Abstract
South Asia is one of the top remittance recipient regions in the world. Remittances constitute a significant portion of GDP and have helped South Asian countries to minimize a shortage of foreign reserves. Remittances have been an important source of income for many families in the region too. Despite the significant role of remittances at the local as well as national level, the impact of remittances on financial development has not been adequately studied in the case of South Asia. This paper utilizes a panel cointegration approach to examine the impact of worker remittances on financial sector development in the top remittance recipient countries in South Asia. We find evidence of a long-run relationship between remittances and financial development. Our test results show support for a positive and significant impact of remittances on financial development. The Pooled Mean Group tests suggest that a 1% point increase in remittances increases the credit to the private sector by greater than 1% points. The positive and significant impact of remittances on financial development is robust. The results support the existence of bidirectional causality between remittances and financial development in the long run.
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