After two years of record-high global remittance flows, largely due to the pandemic, the World Bank has calculated that transfers to low and middle-income countries increased by just 3.8% in 2023. According to the World Bank, this slowdown in remittance flows is a harbinger of worse things to come in 2024 as the impact of global inflation hits along with economic downturns in wealthier nations.
In 2023, remittances to low- and middle-income countries were estimated to have totaled $669 billion, with the majority being sent home from workers employed in advanced economies and Gulf Cooperation Council (GCC) nations. By region, Latin America and the Caribbean saw an increase of 8% in remittance inflows while South Asia was similar with a 7.2% increase compared to the year before. However, remittances being sent to East Asia and the Pacific grew only by 3% and sub-Saharan Africa saw a modest increase of 1.9%.
In contrast, remittance flows to the Middle East and North Africa (MENA) fell by 5.3%, largely due to a sharp reduction in funds being sent to Egypt. Remittances sent to Europe and Central Asia fell 1.4% compared to the year prior, a substantial change considering that they grew by a staggering 18% in 2022 compared to 2021.
Once again, the United States dominated the list as the number one country from where remittances were sent. The top five recipient countries in 2023 were:
- India ($125 billion)
- Mexico ($67 billion)
- China ($50 billion)
- The Philippines ($40 billion)
- Egypt ($24 billion)
In relative terms, however, the five countries with the largest percentage of remittances as part of their GDP were:
- Tajikistan (48%)
- Tonga (41%)
- Samoa (32%)
- Lebanon (28%)
- Nicaragua (27%)
Despite the crucial role that remittances play in sustaining the economies of developing nations, the price of sending money abroad continues to be high. According to the World Bank, migrants pay a fee of around 6.2% to send money home, with bank-to-bank transfers being the most expensive (average cost was 12.1%), followed by post offices (7%), money transfer companies (5.3%), and mobile telephony operators (4.1%).
“Remittances are one of the last remaining sources of private external finance in many countries,” said Dilip Ratha, the lead World Bank economist and author of this year’s report on remittances. “Remittances have long since surpassed the amount of foreign direct investment (FDI) and official development assistance (ODA) in recent years, and that gap is increasing.”
Diaspora bonds
According to the World Bank, there is a direct correlation between a developing nation’s reliance on remittances and their inability to raise funds on the open market due to their poor credit rating. The World Bank has calculated that countries with a “B” credit score or below receive far more funding via remittances than they do from foreign direct investment (FDI), and that correlation is especially strong in nations with a “CCC” credit score or below.
As such, the World Bank and other multilateral institutions have discussed potential ways for mobilizing new sources of financing for these countries, including diaspora bonds. A diaspora bond is a special-purpose bond that is issued by a lower-income nation to its expatriates living abroad that usually offers low yields (and long-term maturities) but does offer discounts on the debt.
India and Israel are two nations which have already successfully implemented diaspora bonds. Since 1951, Israel has raised over $50 billion in diaspora bond issuances, and India has raised around $11 billion (in 1991, 2000, and 2003). Despite these and a few other successes in places like Nigeria and the Philippines, the total amount of money raised via diaspora bonds has been minuscule compared to total remittance inflows.
Although the World Bank sees “enormous potential” in expanding the use of diaspora bonds, several countries such as Ethiopia, Nepal, and Kenya have seen diaspora bond issuances fail, in some cases, rather spectacularly. Furthermore, issues with diaspora bonds needing to be registered with securities and exchange commissions abroad (particularly the UK and USA) further complicate the issue.
Non-resident deposits
Another potential private funding income stream for developing countries is the concept of a non-resident bank deposit, in which non-resident citizens are encouraged to make foreign currency deposits in their homeland. These deposits are (usually) repatriable, can come with higher interest rates, and are generally tax-exempt.
While India has been at the forefront of encouraging non-resident deposits, there is, unfortunately, very little public data about how successful these programs have been. What is known, however, are a few figures about the reported amounts of non-registered deposits in 2023:
- India ($143 billion)
- Sri Lanka ($7.7 billion)
- Mexico ($6.7 billion)
- Pakistan ($3.7 billion)
- Bangladesh ($1.3 billion)
- Gabon ($534 million)
- Honduras ($507 million)
- Cameroon ($454 million)
- Costa Rica ($300 million)
- Dominican Republic ($158 million)
- Republic of Congo ($131 million)
- Equatorial Guinea ($82 million)
- Chad ($53 million)
- Nicaragua ($40 million)
- Central African Republic ($27 million)
India first began encouraging non-resident deposits in 1970, initially attracting $10 billion, but that number has steadily climbed ever since, with the $100 billion mark being exceeded in 2014.
Non-resident deposit programs are relatively easy to implement since they do not require being registered in foreign jurisdictions, however, they do rely on international commercial banks for sending the funds, and the World Bank classifies the fees charged by these banks to be “exorbitant.” Furthermore, non-resident deposits are very sensitive to changes in international interest rates, therefore, they are not classified as being appropriate tools for financing long-term development projects.
Conclusion
Remittances continue to be the largest source of private funding for many middle and lower-income countries, often vastly outstripping the amount of foreign direct investment (FDI) or official development assistance (ODA) they receive. And while a number of proposals for increasing funding from citizens living abroad, including non-resident deposits, diaspora bonds, and leveraging remittances to improve a country’s creditworthiness, have been considered, the truth remains that many developing economies are still wholly dependent on remittances.
Lastly, the World Bank is forecasting a continued slowdown in global remittances in 2024, largely due to downturns in the economies of developed nations and high rates of inflation. Furthermore, stricter regulatory standards have led many banks to reduce the number of correspondents in Africa due to perceptions of higher risk on the continent. Other factors contributing to lower projections of remittances in 2024 include volatile oil prices and currency exchange rates, sanctions, and a “further deterioration” of the conflicts in the Middle East and Ukraine.
