What Are Remittances? Definition & Impact on Economies

What Are Remittances?

Remittances are payments for goods or services, or gifts, and are typically wire transfers in which a person from one place sends money to a person in a different place.

Remittances are often transfers of capital from people in “developed” countries to people in “developing” nations. That money is usually used to help pay for a recipient’s living expenses such as food, housing, and clothes. People from less wealthy countries such as Mexico, Guatemala, and El Salvador may travel to the U.S., where incomes are significantly higher, and the money they earn there can be sent to their families. Job opportunities in construction in the Middle East, for example, might encourage people from Sri Lanka, Bangladesh, Nepal, Indonesia, and the Philippines to work in that region, and some of the money they earn can be sent back to their home countries.

How Can Remittances Drive Economic Growth?

In the U.S., the history of remittances can be traced to the 19th century, when laborers, who immigrated from China, sent their earnings back home. Their income from work on railroads and other construction projects helped families with their expenses, and in turn, that boosted the economies of their hometowns.

That trend continued into the 20th century. In the 1970s, for example, the South Korean government encouraged nurses and doctors to take advantage of relaxed U.S. immigration rules for healthcare professionals, and their earnings sent to Korea helped to boost the nation’s economy, especially in the post-conflict era. Nowadays, immigrants from Central and South America, Asia, Africa, and parts of the Middle East remit money to families living there, and transactions amount to hundreds of billions of dollars each year—having a significant impact on many of the recipient economies.

Remittances can lead to an appreciation in the recipient country’s currency, and that money in circulation means people can buy the goods and services that nation produces. Some of that money can work its way toward property, or other forms of investments.

A developed nation’s economy can also affect the impact of remittances. Rising costs of living, such as higher prices for food and housing, can reduce the amount of money sent abroad by an earner, and that can impact a recipient’s household, and, in turn, that country’s economy. There can also be a social cost tied to remittances: Parents working abroad for years at a time may need to pass on the raising of their children to other family members, and this can potentially mean missing out on their children’s growth and development and the weakening of familial ties due to physical distance.

Which Countries Have the Highest Remittances? Are Remittances a Big Part of Their Economies?

Remittances are important contributions to many nations’ economies.

According to World Bank estimates for 2022 (see table below), remittances account for a large portion of gross domestic product. Filipinos working abroad, for instance, are projected to send $38 billion back to the Philippines, which would make up almost a tenth of GDP. Lebanon is estimated to take in $6.8 billion, accounting for more than a third of the economy. These remittances have become an important source of outside income for some countries. For some, such as China, it’s not nearly significant.

How Are Remittances Transmitted?

Remittances are usually done through banks. A commercial bank from a recipient country might establish a branch abroad (typically in the nation of where many of its remittances originate) to handle large amounts of transactions. Money-transfer operators like Western Union can transmit cash instantaneously, although more recently, online transactions through mobile apps (which transfer balances between bank accounts via mobile device) such as Remitly have also become popular.

Why Are Transaction Costs for Remittances Expensive?

The costs for remittances typically include a fee for exchanging the value of one currency into another and a simple transaction fee. While the central bank may quote foreign exchange rates on a particular day, a commercial bank may quote different rates to make a profit. On top of that, banks often charge a fixed fee for handling a transaction. Across millions of transactions annually, these fees can be a significant source of revenue for banks

According to the World Bank, during the second quarter of 2022, banks were the costliest medium for sending remittances, averaging 11% of the value of money transfer, followed by post offices (6.5%), money transfer operators (5.2%), and mobile operators (3.5%), which provided the cheapest service. Despite their affordability, however, mobile money-transfer applications accounted for less than 1% of total transaction volumes.

Where Can a Nation’s Remittance Data Be Found?

A country’s central bank typically keeps a record of its remittances, which can usually be found in its online database in the Special Data Dissemination Standard (SDDS) section. Remittances are usually classified as part of secondary income in the current account.

healthcare
device
apps
buy