IMF Working Papers

Managing Remittances Inflows with Foreign Exchange Intervention

By Maria-Angels Oliva, Nika Khinashvili

September 6, 2024

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Format: Chicago

Maria-Angels Oliva, and Nika Khinashvili. "Managing Remittances Inflows with Foreign Exchange Intervention", IMF Working Papers 2024, 191 (2024), accessed December 21, 2024, https://doi.org/10.5089/9798400285677.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

In a 157 emerging markets and developing countries sample, remittances continue to grow fast, outpacing other financial inflows (as a share of GDP), particularly in Asia. Without alternative policy instruments, foreign exchange interventions (FXIs) have often been the authorities’ go-to tool to manage the short-term effects of these remittance inflows. However, this practice comes at a cost. This paper shows that FXIs are quick, temporary solutions that often may hinder the development of the recipient country’s financial sector and may not support financial stability over the medium term. The analysis suggests that FXIs act as an insurance tool that, by mitigating FX volatility, protect remittance recipients and tradable sectors from FX risks, encouraging less bank deposits (consistent with more spending) and lower buffers in the banking sector. These costs add to other direct FXI-related costs already identified in the literature. The development of private sector market risk management tools should support longer-term structural reforms required to increase the absorptive capacity of additional FX inflows.

Subject: Balance of payments, Bank deposits, Commercial banks, Financial institutions, Financial services, Foreign direct investment, Foreign exchange, Remittances

Keywords: Africa, Asia and Pacific, Bank deposits, Commercial banks, Eastern Europe, Foreign direct investment, FX inflow, FX risk, FX volatility, Middle East, Remittance inflow, Remittance recipient, Remittances, Western Hemisphere

Publication Details

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