## Remittances: Funds for the Folks Back Home ## Source details **Canonical URL:** [Remittances: Funds for the Folks Back Home](https://www.imf.org/en/publications/fandd/issues/series/back-to-basics/remittances) ## Other formats - [Markdown version](/en/publications/fandd/issues/series/back-to-basics/remittances/index.md) - [Structured JSON version](/en/publications/fandd/issues/series/back-to-basics/remittances/index.json) - [Bundle manifest](/en/publications/fandd/issues/series/back-to-basics/remittances/bundle-manifest.json) ## Bibliographic details - Authors: Dilip Ratha - Published: February 5, 2019 --- ### Overview and definitions - Workers’ or migrant remittances: transfers of cash or goods sent by migrants to support family members in their home country. - Officially recorded international migrant remittances were projected to exceed $483 billion in 2011, with $351 billion flowing to developing countries. - Unrecorded flows through informal channels are believed to be at least 50 percent larger than recorded flows. ### Economic importance and distribution - Remittances have become the largest source of foreign income for many developing countries. - They are more evenly distributed among developing countries than capital flows, including foreign direct investment. - 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. - In Haiti they represented about 12 percent of GDP in 2011. - In some areas of Somalia, remittances accounted for more than 70 percent of GDP in 2006. ### Transaction process and settlement - Typical remittance transaction 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; balances are settled periodically through a commercial bank. - Informal remittances are sometimes settled through goods trade. ### Uses and poverty impacts - Remittances are targeted to meet specific household needs and thus tend to reduce poverty. - Cross-country analyses find remittances have reduced the share of poor people in the population. - World Bank household-survey findings cited: - International remittance receipts helped lower poverty by nearly 11 percentage points in Uganda. - By 6 percentage points in Bangladesh. - By 5 percentage points in Ghana. - Between a fifth and half of the 11 percent reduction in poverty in Nepal between 1995 and 2004 has been attributed to remittances. - Typical uses: - Poorer households: basic consumption goods, housing, children's education and health care. - Richer households: capital for small businesses and entrepreneurial activities. - National-level: help pay for imports and external debt service; banks have raised overseas financing using future remittances as collateral. ### Stability and cyclical behavior - Remittance flows tend to be more stable than capital flows and countercyclical—increasing during downturns or after natural disasters in migrants’ home countries. - During the global financial crisis that began in 2008, remittances proved resilient in source countries such as the United States and western European countries. - Mechanisms of resilience noted: migrants absorbing income loss by cutting consumption and rental expenditures; sectoral job shifts; discouraged return migration maintaining migrant population levels. ### Costs and potential downsides - Potential economic costs: - Emigration of highly skilled workers or labor shortages in origin countries. - Large remittances can lead to appreciation of the real exchange rate, reducing international competitiveness. - Possible dependency effects that could undercut work incentives; negative correlations with growth may reflect remittances’ countercyclical nature. - Human costs: migrants often endure family separation, sacrifices, and risks to work abroad. ### Transaction costs and price structure - For smaller remittances (under $200, 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. - For large remittances, transaction costs are relatively small as a percentage of principal. - Factors contributing to costs: - Sending-agent fee (typically paid by sender). - Currency-conversion fee for delivery of local currency. - Beneficiary collection fees in some small operators. - Interest or “float” earned by remittance agents by investing funds before delivery. ### Transfer costs (reported figures; third quarter of 2011) - Notes: Figures include currency-conversions charge, except for Russia-Ukraine. — denotes data not available. Source: World Bank Remittance Prices Worldwide database; and World Bank Global Economic Prospects 2006: Economic Implications of Remittances and Migration. - Approximate cost of remitting $200 (as a percent of principal): - Australia–Papua New Guinea: MTOs 15.3, Banks 18.1, Hawala — - Germany–Serbia: MTOs 20.9 - Japan–Brazil: MTOs 10.1 - Malaysia–Indonesia: MTOs 1.9, Banks 7.1 - New Zealand–Tonga: MTOs 9.4, Banks 18.2 - Russia–Ukraine: MTOs 2, Banks 1–2 - South Africa–Mozambique: MTOs 11.8, Banks 22.4 - South Africa–Zimbabwe: MTOs 15.8, Banks 19.2 - Saudi Arabia–Pakistan: MTOs 3.3, Banks 3 - United Arab Emirates–India: MTOs 2.5, Banks 13.1 - United Kingdom–India: MTOs 2.4, Banks 5 - United Kingdom–Philippines: MTOs 6.2, Banks 4.9 - United States–Colombia: MTOs 17.5 - United States–Mexico: MTOs 6.7, Banks 3.6 - United States–Philippines: MTOs 6.5, Banks 10 - Hawala: an informal remittance transfer system that operates outside traditional financial channels—largely in the Middle East and other parts of Africa and Asia. ### Policy recommendations to reduce transaction costs and boost inclusion - Make remittance fees a low fixed amount rather than a percentage of principal, since transaction costs (labor, technology, networks, rent) are significantly below current fee levels. - Increase competition by: - Harmonizing and lowering bond and capital requirements. - Avoiding overregulation (for example, not requiring full banking licenses for money transfer operators). - Maintain anti–money laundering and terrorism-financing safeguards, but avoid measures that make it difficult for legitimate money service businesses to maintain correspondent-bank accounts. - Use a risk-based regulatory approach in which only suspicious transactions are checked and small transactions below, say, $1,000 are exempt from requiring proof of identity and address. - Facilitate nonexclusive partnerships between remittance-service providers and existing postal and other retail networks to expand services without large fixed investments. - Increase migrants’ access to banking, because banks tend to provide cheaper remittance services than money transfer operators, by: - Allowing origin-country banks to operate overseas. - Providing identification cards (such as the Mexican matricula consular) that banks accept to open accounts. - Facilitating participation of microfinance institutions and credit unions in the remittance market. - Caution on incentive programs: - Tax incentives may attract remittances but could also encourage tax evasion. - Matching-fund programs may divert funds from other local priorities. - Efforts to channel remittances to investment have met with little success. - Remittances are private household funds and policies should focus on broader improvements in the investment climate, savings incentives, and financial inclusion rather than targeting remittances directly. *Remittances: Funds for the Folks Back Home — F&D Magazine, Dilip Ratha.* --- _Source: https://www.imf.org/en/publications/fandd/issues/series/back-to-basics/remittances_