Managing Remittances Inflows with Foreign Exchange Intervention

Maria-Angels Oliva and Nika Khinashvili

No 2024/191, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: remittance inflow; remittance recipient; FX volatility; FX risk; FX inflow; Remittances; Commercial banks; Bank deposits; Foreign direct investment; Asia and Pacific; Eastern Europe; Africa; Western Hemisphere; Middle East (search for similar items in EconPapers)
Pages: 45
Date: 2024-09-06
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg, nep-ipr and nep-sea
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