Remittances on track to become the largest source of external financing in developing countries

|

This page in:

Officially recorded annual remittances to low- and middle-income countries (LMICs) reached a record high of $529 billion in 2018, according to the World Bank’s latest Migration and Development Brief. This represents a 9.6 percent growth over the previous record high in 2017.
 
Regionally, growth in remittance inflows ranged from almost 7 percent in East Asia and the Pacific to 12 percent in South Asia. The overall increase was driven by a stronger economy and employment situation in the United States and a rebound in outward flows from some Gulf Cooperation Council (GCC) countries and the Russian Federation.
 
With foreign direct investment (FDI) on a downward trend in recent years, remittances reached close to the level of FDI flows in 2018. Excluding China, remittances to LMICs ($462 billion) were significantly larger than FDI flows in 2018 ($344 billion). This makes remittances the largest source of foreign exchange earnings in the LMICs, excluding China.
 
Bearing in mind that the Brief uses officially recorded remittances data, if we were to include remittances through informal channels, its true size and social impact is much larger.
 
In 2019, remittance flows to LMICs are likely to reach $550 billion, to become their largest source of external financing—larger than FDI, including flows to China. Remittances are already more than three times the size of official development assistance.
 
Recent Progress toward Migration-Related Sustainable Development Goals
 
Remittance costs. Reducing remittance costs to 3 percent by 2030 is a global target under Sustainable Development Goal (SDG) 10.7. The global average cost of sending $200 remained high, at around 7 percent in the first quarter of 2019, according to the World Bank’s Remittance Prices Worldwide database. The cost was the lowest in South Asia, at 5 percent, while Sub-Saharan Africa continued to have the highest average cost, at 9.3 percent. Remittance costs across many African corridors and small islands in the Pacific remain above 10 percent.
 
The high costs involved in money transfers along many remittance corridors, particularly for poor workers who lack adequate access to banking services, reduce the benefits of migration, particularly for poor households in origin countries. The highest-cost corridors are mostly in Sub-Saharan Africa. These feature high transfer fees and, in some cases, (e.g., the Angola-Namibia corridor) also high foreign exchange margins.
 
Banks were the most expensive remittance channels, charging an average fee of 11 percent in the first quarter of 2019. De-risking by international correspondent banks—that is, the closing of bank accounts of money transfer operators to avoid rather than manage the risk in their efforts to comply with anti–money laundering and countering financing of terrorism norms—has affected remittance services and may have prevented further reduction in costs.
 
Post offices were the next most expensive, at over 7 percent. In an apparent example of policy incoherence, remittance fees tend to include a premium, that is a cost mark-up, where national post offices have an exclusive partnership with a money transfer operator. This premium was on average 1.5 percent worldwide and as high as 4 percent in some countries in the last quarter of 2018. Renegotiating exclusive partnerships and letting new players operate through national post offices, banks, and telecommunications companies could remove entry barriers, increase competition, and lower remittance prices.
 
Recruitment costs. SDG indicator 10.7.1 calls for global efforts to reduce recruitment costs. The high recruitment costs faced by many low-skilled migrant workers reduce the overall benefits from migration and its impact on reducing poverty in poor countries. The World Bank and the International Labour Organization are collaborating to develop indicators for worker-paid recruitment costs, to support the SDG of promoting safe, orderly, and regular migration. SDG indicator 10.7.1 pgraded to a Tier 2 indicator in November 2018. A Tier 2 Indicator is conceptually clear, has an internationally established methodology and standards are available, but data are not regularly produced by countries. The Bank and the ILO are now working to take the indicator to Tier 1, which would require surveys in many more corridors.
 
The latest Migration and Development Brief, data and a press release are available at www.knomad.org. Interact with migration experts at http://blogs.worldbank.org/peoplemove/

Related Links: 
Migration and Development Brief 31 / Press ReleaseData on Remittance Inflows / Data on Outward Remittance Flows / PresentationWorld Bank Migration and Remittances Website
 
 

Authors

Dilip Ratha

Manager, Migration and Remittances Unit and Head, KNOMAD, Global Indicators Group, World Bank

Join the Conversation