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For many countries, money transfers from citizens working abroad are a lifeline for development

When migrants send home part of their earnings in the form of either cash or goods to support their families, these transfers are known as workers’ or migrant remittances. They have been growing rapidly in the past few years and now represent the largest source of foreign income for many developing countries.

It is hard to estimate the exact size of remittance flows because many transfers take place through unofficial channels. Worldwide, officially recorded international migrant remittances were projected to exceed $483 billion in 2011, with $351 billion flowing to developing countries. These flows are recorded in the balance of payments; exactly how to record them is being reviewed by an international technical group. Unrecorded flows through informal channels are believed to be at least 50 percent larger than recorded flows. Not only are remittances large but they are also more evenly distributed among developing countries than capital flows, including foreign direct investment, most of which goes to a few big emerging markets. In fact, remittances are especially important for low-income countries. Remittance flows to low-income countries are nearly 6 percent of their gross domestic product (GDP), compared with about 2 percent of GDP for middle-income countries.

Getting the money there

A typical remittance transaction takes place in three steps:

  • Step 1: The migrant sender pays the remittance to the sending agent using cash, check, money order, credit card, debit card, or a debit instruction sent by e-mail, phone, or through the Internet.
  • Step 2: The sending agency instructs its agent in the recipient's country to deliver the remittance.
  • Step 3: The paying agent makes the payment to the beneficiary.

For settlement between agents, in most cases, there is no real-time fund transfer; instead, the balance owed by the sending agent to the paying agent is settled periodically according to an agreed schedule, through a commercial bank. Informal remittances are sometimes settled through goods trade.

The costs of a remittance transaction include a fee charged by the sending agent, typically paid by the sender, and a currency-conversion fee for delivery of local currency to the beneficiary in another country. Some smaller money transfer operators require the beneficiary to pay a fee to collect remittances, presumably to account for unexpected exchange-rate movements. In addition, remittance agents (especially banks) may earn an indirect fee in the form of interest (or “float”) by investing funds before delivering them to the beneficiary. The float can be significant in countries where overnight interest rates are high.

Remittances are typically transfers from a well-meaning individual or family member to another individual or household. They are targeted to meet specific needs of the recipients and thus tend to reduce poverty. Cross-country analyses generally find that remittances have reduced the share of poor people in the population (Adams and Page 2003, 2005; Gupta, Pattillo, and Wagh 2009). In fact, World Bank studies, based on recent household surveys, suggest that international remittance receipts helped lower poverty (measured by the proportion of the population below the poverty line) by nearly 11 percentage points in Uganda, 6 percentage points in Bangladesh, and 5 percentage points in Ghana. Between a fifth and half of the 11 percent reduction in poverty in Nepal between 1995 and 2004, a time of political conflict, has been attributed to remittances.

In poorer households, remittances may finance the purchase of basic consumption goods, housing, and children's education and health care. In richer households, they may provide capital for small businesses and entrepreneurial activities. They also help pay for imports and external debt service, and in some countries, banks have been able to raise overseas financing using future remittances as collateral.

More stable than capital flows

Remittance flows tend to be more stable than capital flows, and they also tend to be countercyclical—increasing during economic downturns or after a natural disaster in the migrants’ home countries, when private capital flows tend to decrease. In countries affected by political conflict, they often provide an economic lifeline to the poor. The World Bank estimated that in Haiti they represented about 12 percent of GDP in 2011, while in some areas of Somalia, they accounted for more than 70 percent of GDP in 2006.

More recently remittances proved to be resilient during the financial crisis in source countries such as the United States or western European countries. The crisis affected migrants’ incomes, but migrants tried to absorb the income loss by cutting consumption and rental expenditures. Those affected by the crisis, say in the construction sector, moved to jobs in other sectors (such as restaurants or agriculture). While the crisis reduced new immigration flows, it also discouraged return migration because migrants feared they would not be able reenter the host country. Thus, the number of migrants—and hence remittances—continued to rise even during the global financial crisis that began in 2008.

There are a number of potential costs associated with remittances. Countries that receive remittances from migrants incur costs if the emigrating workers are highly skilled or if their departure creates labor shortages. Also, if remittances are large, the recipient country could face an appreciation of the real exchange rate that may make its economy less competitive internationally. Some argue that remittances can also create dependency, undercutting recipients’ incentives to work and thus slowing economic growth. But others argue that the negative relationship between remittances and growth observed in some empirical studies may simply reflect the countercyclical nature of remittances—that is, the influence of growth on remittances rather than vice versa.

Remittances may also have human costs. Migrants sometimes make significant sacrifices—often including separation from family—and incur risks to find work in another country. And they may have to work extremely hard to save enough to send remittances.

High transaction costs

Transaction costs are not usually an issue for large remittances (those made for the purpose of trade, investment, or aid), because, as a percentage of the principal amount, they tend to be small, and major international banks are eager to offer competitive services for large-value remittances. But for smaller remittances—under $200, say, which is often typical for poor migrants—remittance fees typically average 10 percent, and can be as high as 15–20 percent of the principal in smaller migration corridors (see table).

Transfer Costs
Remittance fees could be reduced significantly if they were a flat fee instead of a percentage of the principal transferred. Approximate cost of remitting $200 (as a percent of principal) between 6.6
Countries MTOs1 Banks Hawala2
Australia–Papua New Guinea 15.3 18.1
Germany-Serbia 20.9
Japan-Brazil 10.1 18.1
Malaysia-Indonesia 1.9 7.1
New Zealand–Tonga 9.4 18.2
Russia-Ukraine 2 1–2
South Africa–Mozambique 11.8 22.4
South Africa–Zimbabwe 15.8 19.2
Saudi Arabia–Pakistan 3.3 3
United Arab Emirates–India 2.5 13.1 1–2
United Kingdom–India 2.4 5
United Kingdom–Philippines 6.2 4.9
United States–Colombia 6.2 17.5
United States–Mexico 6.7 3.6
United States–Philippines 6.5 10
Source: World Bank Remittance Prices Worldwide database; and World Bank
Global Economic Prospects 2006: Economic Implications of Remittances and Migration.
Notes: — denotes that data are not available. Data are for the third quarter of 2011. Figures include currency-conversions charge, except for Russia-Ukraine.
1MTOs: money transfer operators.
2Hawala is an informal remittance transfer system that operates outside traditional financial channels—largely in the Middle East and other parts of Africa and Asia.

Cutting transaction costs would significantly help recipient families. A number of factors could reduce transactions costs:

First, the remittance fee should be a low fixed amount, not a percentage of the principal, because the cost of remittance services does not depend on the amount of principal. Indeed, the real cost of a remittance transaction—including labor, technology, networks, and rent—is estimated to be significantly below the current level of fees.

Second, greater competition would bring prices down. Entry of new market players can be facilitated by harmonizing and lowering bond and capital requirements, and avoiding overregulation (such as requiring full banking licenses for money transfer operators). The intense scrutiny of money service businesses for money laundering or terrorism financing since the 9/11 attacks on the World Trade Center has made it difficult for them to maintain accounts with their correspondent banks, forcing many in the United States to close. While regulations are necessary to curb money laundering and terrorism financing, they should not make it difficult for legitimate money service businesses to maintain accounts with correspondent banks. Using a risk-based approach to regulation—in which only suspicious transactions are checked and small transactions below, say, $1,000 are exempt from requiring proof of identity and address—can reduce remittance costs and facilitate flows.

An example where competition has spurred reductions in fees is in the U.S.–Mexico corridor, where remittance fees have fallen by more than 50 percent from over $26 (to send $300) in 1999 to about $12 in 2005. Fees appear to have leveled off since then. In addition, some commercial banks have recently started providing remittance services for free, hoping that would attract customers for their deposit and loan products. And in some countries, new remittance tools—based on cell phones, smart cards, or the Internet—have emerged.

Third, establishing nonexclusive partnerships between remittance-service providers and existing postal and other retail networks would help expand remittance services without requiring large fixed investments to develop payment networks.

Fouth, poor migrants could be given greater access to banking. Banks tend to provide cheaper remittance services than money transfer operators. Both sending and receiving countries can increase banking access for migrants by allowing origin-country banks to operate overseas; by providing identification cards (such as the Mexican matricula consular) that are accepted by banks to open accounts; and by facilitating participation of microfinance institutions and credit unions in the remittance market.

Boosting flows

Governments have often offered incentives to increase remittance flows and to channel them to productive uses. But such policies are more problematic than efforts to expand access to financial services or reduce transaction costs. Tax incentives may attract remittances, but they may also encourage tax evasion. Matching-fund programs to attract remittances from migrant associations may divert funds from other local funding priorities, while efforts to channel remittances to investment have met with little success. Fundamentally, remittances are private funds that should be treated like other sources of household income. Efforts to increase savings and improve the allocation of expenditures should be accomplished through improvements in the overall investment climate, rather than by targeting remittances.

Dilip Ratha is a lead economist at the World Bank and an advisor to the Multilateral Investment Guarantee Agency.

Opinions expressed in articles and other materials are those of the authors; they do not necessarily reflect IMF policy.


Adams Richard H., Jr., and John Page, 2003, International Migration, Remittances, and Poverty in Developing Countries, World Bank Policy Research Working Paper 3179 (Washington).

———2005, “Do International Migration and Remittances Reduce Poverty in Developing Countries?” World Development, Vol. 33, No. 10, pp. 1645–66.

Gupta, Sanjeev, Catherine Pattillo, and Smita Wagh, 2009, “Impact of Remittances on Poverty and Financial Development in Sub-Saharan Africa,” World Development, Vol. 31, No. 1, pp. 104–15.