Remittances: a lifeline for many economies

SDG 17 emphasizes the importance of partnerships for global development and focuses on facilitating and strengthening financial links between countries. Remittances are monetary transfers sent by workers living abroad to their families at home. The ability to find employment abroad and send money home is critical for many of the world’s most economically disadvantaged people (SDG target 17.3).

Before the COVID-19 pandemic, migration and remittances were trending upward. Remittance inflows to low- and middle-income countries had come to exceed official development assistance by a factor of three, reaching $548 billion in 2019 and overtaking foreign direct investment for the first time.

Border closures and the economic slowdown related to COVID-19 have drastically reduced the number of employment opportunities for migrant workers. As a consequence, remittance flows to low- and middle-income countries (LMICs) are projected to fall 14 percent by 2021 when compared to 2019 pre-COVID levels, the steepest drop in recent history.They are expected to eventually rebound, as the main drivers behind remittances will likely persist. People will continue to search for better economic opportunities, driven by income gaps, demographic imbalances, and climate change.

Remittances to LMICs are expected to decline by 7 percent in 2020, and by a further 7.5 percent in 2021. Regionally, remittances are projected to fall the most in Europe and Central Asia (by 16 percent and 8 percent, respectively), followed by East Asia and the Pacific (11 percent and 4 percent), the Middle East and North Africa (8 percent and 8 percent), Sub-Saharan Africa (9 percent and 6 percent), South Asia (4 percent and 11 percent), and Latin America and the Caribbean (0.2 percent and 8 percent).

The COVID-19 pandemic, falling oil prices, and currency devaluations will have a considerable impact on remittance outflows and job opportunities in the Russian Federation and Gulf Cooperation Council countries, which employ a large share of the migrant populations from Central and South Asia, respectively.

Remittances go directly to recipients, are usually more stable than capital flows, and can act as insurance during economic crises and after natural calamities.

The case of Haiti is illustrative. It is the poorest economy in the Latin America and the Caribbean region and has faced numerous natural disasters. In 2019 remittance inflows to the country accounted for 37 percent of GDP, one of the largest ratios in the world. Remittances inflows to Haiti grew faster than official development assistance and aid (ODA) between 1999 and 2010, when a devastating earthquake led to a large spike in international aid. Since 2012, remittances—mostly from the United States, the Dominican Republic, France, and Canada—again exceeded both official aid and foreign direct investment.

Remittances usually account for a larger share of GDP in smaller, poorer economies. When looking at bilateral remittance flows between countries we can see that not all migrant workers move to high-income countries, and that middle-income countries are also an important source of remittances.

Though often spent on essential consumption, remittances are also invested in physical capital and used for health, education, and information and communication technology expenditures that improve welfare and productivity. Remittances can thus provide insurance against adverse economic shocks, such as droughts and famines, and support disaster recovery and reconstruction.

According to a recent study, money sent home by migrant workers boosted education spending by an average of 35 percent in 18 countries in Sub-Saharan Africa and Southeast Asia and by over 50 percent in Latin America. Reducing the transaction costs associated with sending remittances to 3 percent (SDG target 10.c—see below) from a global average of about 7 percent could provide an additional estimated $1 billion a year for education.

When transferring money is expensive, the benefits of remittances are reduced. The price of sending money home can be very high relative to the amount sent and to workers’ incomes.

SDG target 10.c calls for reducing the transaction costs of remittances to less than 3 percent by 2030. The average cost to send money to low- and middle-income countries declined from 9.7 percent in 2009 to just below 7 percent in the beginning of 2020, still more than twice the target. The cost to send money to Africa is even higher: about 9 percent. South–South remittance costs are high due to foreign exchange controls and additional costs associated with currency conversions.

Banks making wire transfers charge the highest fees for sending money, while post offices and money transfer operators paying through mobile wallets or bank accounts charge the least. Many countries mandate exclusive partnerships between money transfer operators and post offices, which can drive up prices. And anti-money-laundering regulations make it difficult for migrant workers to send small sums.

Remittances are also sent and received through informal channels, making it more difficult to calculate the true size of the flows. Both remittance sending and remittance receiving countries can focus on improving the remittance infrastructure to reduce the high cost of remittance fees on migrants. Supporting the expansion of digital money transfers and facilitating the access to banking services for both customers and service providers of digital remittances can help bring costs down.