These transfers are referred to as workers’ or migrant remittances when migrants or OFWs return home a portion of their earnings in the form of cash or items to support their families. They have expanded quickly in recent years and are now the main source of foreign money for many developing nations.
It is because so many transfers occur through unauthorized methods, it is challenging to determine the precise quantity of remittance flows. In 2022, it is anticipated that officially reported international remittances will top $232 billion, with $167 billion going to underdeveloped nations.
An international technical group is examining the specifics of how to reflect these flows in the balance of payments. It is estimated that unrecorded flows through informal channels are at least 50% bigger than registered flows.
Remittances are not only substantial, but they are also more uniformly spread throughout developing nations than capital flows, such as foreign direct investment, which is mostly directed toward a small number of significant emerging markets. In actuality, remittances are crucial for low-income nations.
How is the money transferred?
Remittance transactions typically involve three steps.
- Step 1 involves the migrant sender paying the sending agent for the remittance using cash, a cheque, a money order, a credit card, a debit card, or a debit instruction issued over the phone, by email, or online.
- In step 2, the sending agency directs one of its agents to transmit the money to the recipient’s nation.
- The beneficiary is paid in step 3 by the paying agent.
The debt owing by the sending agent to the paying agent is often settled through a commercial bank every quarter by an established schedule, as opposed to a real-time payment transfer, as is the case for settlement between agencies. Sometimes informal remittances are settled through the exchange of products.
A fee levied by the sending agent, normally paid by the sender, and a currency-conversion fee for delivering local currency to the beneficiary in another nation is included in the costs of a remittance transaction. Some smaller money transfer companies (MTOs) charge a fee to the recipient to receive remittances, supposedly to cover unforeseen exchange-rate fluctuations.
In addition, by investing money before sending them to the beneficiary, remittance agencies, particularly banks, may make an indirect profit in the form of interest (or “float”). In nations with high overnight interest rates, the float can be large.
Why are remittances helpful?
Remittances are often gifts given by a kindhearted person or family member to another person or home. They are tailored to match the users’ unique needs and so help to lessen poverty.
In fact, according to World Bank studies based on household surveys carried out in the 1990s, international remittance receipts may have contributed to reductions in poverty of close to 11 percentage points in Uganda, 6 percentage points in Bangladesh, and 5 percentage points in Ghana.
Poverty is defined as the proportion of the population living below the poverty line.
How are remittances used?
They might pay for housing, basic necessities, children’s education, and health care in lower-income homes. In homes with more money, they might contribute money for start-ups and entrepreneurial endeavors.
Additionally, they assist in financing imports and the repayment of external debt, and in some nations, banks have been successful in obtaining international financing by using future remittances as security.
Remittance flows typically increase during economic downturns or following a natural disaster in the migrants’ home countries, whereas private capital flows typically decline. They also typically follow a counter-cyclical pattern, being more steady than capital flows.
They frequently give the needy in nations with political unrest an economic lifeline. According to World Bank estimates, they made up around 17 percent of the GDP of Haiti in 2001 and up to 40 percent of the GDP in some regions of Somalia in the late 1990s.
Is there a downside?
Remittances could result in a variety of expenses. If the fleeing employees are highly trained or if their departure results in a labor shortage, the countries that receive remittances from migrants incur costs. Additionally, if remittances are sizable, the recipient nation may experience an increase in the real exchange rate, which could reduce the competitiveness of its economy on a global scale.
Some claim that receiving remittances can also lead to dependency, which reduces recipients’ motivation to work and slows economic progress. Some contend that the countercyclical character of remittances the influence of growth on remittances rather than vice versa may simply be reflected in the negative association between remittances and growth found in some empirical research.
Remittances could also cost people money. Migrants occasionally make big sacrifices, including separating from their families and taking dangers to work abroad. Additionally, they might have to put in a lot of extra effort to save money for remittances.
Can governments boost flows?
Governments frequently provide incentives to boost remittance flows and direct them toward useful purposes. But these regulations pose more of an issue than initiatives to increase access to financial services or lower transaction processes and costs.
Tax benefits could entice remittances, but they could also promote tax fraud. While initiatives to direct remittances to investment have had minimal effect, matching-fund programs to encourage remittances from migrant associations may siphon monies from other local funding objectives. Remittances are, at their core, private monies that need to be handled similarly to other forms of household income.
Instead of focusing on remittances, efforts should be made to enhance the entire investment climate to raise savings and better allocate spending. Remittances should not be considered a replacement for government development aid because they are private monies.
Please read: SLOWER GROWTH IN PHL REMITTANCES IN 2023
Remittances continued to be more resilient than other private capital flows while slowing down during the pandemic, making them even more crucial as a source of foreign inflows for receiving nations. Remittance flows to low- and middle-income nations are predicted by the World Bank to have decreased by 7.0% in 2020, but this fall is anticipated to have been far less severe than the decline in private investor capital.
The World Bank projects that in 2021, remittance flows to poor countries will decrease by an additional 7.5%.
Here come the 2022 – 2023 remittance flows which give a good sign and an increase in favor of remittance companies but are likely to slow in the last quarter.
According to the World Bank’s most recent Migration and Development Brief, released today, officially recorded remittance flows to low- and middle-income countries (LMICs) are predicted to increase by 1.4% to $656 billion in 2023 as economic activity in remittance source countries is expected to weaken, limiting employment and wage gains for migrants.
Additionally, the growth rate of remittance flows for 2022 is revised upward to 8%, reaching $647 billion. Given its durability as a source of external funding, particularly for LMICs with significant external debt, remittance inflows have grown in importance for governments and families in the post-COVID period of slower economic development and declining foreign direct investments.
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