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Finance & Development
A quarterly magazine of the IMF
December 2005, Volume 42, Number 4

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Sending Money Home: Trends in Migrant Remittances

Over the past fifteen years, international migrant remittances have become increasingly prominent—exceeding $232 billion in 2005, with $167 billion flowing to developing countries. This amount, however, reflects only transfers recorded in the balance of payments. Unrecorded flows through informal channels are believed to be at least 50 percent higher than recorded flows. In 2004, recorded remittances were the second largest source of external financing in developing countries, after foreign direct investment, and amounted to more than twice the size of official aid. Remittances are less volatile than most other sources of foreign exchange earnings for developing countries.

Remittances are the second largest source of finance for developing countries.

While capital flows tend to rise during upswings of economic cycles and decline in bad times, remittances tend to be countercyclical relative to recipient countries' economies. They tend to rise when the recipient country suffers an economic downturn following a financial crisis, natural disaster, or political conflict, as migrants transfer more funds during hard times to help their families and friends.

Not surprisingly, remittances rise during financial crises.

The top three recipients of remittances in 2004 were India, China, and Mexico. But it is smaller countries, such as Tonga, Moldova, and Lesotho, that top the list when controlling for the size of the economy—for example, as a share of GDP. On average, the share of remittances in GDP is twice as large in low-income countries as in middle-income countries.

Larger countries tend to receive more remittances in dollar terms...... but, in terms of GDP, smaller countries receive the most.

Rich countries are the main source of remittances. The United States is by far the largest source, with $39 billion in outward flows. Saudi Arabia (classified as a high-income country in 2005) is the second largest, followed by Switzerland and Germany. But when expressed as a share of GDP, outward remittances were the largest in the upper middle-income countries (0.7 percent of GDP compared to 0.2–0.4 percent of GDP in other countries). Although it is conventionally believed that migration flows are South-North and remittance flows North-South, South-South migration is estimated to be at least as large as South-North migration, and South-South remittances are 30–45 percent of the remittances received by the South.

Rich countries are the largest sources of remittances in dollar terms...... but, in terms of GDP, upper middle-income countries are the largest.

Household survey data show that remittances have reduced the poverty headcount ratio significantly in several low-income countries—by 11 percentage points in Uganda, 6 percentage points in Bangladesh, and 5 in Ghana. For the very poor, remittances may not provide more income than could have been earned locally. For the very rich, remittances may even be smaller than the loss of income due to migration. But for the middle-income groups, they enable recipients to move up to a higher income group. In Sri Lanka, for example, households from the third through the eighth income decile moved up the income ladder thanks to remittances.

Remittances help reduce poverty...

Remittances can improve a country's creditworthiness and enhance its access to international capital markets. The ratio of debt to exports, a key indebtedness indicator, decreases significantly when remittances are included.

... and lower recipients' debt service ratios.

Prepared by Dilip Ratha, Senior Economist, Development Prospects Group, and Task Manager, Global Economic Prospects 2006: Economic Implications of Remittances and Migration, World Bank.