The International Monetary Fund (IMF) defines remittances as international transfers of funds sent by migrant workers from the country where they are working (source country) to people, typically their family members, in the country from which they originated (receiving country). Remittances represent household income from foreign economies arising mainly from the temporary or permanent movement of people to those economies. Remittances are mainly derived from two items in the balance of payments framework: income earned by workers in economies where they are not resident (or from nonresident employers) and transfers from residents of one economy to residents of another.
1. Where are remittances across borders included within the balance of payment? Are they current or financial account components? Remittances represent an inflow for developing countries, sometimes greater than financial aids. Developed countries such as US, from which remittances are sent, classify migrant remittances as current transfers in the current account. International transfers of money by private individuals, such as workers’ remittances, appear in the current account of the balance of payments as unilateral transfers. Remittances are increasingly becoming an important means of helping to fund the current account deficits of economies with balance of payments problems.
Remittances may also include capital assets, which migrants take with them to host countries or bring back to home countries; these values are generally reported under the capital accounts of balance of payment. Migrants’ capital transfers are not transactions between two parties but other transfers of money that can arise from the migration of individuals from one economy to another; these would be included in the capital account. There is an economic and accounting relationship within the BOP between the current account, of which remittances are a part, and the financial account. “Net inflows in the financial account balance (including changes in official reserves) essentially finance current account deficits .
2. Under what conditions –for example for which countries currently are remittances significant contributors to the economy and to the overall balance of payments?
Remittances are significant contributors to developing and smaller countries around the world. According to the Global Remittances Mini-Case, remittances often make up a very small, often negligible cash outflow from sending countries; however it represents a very significant volume for developing countries, sometimes more than 25% of their GDP. Over the past 15 years, the inflow of remittances to developing economies has grown sixfold, from $56 billion in 1995 to $334 billion in 2010 . Majority of remittances are received by developing countries, in countries for example Mexico, remittances now make up the second largest source of foreign exchange earnings- and the government has increasingly viewed remittances as an integral part of the balance of payments
Remittances make up a very small cash outflow fron sending countries such as the US, however they have contributed significantly to countries such as Veitnam, Pakistan, Indonesia, Morroco, etc. (which have received between $5 billion to $15 billion), as well as Algeria, Brazil, Japan, etc. which fall in the category of $1 to $5 billion in remittances through formal channels. The World Bank estimates that $414 billion was remitted in 2009, with $316 billion of this total going to developing countries. More than 190 million people, representing approximately 3% of the world’s population, made these remittances. Remittances are more evenly distributed among developing countries than capital flows. In fact, remittances are especially important for low-income countries. Remittance flows to low-income countries are nearly 6 percent of their gross domestic product (GDP), compared with about 2 percent of GDP for middle-income countries . Remittances can generate output growth either by increasing consumption or by increasing investment. According to writers such as Stahl and Arnold, in this context, the positive multiplier effects of remittances may well promote growth, as, for instance, when remittances are used to purchase domestically produced goods and services. On the other hand, large remittance inflows, like any other foreign currency inflows, can cause an appreciation of the real exchange rate and raise the price of traditional exports, while making imports more expensive, and this rings true for smaller economies. 3. Why is the cost of remittances the subject of such intense international scrutiny?
Remittances wired from first world countries by migrants provide an important source of income for families in developing countries. Remittance cost has been the focus of intense international scrutiny primarily because the Global Remittances Working Group, which was established in 2009 and coordinated by the World Bank, realized that excessive remittance charges imposed on these transactional transfers border on exploitive. This prompted G8 countries to start an initiative entitled the “5 x 5”, aimed at reducing transfer costs from an average 10% to 5% in 5 years.
A survey conducted by the World Bank in 2010 found that the average cost of a migrant remittance transaction was 8.89% of the transaction value. On the other hand, regional costs could be as high as 23.6% of the overall value. Additionally, the cost to send remittances also varies widely across remittance service providers. The disparity in fees across providers is one reason for the growing need to assess remittance costs. Furthermore there is no real evidence that these costs are justifiable as there are no true “banking fees” necessarily associated with these transfers, however benefitting entities (remittance agencies) experience large profit margins. Additionally, there is little transparency in the costing of remittances and hence the growth in the involvement of international “watchdogs. The reason remittance costs are heavily examined is that transfer of funds from migrants are seen as a significant source of financing for the economies of developing countries and of the recipient populations . It is believed to have significant benefit to large segments of the population, which without these resources, would live in conditions of abject poverty .
In some cases developing countries’ remittance can account for as much as 25% of their GDP. The IMF has indicated that “if the cost of sending remittances could be reduced by 5 percentage points, remittance recipients could receive over US$16 billion more each year”. For countries in which remittances comprise a large percentage of GPD, this could translate to a considerable increase in inflows. Bibliography
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