Issue 5, 2014. October-November


Getting More Bang from the Remittance Buck

Remittances are an important part of the Georgian economy but they are largely ignored by policy makers and researchers. Dollars and euros from abroad are an important source - at times the only source - of income for some Georgian families. But is the Georgian economy making the most of this valuable resource?

Guy Edmunds

Remittances may be the unsung hero of the Georgian economy. Remittances from abroad amounted to $1.477 billion in 2013, or 9.3% of GDP - similar to agriculture and the services sector. Add in money sent by informal channels (such as handing cash to friends or bus drivers), and the total is higher still.

On a micro level, remittances help to keep some of the poorest families in Georgia afloat. In macro terms, they provide an important counterweight to the country's trade deficit, and help to balance the economy. They are also a more stable source of foreign exchange than Foreign Direct Investment (FDI) - particularly in times of crisis. When Georgia's GDP contracted by 7% in 2009, remittances decreased by about 16%, while FDI shrunk by over 57%.

Of course, remittanceshave vices too. Most notably, they can subsidize unproductive areas of the economy (the so-called "Dutch Disease"), and create a culture of dependency among recipients. Nor are they immune to geopolitics. For example, over half of Georgia's remittances come from Russia. As a recent report from the European Council on Foreign Relations points out, that gives Moscow significant leverage over the Georgian economy, should it choose to use it. A remittance ban, although hard to implement, could be one way of inflicting damage; expelling Georgian migrant workers (as happened in 2006) would be another.

How to Spend It

Yet despite their importance, Georgian remittances receive comparatively little attention from policy makers and researchers. As a result, an important question remains largely unanswered: is Georgia making the most out of this cash cow?

Most remittance money is spent on basic needs. In the 2012 study Socio-economic Problems of Return Migration in Georgia, researcher Mirian Tukhashvili found that over half of it was spent on food, healthcare and the like. Payment of debts accounted for approximately 10% of remittances expenditures as did children's education and property purchases. This is not a bad thing: economists and other scholars praise spending on health and education as contributions to "human capital formation." But equally important for Georgia's longer-term development is the proportion of money saved (16%) or invested in businesses (less than 5%).

There is only so much the government can do. It cannot control where these remittances go, or how they are used. But it can enable recipients to make the most of the money they receive. Here, the authorities have got two things right. Effective regulation means that sending remittances to Georgia now costs less than 1% of the total sent; worldwide, the average is around 9%. Neither does the government tax the remittances sent to recipients. That is wise; experience elsewhere suggests it simply encourages senders to use informal methods of transfer.

"Bank" to the Future

Encouraging greater financial literacy would be another important step. The country's Soviet past means that concepts such as savings, investment and private pensions are relatively new to Georgian society. As a result, Georgia has a relatively low national savings rate (about 20% of Gross National Income). More than anything else, this is a function of poverty: if incomes rise, savings rates are likely to rise, too.But ignorance of personal finance is also a factor.

Greater use of the banking system would also help, given its role in allocating money efficiently between savers and borrowers. Only 56% of Georgians say they have bank accounts or bank cards, according to 2013 data from the Caucasus Research Resource Centres (CRRC) - despite the fact that all social security and pension payments are made through the banking system. (Any discrepancy here may reflect the fact that many people do not use banking services beyond receiving money).

Moreover, Georgians have mixed feelings about banks. According to CRRC, only 35% of respondents say that they trust banks, while 22% distrust them; 31% appear to be indifferent to them, while 9% say they don't know. Instead of opening up savings accounts, many Georgians prefer to stash their cash at home. Another problem is geography. Banks and other micro-finance institutions are expanding their presence in Georgia: since January 2012, for example, the numbers of bank branches and services centers have increased by 12% and 37%, respectively. But since roughly half of remittances flow to the countryside, access remains a difficulty for those in remote areas.

One idea that could work is "mobile" banking, which enables people to access basic banking services and to receive remittances through mobile phones. The idea has a strong track record in other countries, such as Kenya and the Philippines, and has strong potential in Georgia, where 89% of households claim to have a mobile telephone, according to CRRC. The "Kerketi" mobile wallet system, which allows people to transfer money and make payments, was launched in Georgia in 2013, and has ambitious roll-out plans. Banks and micro-finance institutions could also expand the range of remittance-related services available. For example, Crystal and Bank Constanta offer special loans that use future remittance flows as collateral. For now, the numbers taking advantage remain small. But the idea has potential to expand.

Finally, banks looking for additional sources of liquidity to fund their growing business could "securitize" future remittance flows as the basis for borrowing money. "Inbound transfers are a well-tested source of securitized lending globally," says Thea Jokhadze, Chartered Financial Analyst (CFA), who is currently Chief Financial Officer of the Georgian Co-Investment Fund.

"Thus far, a combination of market factors has not rendered such instruments attractive for Georgia," she adds,"but as the growth of the Georgian economy shifts into higher gear, this alternative source of cheap and convenient financing for banks will be worth revisiting. So called future-flow securitizations are difficult and costly to set up, but once structured, can be re-used indefinitely."

Guy Edmunds works for the Danish Refugee Council in Tbilisi. DRC is currently implementing a project called "Enhancing the Role of Georgian Emigrants at Home" in partnership with the International Centre for Migration Policy Development, which is funded by the European Union.