who receive remittances than for the other group of households (8.8%vs.6.9%).

Networks are key intermediates in migration, which operate in both directions. Migration is considered as an important livelihood option from two perspectives. The financial issues, remittances, and the second perspective focuses on migration as an exit option from any vulnerable structure.

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2- Micro-level considerations: How Remittances are Spent in Egypt? Expenditure between consumption and investment at the micro level:

According to Adams study, expenditures on housing dominate the

category of durables. Once-abroad migrant households in this study also showed a

higher propensity than nonimmigrant to allocate expenditure to investments such as agricultural equipment, vehicles, commercial enterprises (stores), and especially land.

These findings are supported by other studies, which depend on a survey that covers both rural and urban areas. The main uses of

remittances are:

-Housing -Investment in Projects

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2- Expenditure between consumption and investment at the micro level:

Concerning the use of remittances in Investment in Projects, it was noted that:

a-Remittances in addition to the managerial experience obtained abroad have a positive effect on the emergence of new entrepreneurs who invest in and run new projects

b-Return migration has a positive significant influence on the value of capital invested.

c- Returnees’ enterprises engaged in services activities is twice that of stayers. Non-migrants tend to be concentrated in trade activities.

d-Returnees tend to invest more in the formal sector.

e-Returnees’ projects tend to create more employment opportunities

f-Returnees’ projects are regionally biased towards urban areas

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Futre Considerations

Studies should introduce appropriate, financial and organizational policies on provision of necessary information to both remittance senders and receivers.

Studies should focus on the improvement of remittance services, to reduce leakages in the transfer process and the introduction of market-conforming investment opportunities to increase the development potential of remittances .

More in general, issues such as the improvement of the overall investment climate, securitizing remittance flows, ruling out taxing remittances, introducing tax referrals for retirement and pension plans, increasing transparency and providing incentives to channel remittances into development projects are all important policy measures which need further studies

Remittances Flows &Trends (The Egyptian Case )

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