Effect of Remittance Inflows on External Debt in Developing Countries

This paper analyzes the effect of remittance inflows on external debt in developing countries, by identifying international reserves as a potential transmission channel. Using panel data over the period 1970–2017 and covering 50 low-and middle-income countries worldwide, we find a positive and significant effect of remittance inflows on the external debt-to-GDP ratio. We also find a negative and significant effect of international reserves on external debt. After controlling for international reserves, the effect of remittance inflows on external debt increases;it remains positive and significant. The results suggest that the role of international reserves as a self-insurance mechanism, and the Dutch disease effect related to remittance inflows are at play. In addition, we find negative and significant effects of economic growth and savings-investment gap on external debt. We also find positive and significant effects of the nominal exchange rate and the United States lending interest rate on external debt. We discuss the policy implications of these findings, while highlighting factors that policymakers should focus on for containing external debt in developing countries in the post-COVID-19.

Preserving economic and financial stability in an emerging market country during the pandemic crisis: Croatia’s experience

The Croatian authorities’ response to the pandemic crisis was considerably greater in size and scope than their reaction to the 2008-09 global financial crisis. This paper aims to identify the main factors that allowed the authorities to respond so ambitiously this time. In particular, the paper explains how solid macroeconomic fundamentals backed by a steady inflow of EU funds enabled the Croatian government and the Croatian National Bank to take bold steps to restore stability in key financial markets and provide liquidity support to the economy without compromising currency stability and fiscal sustainability. In addition, as an EU member state, Croatia was in a position to benefit from a currency swap line with the ECB, as well as from the EU’s common recovery facility, which reduced concerns about the pandemic- induced rise in government debt. Finally, the paper identifies some positive external factors that were beneficial for all emerging market economies. © 2022, Public Sector Economics. All rights reserved.