Resilient Remittances Dilip Ratha

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Remittances sent home by migrant workers provide vital income to millions of people in developing economies.
According to official statistics, global remittances reached a record $647 billion in 2022—three times official development assistance.
Many remittances are not captured by official statistics because people send money through informal channels.
Examples of country-level significance:
- India became the first country to receive more than $100 billion in annual remittances in 2022.
- Money from migrants is worth more than one-fifth of GDP in Tajikistan, Lebanon, Nepal, Honduras, The Gambia, and a dozen other countries.
- Egypt’s remittance receipts are greater than revenue from the Suez Canal; Sri Lanka’s exceed tea exports; Morocco’s are larger than tourism earnings.
Major recipients after India include Mexico, China, and the Philippines.

Remittances provide a financial lifeline at times of crisis:
- During 2020 (early stages of COVID), remittances fell by just 1.1 percent in a year when global income shrank by 3 percent.
- Remittances recovered strongly and grew by almost 20 percent in 2021–22.
Migrant workers contributed as frontline workers during the pandemic and shifted to digital channels when money transfer operators were closed.
Remittances can remain stable even if the source country experiences crisis (example: remittances to Central Asia rose after the 2022 invasion of Ukraine due to a spike in the price of oil and a stronger ruble when expressed in dollars).

The United States is the largest source country for remittances, especially for Latin America and the Caribbean.
- Stricter border controls have trapped increasing numbers of migrants in transit countries (including Mexico and Guatemala), resulting in increased remittance flows to those transit countries.
- Similar increases are observed on Europe’s borders, e.g., Morocco, Tunisia, and Türkiye.
The Gulf Cooperation Council countries are the second-largest source of remittances in US dollar terms and the largest when measured as a share of their GDP.
- The proportion of foreign workers in the Gulf often exceeds 70 percent of the population.
- Saudi Arabia and the United Arab Emirates are large sources for South Asia, North Africa, and Southeast Asia.
- Gulf recruitment patterns may shift as governments recruit fewer foreign workers and diversify recruitment toward Africa and Central Asia.
Russia is a large source; post-2022 developments increased remittances to Central Asia due to oil-price-driven ruble appreciation.

Average cost: customers must pay $12.50 in costs whenever they send $200 to a low- or middle-income country, representing 6.3 percent of the transaction.
The UN Sustainable Development Goals target is less than half that rate; current average is more than double the target.
Africa is the most expensive place for money transfers, with remittance costs reaching 8 percent.
- More than two-thirds of cross-border migration in Africa takes place within the continent.
- Factors raising costs in Africa: multiple currency conversions, exchange controls, lack of interoperable payment systems.
- Example: it can cost more than $70 to send $200 from Tanzania to Uganda (35 percent of the transaction).
Market characteristics:
- Digital wallets accessed via smartphones are the cheapest way to send money.
- Most remittance transfers still involve cash at one or both ends despite rapid growth in digital remittances since COVID-19.
- The remittance market is described as oligopolistic, with a small number of providers exercising control through exclusive networks.
Cumbersome anti–money laundering and counterterrorism financing regulations stifle competition and lead to "de-risking" by banks, which close accounts of money transmitters—especially affecting fragile economies such as Somalia.

When formal channels are unavailable, people resort to irregular channels, complicating efforts to fight financial crime.
A risk-based approach that reduces regulatory requirements for small sums (under $200, say) could unlock cross-border digital remittances.
Where regulations have allowed fintech to use modern technology, remittance costs have fallen sharply.
Remittances can be leveraged to:
- Broaden access to bank accounts and to saving, loan, and insurance products.
- Improve debt sustainability and sovereign credit ratings by providing predictable foreign exchange flows.
- Serve as collateral for borrowing; example: commercial banks in Brazil raised over $1 billion at low interest rates in 2002 through bonds backed by future remittances from Japan.
- Mobilize diaspora savings; examples: Nigeria raised $300 million via diaspora bonds in 2017; India tapped its large diaspora for almost $10 billion.
Taxation of remittances is difficult to enforce and could push flows into informal channels; improving the domestic business environment is a preferable strategy to encourage investment of remittance income.

Reducing remittance costs by just 5 percentage points would cut costs globally by nearly $30 billion a year, with most savings benefiting poor migrants and their families.
Policy measures to increase formal remittance flows include:
- Adopting a risk-based regulatory approach for small-value transfers (under $200).
- Reducing exchange controls and simplifying currency conversion requirements.
- Creating interoperable payment systems and lowering partnership frictions between money transfer operators and national banks/post offices.
- Increasing interest rates on foreign currency deposits and making such deposits repatriable; eliminating surrender requirements to incentivize formal channels.
- Avoiding taxation on remittances that would drive senders to informal channels.
- Enabling fintech access to correspondent banking services to enhance competition and lower costs.

Demographics and climate:
- More than a billion people, most of them in Africa and South Asia, are expected to join the working-age population by 2050.
- Many advanced economies are aging, creating a demographic imbalance that will increase supply and demand for migrant workers.
- Climate change and extreme weather will add to migration pressures.
As migration increases and cross-border payments become cheaper and simpler, remittances are expected to continue to grow and provide stable income to millions of people, playing a vital part in the global economy.

F&D Magazine — Resilient Remittances, Dilip Ratha, September 2023

Resilient Remittances
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