Blog article
See all stories »

Analysing the vital contribution of remittances to low and middle-income countries

The United Nations estimates that there are more than 258 million expats worldwide who send money to their home countries. These remittances support more than 800 million families, including those living in low and middle-income countries (LMICs).

World Bank data reveals that remittances to LMICs reached $529 billion in 2018, a growth of 9.6% compared to the previous year. Moreover, the upward trend is expected to continue, with remittances of $550 billion predicted for 2019. Not surprisingly, this has caught the attention of governments and international policy makers because of the contribution that remittances are making to economic growth.

Indeed, remittances are set to exceed foreign direct investment (FDI) and official development assistance (ODA), and if we take China out of the equation, they are already the largest source of foreign exchange earnings in LMICs. We should also remember that the official figures take no account of remittance flows from informal channels, so the value and economic impact is actually much greater.

The impact is felt in a number of ways – and most immediately by dependants. Expats transfer money to help their loved ones with essential day-to-day needs such as food, school fees, accommodation and medical expenses. Between $200 and $300 is typically sent every month, which is a crucial lifeline for millions of families and often represents as much as 60 percent of a household’s income.

But it is not just at the family level that remittances make their mark. Many developing countries rely heavily on these inward flows because they make up a significant portion of their foreign-exchange earnings and stimulate domestic consumption which then boosts GDP. The biggest remittance earner in 2018 was India ($79 billion), followed by China ($67 billion), Mexico ($36 billion), the Philippines ($34 billion) and Egypt ($29 billion).

As well as fuelling daily consumption, these inward flows can add to savings in banks or be used for other investments, such as property purchases, all of which benefits the receiving countries. As long as the money is invested in some way, it will contribute to national development and improve the economy.

The importance of remittances is underlined by their role in supporting many of the UN’s Sustainable Development Goals (SDGs). Specifically, remittances contribute to the following goals: SDG 1, end poverty; SDG 2, end hunger; SDG 3, promote good health and wellbeing; SDG 4, improve educational opportunities; SDG 6, ensure clean water and sanitation; SDG 8, promote sustainable economic growth and full employment; and SDG 10, reduce inequality.

The challenge is to create the best possible infrastructure and regulatory environment to maximise the value of remittances for LMICs. Currently, transferring money often incurs high costs, with World Bank data identifying the global average to be around 7%, with Sub-Saharan Africa costing on average more than 9%. The UN’s target is to reduce remittance costs to 3% by 2030.

The remittance industry must focus on reducing costs through collaborations and better use of technology. The rapid growth of money transfer operators is a step in the right direction, with mobile money and other sophisticated digital solutions now helping to push down average transfer costs while offering a variety of transfer options.

With more money flowing into LMICs, diaspora bonds may bolster the power of remittances. Diaspora bonds enable expats to invest in their home countries in a more formal way, and it has proved as a useful financing vehicle for nations such as India. The success depends on careful structuring, as Africa exhibited mixed results. While an Ethiopian bond failed to live up to expectations, Nigeria’s first diaspora bond, issued in 2017, raised $300 million for investment in infrastructure and was oversubscribed by 130%.

One development potentially limiting the growth of remittances is the practice of de-risking. This is when banks close the accounts of money transfer operators in order to avoid any risk from money laundering or other illegal activities. Hence the onus lies upon money transfer operators to continuously invest in compliance and technology to mitigate the risk concerns that banks have and bolster their confidence.

Based on current trends, it’s estimated that $8.5 trillion will be transferred to families in developing countries over the 15-year timescale of the Sustainable Development Goals. This represents a huge economic boost for developing countries and is something we should encourage by making the channels for money transfer as versatile and accessible as possible whilst bringing down the cost of international transfers.

3982

Comments: (0)