Reverse remittances? Yes, but not really.

With Sanket

A New York-based money transfer company recently reported that migrants from the Dominican Republic (as well as Colombia, Costa Rica, Ecuador and Russia) are transferring money from their home countries to the United States. The number of such transactions through La Nacional reportedly grew from 150 a month in 2006 to about 80-150 a day in 2008.  The reason behind these “reverse remittances,” according to this company, is that the economic crisis in the United States is reportedly forcing many migrants to dip into their savings and assets back home.

We have no way of judging the extent of such reverse remittances. Data on outward remittance flows are of questionable quality in most of the countries. Also many large migrant destination countries do not report high frequency data on inward remittance flows. A modest, and rather indirect, inference about reverse remittances can be drawn from a decline in foreign currency deposits - which are likely held by migrants or their relatives - in Dominican Republic and other countries. In the last 12 months, such deposits have declined by 7% in Dominican Republic, 12% in India, and 6% in Mexico (see Figure 1).

Figure 1: Non-resident deposits* declined in 2008

* Dominican Republic - foreign currency deposits, India - foreign currency and repatriable rupee deposits, and Mexico - foreign currency demand deposits and time deposits from the public. Note that these charts use different scales.
Sources: Central banks of the respective countries

But there are other possible reasons for the drop in foreign currency deposits. Perhaps migrants are reducing foreign currency deposits in their home country and depositing the money in the US banks? That is unlikely, however, because interest rates in the US are at historic lows, lower than those in most developing countries.

The crisis story is much more plausible. In the last three months, we have also heard anecdotes about some Mexican migrants who sold their (second) homes in Mexico to pay mortgages in the US. There are also anecdotes that some, deciding that returning home was not an option, brought their family members to join them in the US. This would imply, again, that they would liquidate assets in the home country and remit the proceeds overseas.

There are three reasons why a decline in foreign currency deposits may actually show up as remittance inflows rather than reverse remittances. First, (again a reason related to crisis) faced with income and employment difficulties, some migrants might be substituting remittances to their families by drawing on foreign currency deposits back home. Indeed, such withdrawal from a (repatriable) foreign currency deposit to a local currency deposit or cash is considered as remittance inflows in some countries such as India. This component is believed to make up nearly 40% of remittances to India in recent years. And, as mentioned above, foreign currency deposits have been falling in India in recent months.

Secondly, some migrants may decide to return temporarily to take advantage of the lower cost of living in their home country. The withdrawal from foreign currency deposits (and overseas saving) by such returnees is likely to be recorded as remittance inflows. This may be the case in Ethiopia where remittance inflows during this fiscal year have risen 15% over the comparable period a year ago. 

Finally, movements in exchange rates can prompt withdrawal from foreign currency deposits. A sharp depreciation of the local currency against the US dollar makes goods, services and assets back home cheaper, similar to a “sale” effect. Many developing country currencies that were stable or even appreciating against the U.S dollar until the middle of 2008 started depreciating rapidly in the third quarter of 2008. For example, the Mexican Peso went from 10 pesos/US$ in August to 13.5 peso/US$ in October; in the same month, remittance flows to Mexico rose 12% year-on-year. The Indian rupee also depreciated from 42 rupees per US$ in August 2008 to 49 rupees per US$ in November 2008.

Estimating reverse remittances from a decline in foreign currency deposits is nearly impossible for the reasons discussed above. But for sure the decline in foreign currency deposits so far has been minuscule compared to the size of remittance inflows. We recently wrote that remittance inflows to Dominican Republic are estimated to be $3.5 billion, to India $45 billion, and to Mexico $26 billion in 2008. So, reverse remittances? Yes, but not really.