Finance for Development:Final Project – Digital Artifact

Remittances: Can Private Funds Support Public Endeavours?

Financing the SDGs

• There are 17 Sustainable Development Goals (SDG) and 169 targets

• Together, they represent an ambitious and aspirational vision of what the world could be like in 2030

• A socially and economically inclusive and equitable world that is environmentally sustainable

• A world we want to live in

Financing for Development …

The work on financing for development focuses on:How will we pay for all the work that needs to be done to transform the world we live in to the one we want to live in?

What Do We Need Money For?

• Education so everyone can get a job• Health care so everyone is healthy• Infrastructure to provide everyone services like

transportation, water and sanitation systems, electricity, internet – and of course schools and health facilities

• Environmental protection and remediation• And other good things that people need

Is there enough money?• Achieving the SDGs is expected to cost above $3 Achieving the SDGs is expected to cost above $3

trillion a year (the amounts are not precise trillion a year (the amounts are not precise because it is difficult to collect and aggregate the because it is difficult to collect and aggregate the information)information)

• There is enough money overall but it is not all There is enough money overall but it is not all allocated in ways that contribute to achieving our allocated in ways that contribute to achieving our global development objectivesglobal development objectives

• So financing for development is about leveraging So financing for development is about leveraging more and using what we have bettermore and using what we have better

Where will the money come from?

• The biggest proportion of the money will come from mobilizing domestic resources – for example through taxes

• But for the poorest, least developed countries in particular, domestic resources will not be enough and foreign funds need to be mobilized

Annually foreign funds totalling about US$1.7 trillion flow to developing countries:

• The largest source of foreign funds is profit oriented funds of about US$997 billion flowing to developing countries (although not that much goes to the poorest countries): – Foreign Direct Investment (FDI)– Portfolio Equity– Private Debt– Public Debt– Short term Debt

Social impact funds make up the rest of the foreign funds flowing to developing

countries:• Funds that are not profit oriented (social impact)

flows total some US$670 billion annually, including:– Official Development Assistance (ODA)– Other Official Funds (OOF) – Development Finance Institutions (DFI)– South-South Cooperation– Philantropic Foundations– NGOs– Remittances

Total Value of Resources Flowing to Developing Countries Looks Like This:

One of the biggest is remittances

• As the chart shows, remittances are one of the largest sources of funds flowing into developing countries

• These are funds sent from emigrants back to their families in their home countries

• They total over US$300 billion annually

What are remittances used for• These are private funds – the owner earned

them and is giving them to friends or family to help them meet needs

• The UN reckons that most remittances are used for immediate consumption – food, school fees, health care, improvements to housing

• Some are used to start micro-enterprises• Some are used for investments, often in the form

of buildings

Can these funds be captured for the SDGs?

• Various ideas have been advanced on how these funds can be captured by the public sector for investment in the SDGs:– Lower the costs of transferring money so

more reaches the poor in developing countries (who will use it for e.g. health)

– Sell the diaspora (those living overseas and sending money home) development bonds

– Taxes, for example on financial transactions

Let’s examine each of these ideas for their potential to raise money for the SDGs:– Lowering costs– Diverting funds to diaspora bonds– Financial Transaction Taxes

Lowering costs

• Lowering the cost of transfers will help more money get to the intended beneficiaries– Lowering it from +10% to 7.68% is believed to have

saved migrants and their families US$60 billion since 2009

– However, especially in light of anti-money laundering regulations, there are costs involved that will need to be covered

– Already many banks are moving away from providing transfers to developing countries

Will lowering costs raise funds for the SDGs?

• There will be a limit on how low these costs can go while still ensuring sufficient funds to cover financial intermediaries’ costs

• While lowering the cost of transmitting funds is getting more funds to developing countries, these are private funds, not public funds

What are Diaspora Bonds?• Diaspora bonds are a form of government debt• The idea is that nationals living abroad (the

diaspora) retain emotional ties to the country and will be willing to invest

• Some bonds are sold only to the diaspora, some are open to all but nationals receive a preferential rate

• For countries with large diaspora populations, especially if they have difficulties raising money on the international market or attracting investment, they can be an attractive source of financing.

Will Diaspora Bonds Raise Money for the SDGs?

• India and Israel have successfully issued diaspora bonds

• Other countries like Kenya and Ethiopia have issued diaspora bonds with limited success

• Part of the problem has been a lack of awareness• It also may be difficult to convince people who

have fled due to war, poor economic circumstances, or mismanagement to buy a product sold by their former home country

What might work?

• Strong information campaigns to raise awareness

• Giving diaspora communities a say in how any funds raised will be used

• Regional bonds issued by an institution like the African Development Bank

Will it work?

• The diaspora may buy development bonds to support infrastructure in their home countries– However, this is not a substitute for meeting the

immediate needs of their families which is likely to remain their priority

– There may be a need to introduce social safety nets and better public services to free up more money

– Diasporas will need to be assured that the money will be well used – which will be a challenge in some of the poorest countries with low capacity

What are Financial Transaction Taxes?

• Financial transaction tax (FTT) are one of the methods that have been proposed to raise money for the SDGs.

• FTT involve a small (0.05%) tax on the exchange of financial instruments, such as securities, bonds, shares and derivatives

• FTT could include a tax on remittances, which would allow governments to capture some of the savings generated by lowering transaction costs

Will it Work

• It would be relatively easy to collect at FTT of 0.05%

• Money transfer organizations could collect them and remit them to the governments in the sending countries

• These governments could allocate these funds to support the SDGs

• However, this would require the agreement of these countries

Advantages• If transfer costs are lowered then the tax can be

applied without taking money away from the poor beneficiaries in the receiving country

• If countries applying the tax can be convinced to harmonize around this tax the funds could be used to set up a Trust Fund at an MDB

• The MDB could use the funds to build capacity in developing countries – transparency, budget oversight, financial management, etc. that would aid them in issuing a successful diaspora bond

Generating Public Funds from Remittances

• It is likely that most remittances will continue to be used for immediate needs

• However, given the volume of remittance flows capturing even a small portion of these funds could help to fund the SDGs

• Given the need to improve governance and social safety nets to sell a lot of diaspora bonds, a FTT on remittances might be the fastest way to generate funds and build capacity

Conclusion

• Remittances have been growing rapidly over the last ten years: this is likely to continue

• The transaction costs on remittances have declined since 2009: this trend is also likely to continue up to a limit

• Some of these funds may be diverted to development bonds

• Some may be collected via a FTT• While it is unlikely that the public sector can

capture most of this money it is still worth doing.

Thank You!