IMF says remittances’ role to continue waning

TIRANA, Nov. 1 – The waning amount and diminishing role of remittances in Albania are likely to continue due to the changing demographics of emigrants and ongoing economic difficulties in host countries, warns the IMF in its latest country report on Albania. Two decades after the massive emigration wave in 1991, migrant workers have either settled down in host countries with family or begun to return to Albania.
In either case, remittances are likely to go down. This is broadly in line with international experiences that remittances show a parabolic pattern with the prolongation of migration, reaching the peak after 10-14 years of migration and decreasing thereafter. In addition, economic difficulties in Greece and Italy are putting additional strain on remittances via reduced migrant wages and employment opportunities. On the other hand, to the extent that a new wave of workers were to leave Albania, either in response to improved labor markets in Europe or increased domestic hardships, the importance of remittances could again increase.
Emigrant earnings and savings, however, are likely to continue coming back. For example, bank deposits in foreign currencies in Albania rose drastically in the aftermath of the 2010 Greek debt crisis possibly due to the Albanian emigrants’ lack of trust in Greek banks. Emigrants’ savings may also enter the economy as travel receipts, real estate purchases, and other business investment as part of the broad FDI.
The shifting pattern of remittances and emigrant earnings could pose policy challenges in coping with exchange rate volatilities and protecting financial stability. The challenge of exchange rate volatility has long been associated with the seasonality of remittances to Albania: large spikes in the summer and Christmas time. The challenge is further amplified by foreign exchange inflows during the summer tourist season. The Bank of Albania has avoided large exchange rate fluctuations by a measured build-up of foreign reserves complemented with well-timed open market operations. An additional risk, however, might arise with the surge in bank deposits from emigrants, which could very well be recycled back to riskier source countries through their banking subsidiaries in Albania.
Declining remittances also present an opportunity in the long run for more robust and dynamic growth. Remittances in theory can reduce the likelihood of employment and the number of hours worked through a relaxed budget constraint and a rising reservation wage.
Based on the 2005 study, it was found that remittances to Albania indeed reduced the likelihood of participating in the labor force for recipient adults between 22-65 years old and the likelihood of attending school for recipient children between 12-17 years old.
Financial flows from migrants in forms such as direct investment have the potential to be more productive than cash remittances as the latter mainly boosts consumption.
The shifting pattern of remittances, if properly harnessed, is thus likely to help the Albanian economy realize its full potential.
More than 25 percent of Albanian citizens are living abroad, making the country the fourth in the world in terms of emigrants to population ratio. Neighboring Greece and Italy attract most of the Albanians, and account for 90 percent of remittances to Albania. Estimates commonly put the Diaspora in Greece at 800,000 and Italy at 300,000. 50 percent of the first generation of Albanian emigrants to Greece and Italy had secondary or higher education. Around 60 percent of Albanian remittances are from Greece, 30 percent from Italy, and the rest from the U.S., Germany, and other European countries.
Remittances played an important role in alleviating poverty and promoting financial development. The 2005 Albania Living Standard Measurement Survey (LSMS) estimated that remittances on average accounted for a third of disposable income of recipient families and 40 percent for rural families. Remittances were mostly used for importing consumer goods, services, and for the purchase or construction of houses. The level and particularly the severity of poverty as a result were greatly reduced among households receiving remittances.
Remittances also helped promote financial development in Albania through the increasing demand of banking access and services from both senders and receivers and raising banking deposits and credit to GDP.
After peaking at $1.305 million (952 million) in 2007, the amount of remittances and their impact on the current account has since declined. Remittances, as a share of GDP, started declining in the early 2000s, from around 15 percent of GDP then to 9 percent in 2009 and an estimated 7.8 percent in 2010.
Remittances traditionally covered more than 60 percent of trade deficits, but the share dropped to less than 40 percent after 2008. Rising FDI has overtaken remittances since mid-2009 as the number one source of financing for trade deficits. Notwithstanding the fall in total amount remitted, the amount transferred through official channels such as banks and monetary transfer operators (MTOs) has been on a steady rise since the early 2000s with the development of the banking system and the elimination of the black market exchange premium.