Paper abstract:

The study investigates the question of whether there is a direct relationship between remittances and financial development. Using secondary data on remittance flows to the Kyrgyz Republic for the period from 2005 to 2019, we investigate the relationship between remittances and financial development, focusing on the ratio of bank deposits and loans to GDP. We test causality in the VAR model. We find a positive and significant relationship between remittances and financial sector development. The study also investigates whether there is an indirect link between remittances and financial development. According to the analysis, remittances have a significant positive direct impact on deposits. This, in turn, confirms that there is a direct link between remittances and financial development. In this line, loans affect deposits as well which is confirmed by the results of the Granger Causality Analysis as well as the VAR model. This means that there is an indirect link between remittances and financial development in Kyrgyzstan. This also supports the fact that reducing poverty and improving the well-being of the population also depends on incoming transfers. But it has a non-permanent impact because if the cash flow stops, the welfare of the migrant's family will decrease. Moreover, remittances impact the balance of payments, and a major part of the remittances cover consumer imports.