How is remittances ties up into all those economic indicators and how is it a direct or indirect function of these variables?
Strange 1st time somebody asking me a economic question here.
You have a current account deficit when you are spending more of your currency (forex) on importing goods than earning from exports. This leads to depreciation. So Balance of payments fluctuates exchange rate of a country’s domestic currency. So you have to go take loan to sustain the household expenses.
For countries of any developing or poor country where poverty & unemployment is high, remittances make up a sizable portion of GDP. Remittances from citizens working abroad provide an import source of much-needed funds.
Many developing countries have difficulty borrowing money, just as a first-time home buyer might have difficulty obtaining a mortgage. So such countries are most likely to rely on remittances. If your country has a deficit or weak economy you tend to have less stable governments and are less likely to repay the debt meaning possibility of default. While organizations such as the World Bank can provide funding, these funds often come with strings attached. Remittances give countries the ability to fund development their own way. It can also be used to make loans to local businesses.
The funds immigrants send home keep wire transfer companies in business and allow the home country to purchase imports. Your banks can establish branches abroad to make the transfer of remittances easier, in turn growth of your banks.
The more a country depends on inflows of funds from remittances, the more that it will be dependent on the global economy staying healthy. Workers employed abroad may lose their job if there is slow down in global economy. This has a triple-pronged effect. First, the home country may see a significant portion of its income dry up, and thus not be able to fund projects or continue development. These funds are also used for paying for imports & your oil bills. Second, you are dependent on foreign jobs for your fast growing population, because there is no proportionate job growth in relation to population growth. Meaning if you have 1 million unemployed & next year if it has become 1.1 million then there is a problem. Your population is increasing faster than your job creation. Third, not only you are unable to give employment for the local population - workers who are working abroad move back home, exacerbating the problem by increasing the demand for services on an already strapped economy.
Thus, immigrants who seek to send back remittances have become an integrated part of the economy. Remittances are $ earned outside which you re-spend it outside. Export is also $ earned from outside. Tourism is $ coming in from outside. Outsourced jobs brings in $ for your inside service. The problem is when you spend your money earned from inside (i.e Rs) to spend for outside purchases.
Where ever there is a hit in growth in any sector,
(can be export, tourism, remittances, outsourcing, FDI, Consultancy Services, etc) it has a chain reaction to all other sectors or industries. Local businesses have to give salary hike to employees, rent hikes, increase of raw materials & product prices every year. So if money flow reduces in the system, people don’t spend & local businesses indirectly see slow down. So when more unemployment, less spending which affects all sectors.
Eg: I am a Non Resident - I have saved up for past 5-6 years to buy a house - When I buy a house, the builder has spare money to buy a Car from the profit - The Car dealer has spare money to go buy a TV - The TV guy go buys a computer - The computer guy will go buy a mobile & so on. So money is in circulation which fuels the businesses & inturn economy. So one source stops then one person's transaction is gone, in turn reducing circulation & others income. So more & more spending has to happen for economy to propel.
The bottom line is that remittances are an important factor in the global economy, and help drive growth both at home and abroad especially for poor & developing countries.
A weaker domestic currency makes cross-border shopping and overseas travel more expensive. It’s bad for an import oriented country. If your exports are far higher, then yes it’s good.
For eg: If 1$ = 100 PKR – To Buy a 1000$ ticket you pay 100,000 Rs.
Today’ 1$ = 115 PKR So to Buy same 1000$ ticket you pay 115,000 Rs.
So a job seeker now has to arrange more money to buy the same ticket, which was 15000 Rs less just few months ago.
A devalued currency can result in “imported” inflation for countries that are substantial importers. A sudden decline of 20% in the domestic currency may result in imported products costing 25% more since, a 20% decline means a 25% increase to get back to the original price point.
A nation needs to have a relatively stable currency to attract investment capital from foreign investors. Otherwise, the prospect of exchange losses inflicted by currency depreciation may deter overseas investors.
So in nutshell, we should not be over dependent on other countries. You have to build your economy faster than the population growth, reducing the unemployed population year on year by providing local jobs. It not only reduces your dependency, it grows your economy & strengthens it, so you are not at the mercy of other countries. Only when you have employed your entire population, you will be developed & safer in this cut throat world. So where does the key lie to achieve this.
Population control. Countries in the sub-continent should impose 1 child policy, if not everybody will be doomed. China is very good in economic planning. They think & implement policies for 20-30 years ahead. That’s reason they implemented 1 child policy decades ago which is bearing fruit today. It’s a burden on your economic growth when you have more unemployed than your existing jobs. You can see the result in where China is now with its forward thinking & planning. I again emphasize, your job creation & economy has to grow faster than the population for a country to succeed. If not it’s a never ending, negative struggle, till the day you lose the will & strength to hold this burden anymore. Then you sink with it. There are many other factors, population being one of them.
