As individuals, Latin American and Caribbean workers send money home in small amounts, but those savings, taken together, are now so large they are shown to help reduce poverty and spark significant effects on national economies, analysts say.
Latin American and Caribbean remittances grew at double-digit rates this decade and, in 2005, reached the record level of $42.5 billion. That could even be an underestimate: unofficial figures suggest remittances could be bigger by half—as much as $65 billion last year in the region.
Whatever the real numbers, the flows are enormous. For Mexico, the regional leader in remittances receiving a record $20 billion in 2005, the flows equaled 71 percent of petroleum exports at all-time-high levels, 114 percent of foreign direct investment and 171 percent of tourism revenues.
Among the poor, those who benefit most from remittances are the poorest of the poor who received 50 to 60 percent of their income from the transfers, according to a recent World Bank finding in Guatemala. Among the extremely poor (the lowest 10 percent in income ranking), “once they received remittances, their ranking changes, they move up to just below the poverty line or above the poverty line,” Richard Adams, Jr., consultant to the World Bank International Trade Unit, told Emerging Markets. That means that incomes rise from miserable levels to about $540 per year, according to Adams’s analysis last year of data from a 2000 household survey in Guatemala.
The impact of the transfers on poverty is wide-ranging. “Remittances reduce the level, depth and severity of poverty,” says Adams. In other words, remittances from abroad and from migrants within Guatemala reduce the degree to which a family’s income lies below the poverty line, raise the average income of households living in poverty and cut the prevalence of poverty.
Remittances provide other benefits, creating a cushion against adverse shocks and allowing families to continue meeting their survival needs in times of natural disaster, conflict or economic crisis. Households that receive remittances typically build a better future by developing human capital with their investments in education, especially secondary education, and through improvements to housing.
The transfers reach far beyond the receiving families to also benefit other groups in society, primarily by increasing consumer demand. “Remittances benefit everyone, they have a spillover effect which is to create jobs and supply,” Dilip Ratha, an author of the World Bank “Global Economic Prospects 2006” focused on remittances and migration, told Emerging Markets. Household surveys show poverty has dropped by 11 percent in Uganda and 6 percent in Bangladesh, Ratha reports.
Constant improvements in tracking remittances are helping to define the size of the flows and their impact on macroeconomic indicators. The Bank of Jamaica has recently tightened its monitoring of flows that reached $1.6 billion last year. From 2004, the Bank began licensing and supervising remittance companies which “will have to report to the bank (and) the bank now audits the books of the companies,” Chandar Henry, senior economist of the Bank of Jamaica, told Emerging Markets.
Mexico’s central bank implemented several years ago a regulation that requires transfer companies to register with the bank and report monthly the number and amount of transfers to Mexico and specify to which states the funds are sent. Using this method, the bank tracked 58.7 million transfers last year, averaging a modest $341 each. Ninety percent of the transactions with Mexico are made electronically, making it a leading example of the trend to move to electronic transfers.
Brazil monitors its $2.479 billion in remittances through foreign exchange transaction records and expects statistics on the flows to improve following the 2005 simplification of procedures for foreign currency exchange and the authorization of so-called correspondent banks, or counter-top branches set up inside small shops that will expand the banking network nationwide, say Brazilian central bank press officials.
Whatever the total amounts of the flows, they are big enough to have an impact on macroeconomic indicators and even keep authorities in some countries awake at night. Remittances increase international reserves and contribute to appreciation of the local currency. “Remittances add to the stability of the local currency as they add to flows, and they will increase because a large number of migrants have university education,” says Henry of Bank of Jamaica.
A more stable currency comes with costs, though. Sterilizing reserves triggers price increases, and a stronger currency reduces export competitiveness. Even in dollarized economies such as El Salvador, the inflows have an inflationary effect. “The trouble with remittances—and this is a good thing—is they continue over time, so governments have to use this money to invest in infrastructure and training people so a similar price competitiveness is achieved,” says Ratha.
There are upsides to the massive flows, too. A leading positive macro effect of remittances is their ability to improve the credit rating of countries and create a lower interest rate spread on borrowing. World Bank models show that, if remittances were included in determining sovereign ratings, then the credit ratings of Haiti and Nicaragua could rise by three notches and generate a savings on interest rate spreads of 334 and 209 basis points, respectively. If added to export revenues, remittances would cause the debt-to-export ratio of emerging countries to fall significantly (see Table 2).
Remittances in Latin America and the Caribbean today can have the greatest favorable macroeconomic impact on many of the region’s poorest countries: The Dominican Republic, El Salvador, Haiti, Honduras, Jamaica and Nicaragua receive the greatest amount of remittances as a percentage of GNP (see Table 1). This positions these countries for improvements in their credit rating and a decline in spreads on sovereign borrowing.
Table 1: LAC’s leading remittance recipients (as % of GDP)
Remittance Remittances as World Ranking for Gross Natl Income
Recipient: % of GDP Remits: GDP ratio per Capita: USD/yr*
Haiti 24.8% 4 400
Jamaica 17.4% 7 2,980
El Salvador 16.2% 9 2,340
Honduras 15.5% 10 970
Domin. Repub. 13.2% 12 2,130
Nicaragua 11.9% 16 740
*2003 data
Source: World Bank: Global Economic Prospects 2006: Eonomic Implications of Remittances and Migration; Regional Fact Sheet from World Development Indicators 2005.
Table 2: Impact of Remittances on Debt-to-Export Ratios
Debt:X ratio Debt:X ratio
Country: (Conventional) (if add in remittances)
Ecuador 260% 200%
El Salvador 180% 120%
Guatemala 125% 80%
Jamaica 170% 120%
Source: Ratha, Dilip; World Bank.