Remittances slowed in 2023 – we need to take note

The World Bank’s latest Migration and Development Brief shows that officially recorded remittances to low- and middle-income countries (LMICs) reached an estimated $656 billion in 2023. The true size of remittances, including flows through informal channels, is even larger. That said, the growth rate of remittances in last year was only 0.7%, significantly lower than 10.8% and 8.3% registered in 2021 and 2022, respectively (figure 1). And yet, remittances outpaced FDI and ODA. 

Figure 1: Regional growth patterns – remittances slowed, declined in ECA and MENA in 2023, expected to recover this year

By region, remittance flows to Latin America and the Caribbean saw the highest increase, at 7.7 percent. In contrast, Remittances to the Middle East and Africa dropped by nearly 15 percent, primarily due to reduced flows to Egypt. Flows to Europe and Central Asia fell by 10 percent, mainly stemming from diminished transfers from Russia to neighboring countries. The value of outward remittance flows from Russia were impacted by a weak ruble against the US dollar.

The high-level drivers of the regional trends are: (a) Strong labor markets in the advanced economies, particularly in the United States, the largest source country for remittances and the primary destination for migrants globally; (b) Weaker oil prices impacted outward remittances from the GCC countries and from Russia. (c) Exchange rates impacted remittances from Russia due to valuation effects of a weaker ruble/US$; and flows to Egypt, Nigeria and Ethiopia were impacted by multiple exchange rates, a result of balance of payments difficulties facing these nations. (d) War and conflicts also impacted flows, especially through formal channels. Regulations relating to combating money laundering and financing of terrorism were tightened in many corridors. Indeed, in the ECA region, the cost of sending money was higher in 2023 Q4 than in 2022 Q4.  

The slowdown in remittance flows in 2023 reflects a return to more normal growth after the post-pandemic surge in 2021 and 2022. Growth is expected to pick up in 2024 and 2025. By 2025, remittances to LMICs are expected to reach $690 billion. 

It is notable that despite a growth slowdown, remittances outpaced FDI and ODA (figure 2). The gap between remittances and FDI is expected to widen further in the coming years. During the past decade, remittances increased by 55 percent, while FDI declined by 48 percent (see MIGA report). The gap between remittances and ODA is also expected to widen in the coming years. Remittances will likely continue to increase because of enormous migration pressures driven by demographic trends, income gaps, and climate change.

Figure 2: Remittances Larger than FDI and ODA in 2023

This is not to suggest that remittances could substitute for FDI or ODA. Developing countries need FDI, especially in critical infrastructure and green investments. They also need ODA to address public financing needs and externalities such as fragility and climate change. Instead, countries need to take note of the size and resilience of remittances and find ways to leverage these flows for poverty reduction, financing health and education, financial inclusion of households, and improving access to capital markets for state and nonstate enterprises.

Sending remittances remains too costly due to limited competition among providers and inadequate cross-border inter-operability. In the fourth quarter of 2023, the global average cost for sending $200 was 6.4 percent of the amount being sent, slightly up from 6.2 percent a year earlier and well above the Sustainable Development Goal target of 3 percent. Sending money to Sub-Saharan Africa was nearly 8 percent. 

Fees charged to senders (and sometimes recipients) are often masked by nontransparent FX markups. In many countries with multiple exchange rates, remittances tend to flow through unregulated channels. In such cases, the foreign currency may not even flow across borders, thus, depriving the recipient country access to foreign exchange. The problem is acute in countries facing fragile and conflict-affected situations (FCS). 

In a recent panel discussion organized by MIGA ahead of the International Day of Family Remittances, some leading market players addressed the question of how MDBs can help reduce remittance costs and encourage more flows through formal channels. The panelists proposed the creation of a Private Sector Working Group to look into promoting competition and inclusive partnerships, reducing FX markups, promoting interoperability of technology and standardization, simplification and harmonization of regulations including ID requirements, and improving financial literacy. 

To the extent that political risks – such as expropriation, restrictions on currency transfer and convertibility, expropriation, and breach of contract – are constraining investments in the remittances and payments sector, MIGA and other MDBs can provide guarantee to mitigate such risks. Money transfer operators trying to scale up operations in developing countries, or considering investments in FCS countries can take advantage of such guarantees. There may be a need for such cover also in the case of working capital required by MTOs for pre-funding transactions. And countries or enterprises considering investment mobilization through diaspora bonds or diaspora funds could also take advantage of political risk insurance.