Remittances are a critical economic stabilizer

This piece originally appeared in Barron's on December, 2  2022 

At a time when the world faces an extremely challenging outlook, remittances are a vital lifeline for households in developing countries, especially the poorest.  Remittances are primarily money that migrants send home to support their family. They alleviate poverty, improve nutritional outcomes, and are associated with increased birth weight and higher enrollment rates for children in disadvantaged households. Studies show that remittances help recipient households build resilience, for example, through financing better housing and recovering from losses in the aftermath of disasters. 

At the macroeconomic level, remittances have a countercyclical effect, reducing the volatility in growth and helping countries adjust to policy shocks. At the microeconomic level, remittances allow poor households to improve children’s health and educational outcomes, increase their savings, and spend more on consumer durables and human capital.  Remittances should thus be welcomed, encouraged, and facilitated. 

The flow of remittances in dollar terms is continuing to grow in the face of economic headwinds, though falling behind inflation in the latest data. In 2022, remittance flows to low- and middle-income countries are on track to reach $626 billion, up from $597 billion in 2021, outpacing the flow of foreign direct investment  and exceeding official development aid by three times. The true size of remittances, including unrecorded flows through informal channels, is even larger. In sub-Saharan Africa, remittances are estimated to have increased by 5.3% in 2022 on the back of 16.4% growth in 2021.

The top recipient countries for remittances are, predictably, large countries such as China, Egypt, India, Mexico, Nigeria and the Philippines.  As a share of gross domestic product, the top recipients are smaller and poorer countries that face economic hardships and fragility: Lebanon (38% of GDP), Samoa (34%), Tajikistan (32%), and Tonga (50%). During the height of the Covid-19 pandemic, remittances were impacted by the lockdowns and travel bans, but only briefly. 

The resilience of remittances during the pandemic, and in prior episodes of financial crises and natural disasters, owes first and foremost to the determination of migrants who send money home to help families in need. Digital technologies are providing significantly faster and cheaper remittance services, and the onset of the pandemic saw a sharp increase in the use of digital channels for remittances. Still, digital channels account for less than 1% of total transaction volume, which is still dominated by cash remittances. New service providers face restricted access to correspondent banks due to the compliance cost of anti-money laundering and counterterrorism activities. Once the Covid-19 crisis began, the World Bank urged the recognition of remittance services as essential and called for greater efforts to increase the financial inclusion of poor people and improve access to correspondent banking for new money transfer companies.

The global community and the G20 have recognized the importance of increasing the volume of remittances and reducing their costs. Global goals include a target to reduce remittance costs to 3% by 2030. Presently the average cost of sending money to most African countries is more than twice that level.  Increasing competition in the remittance markets, improving access to bank accounts, and avoiding exclusive partnerships between money transfer companies and national post offices can reduce remittance costs. Remittances through official channels can be encouraged by prudent macroeconomic policies that avoid the practice of multiple exchange rates in recipient countries. 

The Covid-19 pandemic and the war in Ukraine have further highlighted the need for frequent and timely data. The World Bank, under the auspices of the Global Knowledge Partnership on Migration and Development, or KNOMAD, and in collaboration with 45 countries, has launched RemitStat, an international working group to improve data on remittance flows.

We are committed to increase remittances for the millions of poor people and communities worldwide. They may prove to be critical in sustaining economies at a time they need it most.