Remittances: An Overview

The term ‘remittance’ is derived from ‘remit’, meaning ‘to send back’. While both bank transfer and remittance methods involve the transfer of money, remittance focuses on cross-border transactions dedicated to familial support. For instance, if a migrant or foreign worker sends money back home, the fund transfer is a remittance.  So, “remittance” refers more broadly to the funds migrants send to their relatives in their home country while working and living abroad. These are also referred to as worker or migrant transfers. A bank transfer/remittance refers to the funds sent or transferred to another entity or account as payment for services or a product.

Remittance flows tend to be more stable than capital flows, and they tend to be countercyclical increasing during economic downturns or after a natural disaster when private capital flows tend to decrease. In countries affected by political conflict, they are often an economic lifeline for the poor. The World Bank estimates that in Haiti they represented about 31 percent of GDP in 2017, and in some areas of Somalia, they accounted for more than 70 percent of GDP in 2006. Since the late 1990s, remittances have been more important than development aid; in some cases, they make up a big part of a country’s GDP (GDP).  In 2018, the amount of money sent back to low- and middle-income countries reached a record high of $529 billion. This was 9.6% more than the previous record high of $480 billion in 2017. In 2018, $344 billion was spent on foreign direct investment in these countries other than China. The total amount, which goes from $633 billion in 2017 to $689 billion in 2018, includes money sent back to high-income countries.

Remittances proved to be resilient during the financial crisis in source countries such as the United States and Western European countries. The crisis affected migrants’ incomes, but they tried to absorb the income loss by cutting consumption and rental expenditures. Those affected by the crisis moved to jobs in other sectors. While the crisis reduced new immigration flows, it also discouraged return migration because migrants feared they would not be able to reenter the host country. Thus, the number of migrants remains unchanged, and hence remittances continued to rise even during the global financial crisis and even more so in recent years in the face of conflicts and natural disasters such as hurricanes, earthquakes, and the COVID-19 pandemic. (Source: IMF)

In FY21, the remittance to India was $87 billion, representing 2.75% of India’s GDP. The top three countries with the most remittances to India are the UAE, the USA, and Saudi Arabia. The countries that get the most remittances from India are Bangladesh, Nepal, and Sri Lanka.

 There are potential costs associated with remittances. Countries that receive remittances from migrants incur costs if the emigrating workers are highly skilled or if their departure creates labour shortages (Brain drain?). If remittances are large, the recipient country could face real exchange rate appreciation that may make its economy less competitive internationally. It can decrease demand for exports and make them more expensive abroad. However, imports are cheaper at home, but that can hurt domestic industries that compete with imports.  It can reduce returns for foreign investors. Ultimately it can widen a country’s trade deficit gap.

Remittances also have human costs. Migrants sometimes make significant sacrifices, including separation from family, and incur risks to find work in another country. And they may have to work extremely hard to save enough to send remittances.

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