What Are Remittances? - International Monetary Fund

Thus, the number of migrants—and hence remittances—continued to rise even during ... (such as requiring full banking licenses for money transfer operators). 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Modifyyourprofile BacktoBasicsCompilation | Finance&Development |PDFversion IV.EconomicsinAction WhatAreRemittances? Formanycountries,moneytransfersfromcitizensworkingabroadarealifelinefordevelopment DilipRatha Whenmigrantssendhomepartoftheirearningsintheformofeithercashorgoodstosupporttheirfamilies,thesetransfersareknownasworkers’ormigrantremittances.Theyhavebeengrowingrapidlyinthepastfewyearsandnowrepresentthelargestsourceofforeignincomeformanydevelopingeconomies. Itishardtoestimatetheexactsizeofremittanceflowsbecausemanytakeplacethroughunofficialchannels.Worldwide,officiallyrecordedinternationalmigrantremittancesareprojectedtoreach$596billionin2017,with$450billionflowingtodevelopingeconomies.Thesearerecordedinthebalanceofpayments;exactlyhowtorecordthemisbeingreviewedbyaninternationaltechnicalgroup.Unrecordedflowsthroughinformalchannelsarebelievedtobeatleast50percentlargerthanrecordedflows.Notonlyareremittanceslargebuttheyarealsomoreevenlydistributedamongdevelopingeconomiesthancapitalflows,includingforeigndirectinvestment.Remittancesareespeciallyimportantforlow-incomecountriesandaccountfornearly4percentoftheirGDP,comparedwithabout1.5percentofGDPformiddle-incomecountries. Gettingthemoneythere Atypicalremittancetransactiontakesplaceinthreesteps: •Themigrantsenderpaystheremittancetothesendingagentusingcash,check,moneyorder,creditcard,debitcard,oradebitinstructionsentbye-mail,phone,orthroughtheInternet. •Thesendingagencyinstructsitsagentintherecipient’scountrytodelivertheremittance. •Thepayingagentmakesthepaymenttothebeneficiary. Forsettlementbetweenagents,inmostcases,thereisnoreal-timefundstransfer;thebalanceowedbythesendingagenttothepayingagentissettledperiodicallythroughacommercialbank.Informalremittancesaresometimessettledthroughgoodstrade. Thecostsofaremittancetransactionincludeafeechargedbythesendingagent,typicallypaidbythesender,andacurrency-conversionfeefordeliveryoflocalcurrencytothebeneficiaryinanothercountry.Somesmalleroperatorschargethebeneficiaryafeetocollectremittances,presumablytoaccountforunexpectedexchange-ratemovements.Andremittanceagents(especiallybanks)mayearnanindirectfeeintheformofinterest(or“float”)byinvestingfundsbeforedeliveringthemtothebeneficiary.Thefloatcanbesignificantincountrieswhereovernightinterestratesarehigh. Remittancesaretypicallytransfersfromonepersontoanotherpersonorhousehold.Theyaretargetedtospecificneedsoftherecipientsandthustendtoreducepoverty.Cross-countryanalysesgenerallyfindthatremittanceshavereducedtheshareofpoorpeopleinthepopulation(AdamsandPage2003,2005;Gupta,Pattillo,andWagh2009).WorldBankstudies,basedonhouseholdsurveys,suggestthatinternationalremittancereceiptshelpedlowerpovertybynearly11percentagepointsinUganda,6percentagepointsinBangladesh,and5percentagepointsinGhana.Betweenafifthandhalfofthe11percentreductioninpovertyinNepalbetween1995and2004,atimeofpoliticalconflict,hasbeenattributedtoremittances. Inpoorerhouseholds,remittancesmaybuybasicconsumptiongoods,housing,andchildren’seducationandhealthcare.Inricherhouseholds,theymayprovidecapitalforsmallbusinessesandentrepreneurialactivities.Theyhelppayforimportsandexternaldebtservice;insomecountries,bankshaveraisedoverseasfinancingusingfutureremittancesascollateral. Morestablethancapitalflows Remittanceflowstendtobemorestablethancapitalflows,andtheytendtobecountercyclical—increasingduringeconomicdownturnsorafteranaturaldisasterwhenprivatecapitalflowstendtodecrease.Incountriesaffectedbypoliticalconflict,theyareoftenaneconomiclifelinetothepoor.TheWorldBankestimatesthatinHaititheyrepresentedabout31percentofGDPin2017,andinsomeareasofSomalia,theyaccountedformorethan70percentofGDPin2006. RemittancesprovedtoberesilientduringthefinancialcrisisinsourcecountriessuchastheUnitedStatesandwesternEuropeancountries.Thecrisisaffectedmigrants’incomes,buttheytriedtoabsorbtheincomelossbycuttingconsumptionandrentalexpenditures.Thoseaffectedbythecrisismovedtojobsinothersectors.Whilethecrisisreducednewimmigrationflows,italsodiscouragedreturnmigrationbecausemigrantsfearedtheywouldnotbeablereenterthehostcountry.Thus,thenumberofmigrants—andhenceremittances—continuedtoriseevenduringtheglobalfinancialcrisisandevenmoresoinrecentyearsinthefaceofconflictsandnaturaldisasterssuchashurricanesandearthquakes. Therearepotentialcostsassociatedwithremittances.Countriesthatreceiveremittancesfrommigrantsincurcostsiftheemigratingworkersarehighlyskilledoriftheirdeparturecreateslaborshortages.Also,ifremittancesarelarge,therecipientcountrycouldfacerealexchangerateappreciationthatmaymakeitseconomylesscompetitiveinternationally.Somearguethatremittancescanundercutrecipients’incentivestoworkandthussloweconomicgrowth.Butothersarguethatthenegativerelationshipbetweenremittancesandgrowthobservedinsomeempiricalstudiesmaysimplyreflecttheinfluenceofgrowthonremittancesratherthanviceversa. Remittancesalsohavehumancosts.Migrantssometimesmakesignificantsacrifices—includingseparationfromfamily—andincurriskstofindworkinanothercountry.Andtheymayhavetoworkextremelyhardtosaveenoughtosendremittances. Hightransactioncosts Transactioncostsrarelyaffectlargeremittances(forthepurposeoftrade,investment,oraid):asapercentageoftheprincipalamount,theytendtobesmall,andmajorinternationalbanksareeagertocompeteforlarge-valueremittances.Butforsmallerremittances—under$200,say,whichisoftentypicalforpoormigrants—feestypicallyaverage7percent,andcanbeashighas15–20percentinsmallermigrationcorridors(seetable). Cuttingtransactioncostswouldhelprecipientfamilies.Here’show: First,thefeeshouldbealowfixedamount,notapercentage,becausethecostofremittanceservicesdoesnotdependontheamountofprincipal.Therealcostofaremittancetransaction—includinglabor,technology,networks,andrent—isestimatedtobesignificantlybelowthecurrentleveloffees. Second,competitionwouldbringpricesdown.Newmarketplayerscanbeencouragedbyharmonizingandloweringbondandcapitalrequirementsandavoidingoverregulation(suchasrequiringfullbankinglicensesformoneytransferoperators).Theintensescrutinyofmoneyservicebusinessesformoneylaunderingorterrorismfinancingsincethe9/11terroristattacksontheWorldTradeCenterhasmadeitdifficultforthemtomaintainaccountswiththeircorrespondentbanks,forcingmanyintheUnitedStatestoclose.Regulationsarenecessary,buttheyshouldnotmakeitdifficultforlegitimatemoneyservicebusinessestomaintainaccountswithcorrespondentbanks.Arisk-basedapproachtoregulation—checkingonlysuspicioustransactionsandexemptingsmalltransactionsbelow,say,$1,000fromidentityrequirements—canreducecostsandfacilitateflows. CompetitionhasspurredreductionsinfeesintheUS–Mexicocorridor,whereremittancefeesfellmorethan50percentfromover$26(tosend$300)in1999toabout$12in2005,andhaveleveledoffsincethenataround5percentfor$200inthefirsthalfof2017.Somecommercialbanksprovidefreeremittanceservices,hopingtoattractcustomersfortheirdepositandloanproducts.Andinsomecountries,newremittancetools—basedoncellphones,smartcards,ortheInternet—haveemerged. Third,nonexclusivepartnershipsbetweenprovidersandexistingpostalandotherretailnetworkswouldhelpexpandremittanceserviceswithoutlargeinvestmentstodeveloppaymentnetworks. Fouth,poormigrantscouldbegivengreateraccesstobanks,whichtendtochargeless.Bothsendingandreceivingcountriescanincreasebankingaccessformigrantsbyallowingorigin-countrybankstooperateoverseas;byprovidingidentificationcards(suchastheMexicanmatriculaconsular)thatareacceptedbybankstoopenaccounts;andbyfacilitatingparticipationofmicrofinanceinstitutionsandcreditunionsintheremittancemarket. Boostingflows Governmentssometimesofferincentivestoincreaseremittanceflowsandtochannelthemtoproductiveuses.Butsuchpoliciescanbemoreproblematicthaneffortstoexpandaccesstofinancialservicesorreducetransactioncosts.Taxincentivesmayattractremittances,butalsomayencouragetaxevasion.Matching-fundprogramstoattractremittancesfrommigrantassociationsmaydivertfundsfromotherlocalfundingpriorities,whileeffortstochannelremittancestoinvestmenthavemetwithlittlesuccess.Fundamentally,remittancesareprivatefundsthatshouldbetreatedlikeothersourcesofhouseholdincome.Effortstoincreasesavingsandimprovetheallocationofexpendituresshouldbeaccomplishedthroughimprovementsintheoverallinvestmentclimate,ratherthanbytargetingremittances. DILIPRATHAisheadoftheGlobalKnowledgePartnershiponMigrationandDevelopmentandleadeconomist,migrationandremittances,intheWorldBank. References Adams,RichardH.,Jr.,andJohnPage.2003.“InternationalMigration,Remittances,andPovertyinDevelopingCountries.”WorldBankPolicyResearchWorkingPaper3179.Washington. ———.2005.“DoInternationalMigrationandRemittancesReducePovertyinDevelopingCountries?”WorldDevelopment33(10):1645–66. Gupta,Sanjeev,CatherinePattillo,andSmitaWagh.2009.“ImpactofRemittancesonPovertyandFinancialDevelopmentinSub-SaharanAfrica.”WorldDevelopment31(1):104–15.