TWO pieces of economic news earlier this week have revealed, once again, just how vulnerable our Overseas Filipino Workers (OFWs) are to what economists dryly refer to as ‘external factors.’
On Monday, the Bangko Sentral ng Pilipinas (BSP) published data that showed the growth rate of OFW remittances slowed in April. The month’s total of $2.23 billion represented a year-on-year increase of 4.9 percent over the $2.12 billion sent to the country in April 2014. While still positive, this was a slower pace than the 5.4 percent expansion recorded for the same month a year earlier, and considerably less than the 11 percent posted in March.
At the same time, the peso is being battered in the local currency market. In trade on Monday, the peso slipped to P45.20 to $1, the lowest the local unit has been in 15 months; the peso closed at P45.29 back on March 21 of last year.
The two pieces of news are related, but in ways that are perhaps not obvious to the casual observer. Ordinarily, weakness in the peso with respect to the dollar is a positive development for remittance-receiving families, because they will receive more pesos for each dollar sent. However, a weakening peso for all practical purposes raises inflation by raising the peso-relative cost of all imports. Technically, this also includes the foreign money that is being “imported” by remittance-receiving families; these families, however, are unlikely to notice; the burden of the extra costs of money is instead borne directly by banks and other businesses (for instance, pawn shops) that convert the dollars to pesos for local use. Families feel the pinch later, when more expensive imports contribute to higher prices of goods and services.
Changes in exchange rates affect remittances in a hidden way as well. Remittances that start as amounts of foreign currency often undergo conversion two or more times before reaching their intended recipients. For example, a remittance from a worker in Germany, paid in euros, generally is coursed through a US bank, where it is converted to dollars, and then transmitted to the Philippines, where it is converted to pesos. A relative weakness of one or more of the three currencies involved will affect the final amount received, almost always negatively.
OFW remittances contribute more than 10 percent of the Philippines’ GDP, and when growth in remittances lags behind growth in the number of OFWs, it must be taken as a warning that the situation could have a broadly negative impact: In simple terms, remittances have to grow at or above the rate of GDP growth in order to contribute positively to the wider economy; when they do not, as is the case after the April numbers, GDP growth will be reduced.
For five years, the Aquino Administration has treated OFWs as an afterthought, having no real policy other than to react – usually too late – to various crises. The current indicators of remittance levels and peso exchange value are not a crisis yet, but because these factors potentially affect much more than just the OFW sector, the government should not waste a moment waiting for the situation to clear up on its own. Taking the proactive approach and examining costs of remittance services, the impact of currency controls, as well as the exchange rate policy, all with a mind toward increasing where possible value for money for remittances would not just make the sacrifices of our ‘modern-day heroes’ more worthwhile, but would help to prevent or minimize significant shocks to the entire economy.