Filipino Migrant Workers Remittances, External Debt, and the Philippine Economy

Preliminary Analysis Trends and Issues

Regional Conference on MigrationPeople's Global Action (PGA)

October 24, 2008

James Matthew MiraflorResearcher

Freedom from Debt Coalition

Context: OFW remittances and its Current Role in the EconomyThe Global Forum on Migration on Development

(GFMD) will be held in the Philippines.The Philippines has the highest remittances per

Gross Domestic Product (GDP, about 10%), and the third largest recipient of dollar remittances, in the world today. The Bangko Sentral ng Pilipinas (BSP) records show that

US $14.4 billion dollars were remitted in 2007, a 13.23% increase from 2006’s US $12.7 billion dollars.

After more than three decades of pursuing labor migration as a policy, the Philippines today is one of the world’s top labor-sending countries.Total cumulative migration now accounts for 8.7 million

Filipino migrant workers across 197 countries,Average of 3,000 Filipinos leave each day to work

overseas

OFWs: A Foreign Currency Suction

As it stands, the growing OFW remittances remain as one the primary causes of the growth of our foreign currencies.OFW remittances doubled in less than a decade, from

US$ 6.79 billion in 1999 to US$ 12.6 billion in 2006.Gross International Reserves (GIR) doubled from US$

15.06 billion in 1999 to US$ 33.75 billion in 2006.

Situation as of end-January 2008: The Philippines’ gross international reserves reached

a record high of $34.4 billion. The peso broke into the 41:$1 level for the first time in

seven and a half years .

OFWs: A Foreign Currency Suction

OFW Remittances and GIR (in billion US dollars)

18.49

22.97

12.76

6.05

10.69

8.557.58

6.896.03

6.79

16.2317.0616.3615.6915.0615.06

-

5.00

10.00

15.00

20.00

25.00

1999 2000 2001 2002 2003 2004 2005 2006

OFW Remittances

Gross InternationalReserves

Source: Bangko Sentral ng Pilipinas, Philippine Overseas Employment Authority

Immediate Effects on Monetary and Macroeconomic StatusRepercussions of Peso Rise

While the strengthening of the peso had acted as a buffer against rising oil prices and had done much to reduce the value of foreign debt, the phenomenon is largely a negative development for at least three sectors,

1) the Overseas Filipino Workers (OFWs), whose remittances decrease in value,

2) the Export and Tourism industries, which earn relatively less due to relatively decreasing value of foreign currency, and

3) the Business Process Outsourcing (BPO) industry which had suddenly become more expensive.

Immediate Effects on Monetary and Macroeconomic StatusThe Bangko Sentral Dilemma

In end-2007, BSP expected a net loss of P41 billion, a turnaround from the P3.79 billion in net profit last year, due to heavy foreign exchange losses arising from the dollar’s weakening against the peso.

The central bank is expected about P67 billion in losses from foreign exchange fluctuations, a reversal of the P3.8 billion in gains in 2006.

To prevent the peso from appreciating, the administration had to conduct “sterilization measures” – buying dollars off the system in order to maintain the exchange rate, resulting in a marked increase in the GIR.

Immediate Effects on Monetary and Macroeconomic StatusDollar Inflows and Inflationary Pressure

Remittance recipients will have to buy pesos using the dollars they received in order to make use of the fruits of OFW labor.

This pressures the government to print more money in order to satisfy peso demand, maintaining the exchange rate (sterilization).

However, printing more money (a form of inflation tax) may exacerbate inflationary pressures, effecting a “demand-pull” inflation on top of the current “cost-push” one we are experiencing (hiked-up oil and food prices, etc.) – similar to China’s overheating

The Causes of Migration

The main reason why OFWs are going out of the country, in the first place, is the largely unabated unemployment. From 2.24 million people unemployed in 1988, it jumped

to 4.25 million in 2004.

Labor exportation policy (LEP) evolved from being a stop-gap solution on unemployment (as invented by the Marcos administration, with then Labor Secretary Blas Ople as the brains) to a full-blown “development” strategy for the government.

Domestic unemployment, reliance on overseas employment.

Persons Unemployed vs. OFWs Deployed (in millions)

2.642.24

2.212.03

2.72 2.59

2.50

2.62 2.70

2.55

3.14

3.10

3.46

3.65

3.87

3.93

4.25

4.13

0.990.930.87

0.890.870.840.840.830.75

0.660.650.720.700.690.620.450.460.47

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Persons Unemployed

OFW Deployment

Source: National Statistics Office, POEA

LEP, a Balance of Payments troubleshooter

Another reason for the exporting labor is to help in mitigating the Balance of Payments (BoP) problems of the government, problems which are consequent of a liberalized and export-subtituting economy.

Moreover, due to massive debt service requirements, the government is bothered continuously by a financial hemorrhage.Induced by an “automatic appropriations

provision” on debt service in budget lawThis is until the OFWs came into the picture

and brought home the dollars.

Paying Debts through Migrants’ Labor In the macroeconomic perspective, resource outflow due to

external debt service was neutralized by OFW remittances.

Source: Philippine Overseas

Employment Agency, OFW Remittances,

Bureau of Treasury for

Debt Service, BSP for

currency exchange

OFW Remittances versus Foreign Debt Servicing (in billion pesos)

169.22

201.44

265.59 267.39

307.55

355.35

410.78

479.16

588.81

654.84 666.84

49.43 62.22 68.8688.84

107.81

157.03175.10

209.27235.11

276.17

172.83

0.00

100.00

200.00

300.00

400.00

500.00

600.00

700.00

800.00

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

OFW remittances

Foreign Debt Service

The Role of IFIs: Development Debacles, Champions of “Debt Sustainability” Framework

It can be remembered that our economic system, at least much of it, was a product of structural adjustments imposed to us by policy conditionalities attached to loans peddled to the our goverments by International Financial Institutions (IFIs) such as the IMF and World Bank.

The IFIs are also the ones which imposed the “automatic appropriations provision” in the budget law, according to their framework of “debt sustainability”.

Remittance-dependence is a direct consequence of an IFI-imposed “debt-driven” development framework.

GFMD in the Philippines, what does it mean for us?

The forum is purportedly advancing its singular objective: to highlight migration as an important economic strategy for nations. Showcasing the Philippines as the primary model, GFMD

will endorse methods by which countries can take advantage of remittance flows.

In fact, OFW remittances have become a major source of the country’s foreign exchange earnings, exceeding private investment flows and official development assistance (ODA).

With the gap still increasing, official records show that in 2006, the total remittances was $2 billion higher than the total ODA of $9.5 billion and $2.92 billion net of foreign direct investments of the same year.

New Paradigm: Employment as Aid, Remittances as FfD – A CritiqueIn a period of increasing budgetary constraints

among the developed countries, having resorted to massive deficit spending to bail-out their financial institutions at the wake of a global meltdown, they are to cut-back on aid spending.

Their renewed “commitment” to ensure employment of migrant workers from developed countries is merely a way to counter-balance their unified stand to renege on the international commitment to give 0.7% of their GDP to ODA to Southern nations.

The move to replace aid with employment completely puts into the backburner the concept of aid for social justice, as reparation of centuries-long exploitation of the Southern countries by the Northern ones.

The Focus on Remittance: Who’s to Gain?

The call to focus on migration as a development strategy would only encourage more supply of migrant workers, increasing the demand for foreign employment which may facilitate a “race to the bottom” with respect to wages and working standards.

Also, the transfer of remittance are facilitated mostly by international banks,which will gain the most in this setup.

Recommendations

Effective Education and Domestic Employment with Adequate Wages for National Development No effective national development policy. Labor supply remains to be services-driven and export-

oriented, primarily compelled by low internal employment rate and the macroeconomic value of foreign currency remittances of OFW.

Local skills-training is unduly influenced by global labor demand.

Solution begins with labor empowerment through education followed by sustainable employment through government-spurred job-creation.

Generate jobs at home!

RecommendationsGovernment’s Budgetary Allocation to Enhance

Human DevelopmentNeed for government’s aggressive spending to

improve the quality of education and health services - in this way, OFW families can expect better returns to their investments for their families.

Enhanced State Protection of Migrants’ Domestic Investmentse.g. education insurances, and other pre-need

industries, public insurance funds which invest in speculative markets (GSIS, SSS, Pag-ibig)

A growing amount of OFW remittances go to the real estate industry, a volatile industry which is vulnerable to price speculation.

The state should ensure the stability of these industries.

In the end, remittances cannot sustainably replace strong economic and social fundamentals as the main driver of progress. At most, the dependence on remittances is an act of desperation both on the individual family level and the macroeconomic level – which are both saddled with enormous debts.

The domestic economic crisis and the global financial crunch should already serve as starting point for a strategic resolution of the problem.

Thank you.

Freedom from Debt Coalition. #11 Matimpiin Street, Brgy. Pinyahan, Quezon City, Philippines 1100. http://www.fdc.ph. mail@fdc.ph. +63(02)9246399 (telefax). +63(02)9211985.