The evil in the heart of the good: Unfolding the role of remittances in the escalating trade deficit figures of the MENA region.

The MENA region is ranked first in terms of remittance receipts (3.83% of GDP) worldwide, it has also the highest non-oil trade deficit among other developing regions (World Bank, 2018). This study uses panel data from 11 Labor-abundant MENA countries (main destination of remittance receipts) to examine the trade balance effect of remittances. We postulate that the main driver of the trade deficit in the MENA region is the weak industrial sector, which fails to provide domestic substitutes for imports of manufactured products (El Wassal 2012). Based on our hypothesis, we imply that in countries with weaker domestic absorptive capacity, the excessive demand of remittance-recipient families will not be compensated by domestic production, but rather imports of the consumption good, thus worsening the trade balance deficit.

The empirical work from the MENA region on the trade balance effects of remittances is limited. Bouhga-Hagbe (2004) supported the evidence of this effect in Morocco, wherein remittances covered the trade deficit and contributed to the observed surpluses of the external current account. Kandil and Mirzaie (2009) showed that remittances promote both exports and imports in Jordan while nourishing only exports in Tunisia. In the case of Egypt, El Sakka, and McNabb (1999) reported that imports financed through remittances have a high-income elasticity, thereby implying
that they are either consumer durables or purchased by high-income groups. In a study, involving interviews of 304 remittance-receiving families across 16 Egyptian governorates during 2015–2016, Farzanegan et al. (2017) examined further the causes and effects of
remittances. Using a panel of 17 remittances receiving countries in the MENA and Central Asia regions over a period of 1990–2009, Abdih et al. (2012) concluded that a significant portion of remittances is
used to purchase foreign goods.

Our empirical results confirm the import triggering effects of remittances, however these effects are mitigated as the investment capacity of a country gets stronger and become able to neutralize foreign purchases with domestic products. Many policymakers are pushing to increase remittances as a reliable source of income by reducing transfer costs. The real challenge is promoting the productive use of these remittances in financing domestic production capabilities and non-oil exports. The channel of promoting domestic capital formation through encouraging private savings and productive use of remittances could improve the balance of trade. This can be realized by promoting financial services, which targets repatriates and their families, like saving incentives, interest rate premium on migrant’s deposits, and the issuance of remittances back bonds. Although
remittances may carry some development-related outcomes, such as income smoothing, reducing poverty, and promoting education, the applied literature is still equivocal about the magnitude of these effects and the governing conditions to realising these effects. Our paper is an
example of a study that has highlighted a rather countercyclical effect of the
inflow of remittances on the recipient countries’ trade balance. This piece of
evidence among others suggests that promoting remittances does not always come in favour for the recipient economies and is conditioned to the prevailing economic and institutional environments.

Reference:

Mohammad Reza Farzanegan & Sherif Maher Hassan (2019) How does the flow of remittances affect the trade balance of the Middle East and North Africa?, Journal of Economic Policy Reform, DOI: 10.1080/17487870.2019.1609357

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