REMITTANCES SURGE, BUT FACE SCRUTINY

UNCLAS SECTION 01 OF 02 KINGSTON 001280 SIPDIS SIPDIS STATE FOR WHA/CAR (WBENT),WHA/EPSC (JSLATTERY) SANTO DOMINGO FOR FCS AND FAS E.O. 12958: N/A TAGS: ECON EFIN JM SUBJECT: REMITTANCES SURGE, BUT FACE SCRUTINY ¶1. Summary: Remittances solidified their position as the leading foreign exchange earner in Jamaica, rising 12.6 percent to USD 1.65 billion at the end of 2005. At this level, Jamaica has the largest per capita level of remittances in the region, with inflows accounting for almost 18 percent of GDP. The continued buoyancy was underpinned by increased labor migration and declining costs. While most of the funds were used for consumption, signs suggest a rising share is being channeled into productive assets. Despite positive developments, however, remittances have come under greater scrutiny in recent times, with the World Bank and the IMF highlighting some negative aspects. The GOJ has also been expressing concern about the possible misuse of the funds and is examining increased regulation and study of the industry. Negatives aside, remittances should maintain the growth momentum observed during the last ten years. As this growth continues more funds could be diverted from consumption to production, aiding growth and development. End summary. -------------- Remittances Remain Bullish -------------- ¶2. Remittances to Jamaica climbed by 12.6 percent in 2005 to USD 1.65 billion or 18 percent of GDP. At this level, remittances continued to grow on average by 16 percent since 2000 and solidified its position as the island's single largest source of foreign exchange and the mainstay of the external economy. Remittances for 2005 outstripped tourism receipts of USD 1.5 billion and were 137 percent of merchandise exports and almost three times greater than foreign direct investment. Jamaica also remained the highest per capita recipient of remittances in the region in 2005, with a per capita figure of USD 623 per year. This is not surprising given that a 2006 Jamaica Chamber of Commerce (JCC) survey showed that over one-third of all households receive money from abroad, with half reporting that their average receipt has been increasing in recent years. The upward trend is attributable to three main factors: increased labor migration to major source countries such as the U.S. and Canada; improved accessibility and convenience, with the channels for sending money expanding; and the continued improvement in technology and increased competition, making it much cheaper and safer to remit funds. Remittances have also surged in response to the sluggish economic conditions prevailing in Jamaica. -------------- Remittances Slowly Shifting To Development -------------- ¶3. While remittances continue to be primarily used for consumption, emergent signs suggest an increasing share of the flow is being leveraged for development. The clearest indication of this yet was provided by Manager of International Markets for Grace Kennedy Remittance Services (GKRS),Noel Greenland. (Note: GKRS is the local agent for Western Union and accounts for 65 percent of the market. End note.). Greenland told emboffs that: "Whatever is good for Jamaica is good for us", adding that his company would be allowing the recipients of remittances to have funds deposited directly to their savings account, a service already offered by at least one other company. These direct deposits will allow recipients to gain interest on their funds and possibly use the savings to leverage additional funds in the form of loans to start small businesses. Greenland also disclosed that GKRS was exploring the idea of identifying a separate pool of funds to lend small businesses. ¶4. Recent studies also suggest that an increasing share of the money remitted from Jamaicans abroad is being sent directly to building societies to pay mortgages. This study found that remittances do not only serve basic welfare needs, as previously assumed, but are increasingly being used to spur investment in housing, thereby generating employment and economic growth. Equally important is the fact that remittances are the only source of external payments going primarily to the poor. It should be noted that the reduction in poverty since the late 1990s occurred simultaneously with the surge in remittances, amidst one of the longest periods of economic stagnation in Jamaican history. Remittances also continue to play a positive role in maintaining macro-economic stability as well as reducing the current account deficit and possibly averting a balance of payments crisis. -------------- Remittances Facing Greater Scrutiny -------------- ¶5. Despite the positive attributes of remittances, the flow has come under increased scrutiny from the GOJ and international institutions in recent times. The GOJ has become particularly KINGSTON 00001280 002 OF 002 concerned about the possible use of remittances for terrorist financing and money laundering and has suggested a study to ascertain: (1) how the money is being utilized; (2) the profit margin of remittance firms; (3) the income group transferring money; and, (4) the recipients of remittances. To bring some amount of order to the industry through regulation, the GOJ also initiated dialogue with players in the remittances industry, a welcome development for Greenland. This drive to regulate the industry was largely due to ongoing pressure from GKRS to curb the activities of some companies. He noted that when the U.S. stepped up regulation after September 11 it provided an avenue for Western Union to intensify its lobbying efforts. When asked for his opinion on the current regulatory environment, Greenland told emboffs that the framework was taking shape. "The regulatory environment is healthy, but needs more muscle", Greenland concluded. ¶6. There are signs that the GOJ understands this need. The Bank of Jamaica (BOJ) hosted a conference June 12-16 - co-sponsored by the Department of the Treasury's Office of Technical Assistance (OTA) and the Caribbean Group of Bank Supervisors - for Caribbean Regulators of Money Services Bureaus. The Caribbean regulators requested this assistance from the USG to support ongoing efforts to develop best practices related to the industry, and to improve their oversight and regulation. ¶7. The World Bank and the IMF have also weighed in on the discussion on remittances, expressing concern about the impact of brain drain on Jamaica, despite the positive roles of satisfying basic needs and maintaining macroeconomic stability. An IMF working paper released in January and titled 'Emigration and Brain Drain: Evidence from the Caribbean' stated that there is a high level of emigration to OECD countries from Jamaica. The paper suggests that the migration rate is particularly high for skilled labor, with calculations showing that losses due to migration outweigh actual remittances to the country, a real sign of brain drain. According to the working paper, the tertiary-educated labor force in Jamaica has been reduced by 85 percent due to emigration to OECD member countries. "The magnitude of these migration rates suggests that potentially, emigration can have large impacts on the local labor markets and on the welfare of those who stay behind in the Caribbean countries. Total losses due to skilled migration...outweigh the recorded remittances for the Caribbean region on average, and for almost all the individual Caribbean countries", the paper pointed out. ¶8. Remittances have also come under criticism due to social ills associated with them. It is a common anecdotal belief that much anti-social behavior among children and young adults is due to a lack of proper supervision following the migration of parents. Many hold that this "free money" facilitates idleness and by extension deterioration in work ethic among recipients who no longer have an incentive to engage in productive activities, creating dependence. According to this view, the very factors - low income and lack of opportunities -that promote migration also discourage investment, as the educated human resource is lacking. -------------- Comment -------------- ¶9. Remittances are expected to remain buoyant during 2006, particularly given the sluggish economic conditions in Jamaica and the continued migration of skilled, educated labor. As growth in remittances continues, more of the money should find its way into productive areas, which could spur economic growth and development. In addition, the increased flow will continue to provide a critical source of funding for the country's soaring current account deficit. That said, the negative impact of remittances cannot be overemphasized, especially as the country grapples with the consequences of insufficient human resources and growing anti-social behavior. Labor faces a global market and gravitates toward the most lucrative offer and the safest environment in which to operate. Reducing crime, increasing investment in education and training, and providing sufficient compensation to retain expertise are always priorities, but ones that are difficult to synchronize with limited resources. End comment. JOHNSON