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TABLE OF CONTENTS

ABSTRACT

  1. INTRODUCTION
  2. Definition
  3. Treatment of Remittance in the Canadian BOP
  4. Migrants’ Funds
  5. Other Issues
  6. BACKGROUND AND HISTORY

2.1 Overview of Developments

2.2 Reasons for global discrepancy

2.3 The Compilation Guide to deal with measurement issues

  1. Data Sources

3.1International Transaction Reporting System (ITRS)

3.2Direct Reporting System (DRS)

3.3Household Surveys (HS)

3.4Models and Estimations

  1. Proposed Changes - BPM6
  2. Current Trends and Analysis – Canada
  3. BEA Model and its Modified Version
  4. Projections
  5. Conclusions and Suggestions for Future Work

MEASURING MIGRANTS’ REMITTANCES: ISSUES AND CHALLENGES

By Mukesh Ralhan

Abstract

The conceptual and methodological problems associated with measurement of migrants’ remittances have drawn the attention of the statistical agencies and central bankers around the world. This has resulted in a host of meetings, seminars and conferences at the international level organized by the International Monetary Fund (IMF), the United Nations (UN) and the World Bank (WB) and other agencies. The paramount interest shown in this area stems from studies showing that flow of funds to developing countries in the form of remittances stimulate growth in investment, jobs and income etc. of the recipient countries. Moreover, as private capital flows continue to show a downward trend, workers’ remittances have become an increasingly prominent source of external funding for many developing countries. (Ratha, Dilip, Global Development Finance, 2003).

Our paper presents an overview of developments in regard to Migrants’ remittances and how these are currently measured and captured in Canadian Balance of Payments (BOP) framework at present. Albeit, a blend of methodological frameworks would be the correct way to arrive at remittance outflows projections, this is not feasible in the case of Canada as the existing data sources like Citizenship and Immigration Canada (CIC) or Survey of Household Spending (SHS) etc. suffer from their focus on inflows and poor quality due to extremely low rate of response respectively. Moreover, SHS is not designed to capture quality information in regard to immigrants. Further, since Canadian BOP data compilation framework is mostly survey-oriented, we do not have access to the International Transactions Reporting System (ITRS) database, as is the case with some other countries that rely on this system for their BOP statistics. At present, there is no mechanism for capturing remittance related data through the Direct Reporting System either i.e. in particular from the specialized remittance sending agencies, known as money transfer operators (MTOs). In the light of these problems, the Bureau of Economic Analysis (BEA), USA imputes remittance statistics based on a model developed by them. Our paper adopts the modified version of the basic model of BEA for estimation of remittances in Canada. Since some of the definitions, concepts and methodologies in computing BOP statistics are different in the US and Canada, we have modified various parameters of the models to make it suitable for Canadian BOP framework. We have used survey results from various international surveys on remittances as also various Canadian surveys viz. Labour Force Surveys (LFS), Survey of Household Spending (SHS), Longitudinal Survey of Immigrants to Canada (LSIC), Labour Market Activity Survey (LMAS), Survey of Labour and Income Dynamics (SLID), Longitudinal Survey of Immigrants to Canada (LSIC) and blended it with the modified version of the BEA model to arrive at the remittance projections. Based on very conservative estimates, our projections show that the personal remittances by immigrants in Canada aggregated to around $14 billion for the year 2006 while the published data indicate these to be $ 7 billion. Our preliminary results indicate that the previous remittance estimates suffer from gross under-estimation. In the end, we suggest ways to improve the remittance statistics in accordance with international practices and standards and also the future course of action.

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SPECIAL ACKNOWLEDGEMENTS

Our study has benefited greatly from the discussions we had with the World Bank representatives Matteo Vaccani, Consultant, and Emiko Todoroki, Financial Sector Specialist, Financial Market Integrity, Financial and Private Sector Development, Washington, DC, who visited Canada on 16 November 2007 in connection with preparation of report focused on the bilateral remittance corridor between Canada and the Caribbean, with a specific focus on the Canada-Haiti and Canada-Jamaica corridors.

1. Introduction

1.1Definition: In terms of Balance of Payment framework (Chapter 9 of BPM5), compensation of employees is a component of income while workers’ remittances is a component of current transfers; both are part of current account. Migrants’ transfers are a component of capital transfers, which is part of the capital account. The definitions of these components, according to the BPM5, are:

Compensation of employees comprises wages, salaries, and other benefits earned by individuals – in economies other than those in which they are residents – for work performed for and paid for by residents of those economies.

Workers’ remittances cover current transfers by migrants who are employed in new economies and considered residents there. A migrant is a person who comes to an economy and stays there, or is expected to stay, for a year or more. Workers’ remittances often involve related persons.

Migrants’ transfers are contra-entries to the flow of goods and changes in financial items that arise from the migration of individuals from one economy to another.

1.2Treatment of Remittance in the Canadian BOP:

In the Canadian context, the terminology used for ‘Workers’ remittances’ is slightly different and is shown as ‘Other Private Transfers (Remittances)’ under Private Transfers in the Current Account. In the Capital and Financial account, the migrants’ transfers and compensation to employees are captured as short-term receivables/payables to non-residents (although it is not exactly clear how compensation to employees is treated at present). With a view to complying with international standards, Canada introduced major changes in BOP framework after introduction of BPM5. Prior to implementation of BPM5, Capital transfers like migrants’ funds, inheritances and debt forgiveness were treated as current transfers. Subsequently i.e. after the implementation of BPM5, these were excluded from the current account and included in the capital account. The Canadian practice in regard to migrants’ effects was to exclude it from the Capital account whereas the international standards included these as part of the Capital account. In Canada, however, there were no estimates available for Migrants’ funds although there have been some attempts to measure them (Wai-yong, 2001. (See Annexure I: Current Treatment of Remittances in the Canadian BOP framework)

1.3Migrants’ Funds:

The general treatment meted out to the funds brought by the Migrants’ Funds (Landed Immigrants), is to record it in the Capital Account as “$ in possession” (under Other Assets). The practice is to record “$ in possession” by immigrants in the investor class under direct investment. It is generally assumed that 80% of “Total $” by immigrants in the investor category will be retained abroad. The above estimation, however, is subject to some adjustments like percentage of new perspective immigrants who are refused an entry visa, 2% of “total $” for the landed immigrants who have been refused returned permits and percentage of “total “ for landed immigrants who return to their home countries. There were other main changes in vogue prior to the changes proposed by Wai-yong (2001): 1) No adjustment to be made to investment in houses by immigrants upon arrival, 2) Adjustment made to reflect unsuccessful applicants, 3), Adjustments made to reflect immigrant outflow, 4) Money invested by investors recorded as direct investment.

1.4Other Issues:

These estimates relied completely on the Citizenship and Immigration Canada for projections of inflows. Moreover, the projections did not take into account the developments in measuring workers’ remittances or migrants’ funds as per international standards. The funds brought by the Landed Immigrants constitute only one part of the remittances i.e. inflows and the data provided by the Citizenship and Immigration Canada is not adequate to capture the dynamics of migrants’ funds especially for outflows. It can reasonably be assumed that the existing practice of measuring migrants’ funds is not commensurate with the methodologies, concepts and practices followed by other countries.

2. Backgrounds and History:

For expositional purposes, the paper is divided as thus: The introductory part deals with conceptual, definitional and methodological issues of personal remittances in the context of Canadian BOP framework; the second part focuses on the historical background; Section 3 presents an overview of existing and potential data sources; After a review of the proposed changes in BPM6 in Section 4, the paper discusses the current trends and analysis of remittances in Canada in Section 5; Section 6 and 7 relate to the BEA methodology and projections for Canada based on the modified version of the BEA model. Finally, we summarise the conclusions emanating from our study in the last part.

2.1The table below provides a succinct overview of the developments in regard to remittance flows:

Year / Details
SeaIsland
2004 / G-8 Heads of State underline the importance of accurate measurement of remittance flows. G-7 Finance Ministers and others called for the establishment of a statistical working group, to be led by the World Bank, for improving remittance data.
January 2005 / World Bank and International Monetary Fund together with numerous partners, agreed to establish the International Working Group on Improving Data on Remittances
January 2005 / Technical Sub-group on the Movement of Natural Persons (TSG) set up to review concepts and definitions relating to remittances.
Center for Latin America Monetary Studies (CEMLA) involved in the project to improve central bank remittance reporting and procedures.
September 2005 / CEMLA Remittances International Steering Committee organized seminar/meeting on Remittances in Ottawa.
June 2006 / “Luxembourg Group” set-up by the Eurostat, the statistical office of the European Union, to prepare practical guidance on data sources and compilation for remittances.
First Meeting of the Luxembourg Group on Remittance Statistics held in Luxembourg.
CEMLA prepares its own draft remittance compilation guide for Latin American and Caribbean (LAC) countries.
January 26, 2007 / The IMF constitutes a committee to prepare ‘Remittances Compilation Guide’ and sets up various sub-groups to complete the task. The draft is expected to be released in January 2008.

The growing interaction and continued interest at the national and international levels in compiling accurate remittance statistics stems from the fact that remittance flows especially for developing countries are a big source of developmental finance particular at a time when channels of private funding have either dried up or have become costly (Ratha, 2003).

2.2 Reasons for global discrepancy:

In principle, the combined credits (inflows) and debits (outflows) for all countries should equal zero, as the credits of one country or international organization are debits of another. In practice, however, the data do not offset each other. Statistical discrepancies may reflect the incomplete coverage of transactions, the inaccurate and inconsistent recording of transactions resulting from differences in classification and practices, and the difference in the time of recording transactions. Global total discrepancy has been growing rapidly in recent years because recorded workers’ remittance credits more than doubled in the last five years while recorded debits grew much more slowly (Reinke and Patterson, 2006). Existing data sources from customs authorities and/or through ATM cards where family members have access to migrants’ accounts are not sufficient to capture remittance data. So this is clear evidence that there are problems in extracting data from the BOP framework.

2.3The Compilation Guide to deal with measurement issues:

Aggregate flow data published in the BOP statistics are, therefore, far from perfect. The concepts and methodologies are not applied uniformly across all countries, and data sources and compilation methods are better in some countries than in others. Some countries report no data, or not on all items. Data comparisons and aggregations are therefore difficult, and data users often need to make imputations or estimations for missing values. Some problems are due to different interpretations by countries of definitions and classifications, but overall the paucity of source data is seen as the biggest constraint to improving remittance data (Reinke and Patterson, IMF, 2006). According to Reinke and Patterson (2006), the other problems associated with remittances are:

  • Countries receiving large inflows are often those with relatively weak capacity and limited resources, even though remittances are a larger item in the balance of payments statistics.
  • Remittances made through informal channels or through money transfer operations are difficult to estimate.
  • Some countries like Bureau of Economic Analysis (BEA), USA, use models but parameters are difficult to estimate on a regular basis in a cost-effective manner, and models may lack sufficient data checks. Incidentally, we have used the modified version of the model developed by the BEA as other data sources as identified by the International Monetary Fund (IMF) are difficult to obtain at present in Canada. The next section deals with the sources of data.
  1. Data Sources:

The committee set up by the International Monetary Fund (IMF) for preparing the Remittance Compilation Guide has identified the following sources of data for compiling remittance statistics:

3.1International Transactions Reporting System (ITRS):

Chapter III of the BOP Compilation Guide of the International Monetary Fund (1995) describes the ITRS system as follows:

“An international transactions reporting system (that is, a system for reporting international transactions) measures: (1) individual BOP cash transactions that pass through domestic banks and through enterprise accounts with banks abroad, (2) noncash transactions, and (3) stock positions. Statistics are compiled from forms submitted to domestic banks and from forms submitted by enterprises. An international transactions reporting system (ITRS) can provide comprehensive and timely BOP statistics. Most International transactions reporting systems, which were formerly known as foreign exchange record system, evolved as by-product of foreign exchange control systems.”

In regard to “threshold practices”, it further adds: “In many international transactions reporting systems, thresholds are used so that transactions of less than certain amounts need not be reported. Compilers have generally found large numbers of transactions that, in aggregate, account for small values. The use of thresholds prevents undue reporting burdens and processing costs. However, while it may be unnecessary to report small transactions individually, an aggregate record of small transactions should be kept to obtain overall aggregate results and to assist in the process of reconciliation.” IMF recommends higher thresholds limits or periodic sample surveys of small transactions.

The compilation guide states that the ITRS data have typically been reporting on paper, but electronic transmissions are increasingly being used. Until the 1990s, standards for electronic transmissions remained national. However, the movement towards a global marketplace has required an international standard for electronic transfer, from computer to computer of commercial or administrative transactions. Such a standard, known as Electronic Data Interchange for Administration, Commerce and Transport (EDIFACT), has been developed under the auspices of the United Nations. The EDIFACT standard is also used in preparing electronic communications for BOP purposes.

According to the compilation guide, the use of the UN EDIFACT (See Annexure II) standard is steadily expanding on a worldwide basis. As more and more business systems conform to EDIFACT, the process for using these messages to report information to authorities will become more efficient. Ready access to electronic data reduces costs for enterprises and for banks acting as intermediaries in the data collection process. These cost savings stem from the “automatic” nature of data provision. Once reporters have programmed their systems to send relevant data to BOP compilers, there is no necessity for subsequent reporting unless changes occur in reporting requirements or in reporters’ systems. Benefits to BOP compilers include more timely and more accurate data.

The Luxembourg Group is also looking at the possibility of successful compilation methods based on transactions data from ITRS, household surveys, and various approaches using models. The Group aims to assemble compilation guidance that is better than any current practice offering countries a choice of methodologies. Choice in approaches is important due to the variance in countries’ economic and demographic structure, statistical infrastructure and resource establishment, and data requirements. The ITRS may not be an available option for compiling BOP data for Canada, as it did not have extensive exchange control systems or regimes. However, we can always explore the possibility of accessing bilateral transactions data relating to Canada from countries that have ITRS as a source to complement their BOP statistics. The introduction of ITRS in Canada is not considered feasible and practical due to cost and other considerations.

3.2Direct Reporting System (DRS):

According to the IMF, the DRS also can play a significant role in providing data on remittances, in particular from specialized remittance sending agencies, known as money transfer operators (MTOs). Direct reporting requires that MTOs are obliged by legal or regulatory means to provide all necessary data to the data compiling agencies.

The Proceeds of Crime (Money Laundering) and Terrorist Finance Act (PCMLTFA) governs the institutions providing remittances services in Canada. The institutions covered by the Act are required to comply with the client identification, record keeping and reporting requirements. The remitting institutions are expected to verify valid identification as and when an electronic fund transfer of $3,000 or more is involved. The paper on “The Remittance Industry in Canada” by the Balance of Payments Division, Statistics Canada, provides an overview of the remittance industry. The service of money transfer is not regulated in Canada and can be offered by any business. There are also no limitations on transactions, currencies or services, as long as they comply with the government’s regulations governing Canada’s anti-money laundering and anti-terrorist financing regime and do not offer services, such as deposit-taking, that are specific to regulated financial institutions. However, in the light of Financial Action Task Force (FATF) recommendations, there is a call for licensing and registration of money transfer businesses and foreign exchange dealers that are only subject to the PCMLTFA at present. Major global players like the Western Union and MoneyGram mainly dominate the Canadian remittance industry. Other remittance agencies include JNBS, CAM Transfer, Bobby Express and financial institutions and banks. There are also a number of smaller money transfer agents who target immigrant communities from developing countries.