## Resilient Remittances Dilip Ratha

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**Canonical URL:** [Resilient Remittances Dilip Ratha](https://www.imf.org/en/publications/fandd/issues/2023/09/b2b-resilient-remittances-dilip-ratha)

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## Bibliographic details
- Authors: Dilip Ratha
- Published: September 1, 2023

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### Importance and headline findings
- 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.

### Stability and role in crises
- 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).

### Source countries and regional patterns
- 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.

### Costs, market structure, and Africa
- 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.

### Regulatory barriers, digital potential, and financial inclusion
- 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.

### Policy implications and practical measures
- 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.

### Outlook and drivers of future remittance growth
- 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*

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_Source: https://www.imf.org/en/publications/fandd/issues/2023/09/b2b-resilient-remittances-dilip-ratha_