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Remittances – a lifeline for developing economies

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Remittances support Kyrgyz elderly. Photo: V. Pirogov

Albania depends on remittances. Photo: A. Andjic

Kyrgyz traders are backed by emigrant family members. Photo: V. Pirogov

After leaving for better lives abroad, emigrants often send money home to their native countries as remittances. The impact of these funds is staggering, but they could be better channelled.

“If you can’t be there, your money can,” reads the slogan on Western Union’s website. It could equally be a précis of the increasing role emigrants are playing in helping economies, especially developing economies, grow.

The physical disconnection of millions of migrants from homes, families and friends in search of better lives abroad is partly bridged by a financial connection. It’s a simple formula. Developed countries attract migrant workers, and migrant workers send home money as remittances.

The World Bank estimates that annual global remittance transfers add up to approximately $150 billion, with the lion’s share going to the developing countries. That’s more than total annual government aid to poor countries and in some cases exceeds foreign direct investment.

In parts of central and eastern Europe, where the concept is relatively new due to the lack of migration under communist regimes, remittances can account for more than 15 per cent of a country’s gross domestic product. In Moldova that figure exceeds 23 per cent. This region is now attracting around $14 billion a year in remittances that pass through official channels.

It is believed that far larger amounts are transferred unofficially. Emigrants may not trust banks and/or there may not be banks operating near their home towns where they send remittances so in many transition countries most remittances enter through informal channels, often in the back pockets of workers travelling home on visits. In Albania, for example, the central bank estimates that, until recently, 77 per cent of emigrants used unofficial means to transfer cash, usually bringing it home themselves.

This means that significant amounts of money bypass official financial systems, money that could otherwise contribute to building the official economy.

The big question facing governments and central banks today is how to further improve the impact of these huge inflows of money on their economies. To address this subject, the EBRD recently arranged a seminar, sponsored by the Swiss government, on remittances around the world. The event attracted central bankers from central and eastern Europe and the Commonwealth of Independent States, in order to share views and experience with senior staff from International Financial Institutions, the Bank for International Settlements and representatives from the USA and the Philippines.

“It is becoming clear that remittances are a crucial part of the wider model for developing economies,” said EBRD President Jean Lemierre. “The EBRD is therefore taking an active role in promoting the awareness of remittances, improving ways to better channel these funds, and building on lessons learned from different countries to make better use of money transfers in the future.”

Adrian Fullani, Governor of the Bank of Albania, said: “Remittances are one of the most important sources of finance for developing nations and therefore we must establish an environment that can enhance their impact on the overall development process.”

One way to do this is to improve legislation and regulation to gain people’s trust, and to ensure predictable and safe money transfers. By developing more formal routes for money transfers, countries can help integrate these funds in the wider economy. Jean-Marc Peterschmitt, EBRD Director for Bank Lending, believes making better use of local banks is crucial for leveraging the impact of remittance flows.

Some of the biggest recipients of remittances are people living in poorer, more rural areas, people with little knowledge or access to banking systems. “It is a question of educating people to use local banks and open an account, and banks using the opportunity of remittances to offer specifically tailored products,” said Mr Peterschmitt. “And banks must reach out more through extended branches or agencies.”

Encouraging beneficiaries to use local banks will help strengthen the banking sector, expand credit availability and new products in transition countries. There is also an upside for those sending money. With transfer fees often very high, encouraging a more formal means can create a more competitive environment.

“It is a win-win situation,” says Mr Peterschmitt. “Banks and the economy will benefit, and new customers can benefit from products they were never aware existed such as interest on savings, or leveraging money for mortgages or loans to start a business.”

The EBRD is looking at opportunities in directing remittance flows more effectively. The Bank could, for example, work with local banks to help develop new remittance-based products while addressing barriers to bank use such as high administration costs; it could also help banks establish international networks to benefit senders and receivers of remittances.

“It is obvious that remittances are an asset not yet being used properly,” said Mr Lemierre. “It is a question of creativity and innovation to better manage the flow of these resources. This way they can further benefit individuals and economies alike.”

Written by EBRD Press Officer, Jazz Singh

7 October 2005