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The debilitating cost of remittances
Dilip Ratha knows how hard it is to work abroad and send money home. Why? Because he had to go through the same hoops when he was a migrant.
It's the inconvenience and the cost, the World Bank's head of KNOMAD and lead economist says during a livestream conversation on closing the global digital gap hosted by GZERO in partnership with Visa.
Still, Ratha points out, these flows are a lifeline for millions of poor families around the world. And they keep the lights on in remittance-dependent economies like El Salvador or Lebanon.
With an average 6% commission, the amount lost each year is double all the aid that the US gives to the entire world or what sub-Saharan Africa gets.
How can we get unbanked people to go digital?
Sending remittances can be prohibitively expensive. How come?
It costs a lot to manage cash in a secure way for unbanked people, Rubén Salazar, global head of Visa Direct, says during a livestream conversation on closing the global digital gap hosted by GZERO in partnership with Visa.
But some players are making progress in reducing costs, which the UN wants to cap at 3% by the end of the decade.
For Salazar, we need to tackle the problem holistically. That's why Visa has just inked a deal with Singaporean B2B payments platform Thunes to integrate digital wallets for unbanked people with Visa's digital payments network.
- What We're Watching: Digital payment lifelines for cash-strapped ... ›
- Hard Numbers: Americans use less cash, Africans heart mobile ... ›
- Hard Numbers: Mexicans benefit from US labor boom, UAE-Euro ... ›
- Money on the move - GZERO Media ›
- Remittances We're Watching: OFW superheroes, Central America ... ›
Watch live October 19: Can access to digital tools transform the world's economy?
Is digitization crucial to economic growth? GZERO Media is partnering with Visa to explore what it means when 70% of the global economy’s growth in the next decade is projected to come from digitally-enabled businesses – yet 3.7 billion people lack internet access. What are the tools and initiatives needed to bring more people into the digital economy?
Live on Wednesday, October 19, our expert panel will explore the impact of digitization on empowering consumers and small businesses. Please register to attend.
Participants:
- JJ Ramberg, Co-Founder, Goodpods, and former host of MSNBC's Your Business (moderator)
- Usman Ahmed, Head of Global Public Affairs and Strategic Research at PayPal Inc.
- Dilip Ratha, Head of KNOMAD and Lead Economist at the World Bank
- Ruben Salazar, Global Head of Visa Direct
- Kati Suominen, Founder and CEO, Nextrade Group
- Ali Wyne, Senior Analyst, Global Macro-Geopolitics, Eurasia Group
Critical lifeline: remittances and the developing world
Remittances offer a vital lifeline to some 800 million people around the globe. In Mexico, the migrant advocacy group APOFAM highlights how groups of people can work together to make a difference for families impacted by migration. APOFAM’s members are related to migrants who have moved to the US, many of them undocumented, and the group helps pool resources to aid Mexicans. Whether it’s a Mexico-based mother of two whose husband works in the US or a group of elderly artisans, APOFAM helps people flourish thanks to remittances.
Watch our recent livestream discussion on remittances and other tools for economic empowerment.
A woman speaks on the phone outside a money exchange office in Ciudad Juarez, Mexico.
Hard Numbers: Mexicans benefit from US labor boom, UAE-Euro remittances surge, Egypt feels the Ukraine burn, Bangladesh’s cap
16.6: Remittances to Mexico in the year leading up to July rose a whopping 16.6% to $32.8 billion, in large part due to the US’ post-pandemic booming labor market. Unemployment levels remain very low in the US – a good thing for Mexican remittances – though that could change as the US Federal Reserve doubles down on its effort to quell inflation.
30: Foreign exchange houses in the United Arab Emirates have recorded a surge in monthly remittances to Europe as Europeans in the UAE take advantage of the weaker-than-usual euro to send money home. One big foreign exchange company, Al Fardan Exchange, recorded a 30% monthly rise in September as the euro depreciated against the US dollar.
14.7: Remittances from Egyptians working abroad shrank 14.7% in July compared to the same time last year. This comes as the value of the Egyptian pound has fallen against the US dollar as import-reliant Cairo feels the economic pinch of the war in Ukraine. Together, tourism and remittances are amongst Egypt’s most important sources of foreign currency reserves.
108: Bangladesh recently enforced an exchange rate cap of 108 taka per US dollar for remittances in a bid to stabilize the country’s currency. (For a history of the dollar/ taka exchange rate, see here.) Amid a spate of economic crises that led to the South Asian country’s foreign reserves drying up earlier this year, many residents turned to the underground exchange, which further destabilized the local currency.
Applicants looking at job offers displayed on a glass window of a recruitment agency in Manila, Philippines.
Remittances We’re Watching: OFW superheroes, Central America flows, Ukraine war
The Philippines: From remittances to migrant worker superpower?
Being an Overseas Filipino Worker is nothing to sneeze at. When OFWs, as they're popularly known, go home for Christmas carrying huge cardboard boxes of gifts, they have a dedicated customs line and huge billboards thanking them for doing such a good job. Why? Because the remittances they send make up almost 10% of GDP. What's more, the Philippine labor diaspora is among the world’s biggest at 10% of the population — and a prized voting bloc. That’s why President Ferdinand Marcos Jr. spent almost as much time visiting OFWs in the US and the Gulf as he did on the domestic campaign trail. It paid off: Marcos killed it with OFWs, who helped him last May win a plurality of the vote for the first time since his authoritarian dad was in charge. Now, Marcos Jr. wants OFWs to play an even bigger role in his administration. For one thing, he’s asking them to go beyond remittances and actually invest in crucial business sectors such as tourism. For another, Marcos thinks the Philippines can punch above its tiny diplomatic weight by leveraging the power of its huge expat workforce to achieve political goals like trade deals. If a pandemic-era deployment ban on Filipino nurses worsened a global shortage, imagine what would happen to the shipping industry if Manila called back a quarter of the world's seafarers.
How pandemic and inflation impacted remittances to Central America
Lockdowns in the US had a disruptive effect on many Latin American countries that rely on remittances from the US to keep their economies afloat. Border closures and a stagnant US economy in the first half of 2020 caused remittances to drop, with outflows to Mexico, Guatemala, and Honduras contracting (year on year) in April 2020 by 3%, 20%, and 28% respectively. That trend reversed course in the second half of 2020 as the US entered the “we have to learn to live with it” stage of the pandemic. Remittances strengthened further in 2021 as the US economy came roaring back. Surging demand coupled with the Biden administration’s $1.9 trillion stimulus package led to record levels of remittances to Latin American countries, where pandemic-related economic disruptions remained rampant. Remittances to Mexico grew 27%, while Guatemalan migrants sent 35% more back. Payments to Honduras and El Salvador, meanwhile, grew 26%. We’ll be watching to see whether these outflows recede as the US Federal Reserve doubles down on efforts to rein in soaring US inflation. What’s more, inflation in the receiving countries – the annual rate in August was at 8.7% in Mexico, 10.4% in Honduras, and 8.4% in Guatemala – means that whatever is sent home will be worth less.
Ukraine: War and remittances
The war in Ukraine has sent a shockwave through the normal patterns of remittance flows in Eastern Europe and the former Soviet Union. To start with, consider that Ukraine counts on remittances for 10% of its GDP, most of that coming from Poland and the US. Russia, meanwhile, is home to millions of migrant workers from countries in the Caucasus and Central Asia, some of which depend on remittances for nearly a third of GDP. When the war started, remittances to Ukraine skyrocketed as Ukrainians living abroad sent money home to loved ones in danger and global platforms cut fees for money transfers. Since then, flows have tailed off, in part because millions of Ukrainians have fled, meaning transfers now reach them in other countries. At the same time, Western sanctions on Russia reverberated into Central Asia. First, the hit to Russia’s economy pushed hundreds of thousands of migrant workers to head home. Second, financial sanctions complicated Russian banks’ ability to send money across borders. In Kyrgyzstan alone, for example, remittances fell by 20% after the war started, and the World Bank has warned that the decline could push the poverty rate to 38% of the population, up from 20% in 2019.The Graphic Truth: Sending money home
Migrants leave their countries of origin not only to find work opportunities — the hard-earned money they send back helps keep the lights on back home. After a COVID-related blip in 2020 – which saw a small decline but defied disastrous predictions – global remittances sent by migrants to relatives in their countries of origin are again on the upswing. That’s a big deal for the migrants’ families and for governments of nations who rely on that revenue to keep the economy from collapsing. We take a look at the countries that send and receive the most migrant cash, those that most depend on remittances, and how inflows have performed recently.
Money floating around the globe.
Money on the move
What are remittances?
Some think of globalization mainly as cross-border flows of goods, services, ideas, and information. But crucial to globalization’s dynamism, and its powers of disruption, is the accelerating global movement of human beings. In fact, this is one of history’s oldest stories. People judge life “over there” to be safer and maybe more prosperous than life “over here,” and they hit the road in search of opportunities for richer lives and livelihoods.
And many of these people hope to help others. In every region of the world, migrants cross borders that separate poorer countries from wealthier ones in hopes of earning money they can share with those they’ve left behind, and the digital age has made it much easier for someone earning a relatively high wage abroad to send money back home in a matter of seconds. These financial flows are known as “remittances,” and they account for an increasingly large part of global economic activity. Small payments by large numbers of people add up: The World Bank estimated earlier this year that global remittances will reach $630 billion in 2022, a 4.2% annual jump.
The benefits of this process are widely shared. Remittances add wealth, opportunity, and therefore political stability to countries and families that need them. That’s especially important for poorer people in countries like India, Mexico, China, the Philippines, and Egypt, the world’s five largest remittance recipients in 2021. It’s even more important for countries like Lebanon, the Central Asian states, and small Pacific island nations, where remittance inflows make up from one-third to one-half of GDP.
They can provide a humanitarian lifeline for people trapped inside countries in trouble: Remittances once intended for Ukraine may now be flowing into the neighboring countries, particularly Poland, which is housing millions of Ukrainian refugees who need financial support. This boost for people in developing countries is never more important than in a time of rising global prices for food, fuel, and other basic necessities. Wealthy countries benefit too. Immigration increases the supply of labor by welcoming people who will, in some cases, take jobs that citizens of rich countries don’t want, putting downward pressure on production costs and retail prices.
But there are all kinds of disruptions that can break the virtuous circle of migration and remittances. Frictions arise when migrants create downward pressure on wages for some locals and social tensions when cultures clash. Fears of uncontrolled cross-border flows of people have created anxiety and anger in America and Europe. Wars and their fallout disrupt flows of money and people, a trend most obvious now in migrants from the Caucasus and Central Asia facing tougher economic conditions in Russia. The pandemic has also slowed migration in many regions, in some places dramatically. China’s “zero-COVID” policy, in particular, has made life much harder for those who would work in that country.
There is another potential source of remittance disruption: the cost of wiring money rises too. The global average cost of sending $200 reached 6% in the fourth quarter of 2021, according to the World Bank. That’s twice the level that the UN says will help poorer countries reach their development goals. It’s even more expensive to send money to Ukraine from some places and especially expensive to wire money to sub-Saharan Africa. Migration and the economic importance of remittances will surge in coming years as climate change, in particular, gives more people reason to move.