Migrants’ International Payments May Mean Developing Countries Are Better Markets than they Appear
The last three decades have seen a large increase in the number of people living and working outside their countries of origin. The World Bank estimates that between 1990 and 2015, the number of migrants worldwide rose from 152 million to 250 million, and now make up about 3.4 percent of the global population. Many migrants send money back via international payments methods to families and friends in their countries of origin – in amounts substantial enough to turn some developing countries into better markets for international businesses than they may at first appear.
As the proportion of migrants in the world population has grown, the dollar value of these international payments, known as “remittances,” has also risen. In April 2016, a World Bank report forecasted that 2016 migrant remittance payments would total $603 billion, of which $431 billion would go to developing countries. These estimates are for remittances made using official international payment methods – the report suggested that unrecorded/unofficial payments could be much larger.
Remittances Drive Substantial International Payments
By far the largest source of remittance payments is the United States: in 2015, international payments worth over $133.5 billion were made by migrants working in the U.S. Of this, nearly $24 billion went to Mexico, $16.25 billion went to China, and nearly $11 billion to India. Other developed countries also remit funds, though on a smaller scale. In 2015, migrants in the United Kingdom sent global payments totaling nearly $25 billion back to their families; the largest recipients were Nigeria ($3.7 billion) and India ($3.6 billion). Migrants in Australia also remitted over $16.5 billion, much of it to China and India.
Remittances thus represent a substantial transfer of funds from the developed world to developing countries, significantly exceeding official development aid. In 2015, India was the largest remittance-receiving country with an estimated $69 billion, followed by China ($64 billion), and the Philippines ($28 billion). But although remittances to China and India are large in money terms, they are not large in relation to the size of their economies. In contrast, remittances make up over 25 percent of GDP for some smaller developing countries: in 2014, over 40 percent of the economy of the central Asian republic of Tajikistan relied on international payments from migrants.
International Payments by Migrants are Important Drivers of International Trade
These large inflows to developing countries create opportunities for international businesses. Families with access to funds from overseas may purchase more imported goods and services: for example, in 2014 remittances financed around 25 percent of imports in Nigeria and about 20 percent in Senegal. Remittances also support the development of local businesses, creating opportunities for international B2B sales. In Vietnam, for example, money sent by overseas Vietnamese has boosted local businesses and real estate markets: the World Bank says “about 70 percent of remittance inflows to Ho Chi Minh City (HCM) went into production and business, and some 22 percent to the real estate sector.” In Vietnam, also, the central bank uses remittance income to stabilize the banking sector, which helps to encourage trade finance for export and import businesses.
For many developing countries, remittances are an important source of foreign currency, enabling them to build up FX reserves. Strong FX reserve buffers reassure international businesses that their local business partners will be able to obtain the foreign currency needed to meet their obligations. Strong FX reserve buffers also encourage the development of local branches, subsidiaries and franchises, since businesses can be confident that the profits earned from local business can be repatriated when needed.
Risks to International Migration and Remittance Flows
There is a popular view in many developed countries that migrants are a burden, draining money from the country while making demands on services such as healthcare and competing with native-born workers for jobs. But the full picture is more complex. Many international businesses rely on migrant workers, both skilled and unskilled, to enable them to deliver value for money to their customers. Migrants pay taxes and contribute to the local economy where they live and work.
Research by the Organization for Economic Cooperation and Development (OECD), the World Bank and the International Labor Organization shows that overall, migrants contribute more to the economies of their host countries than they take out.
However, the international payments landscape may be growing more challenging for countries that rely on remittances. This is for two reasons. Firstly, banks under pressure to comply with tighter anti-money laundering (AML) legislation in developed countries are closing the accounts of international payment solutions providers in developing countries. The Consultative Group to Assist the Poor (CGAP) observes that in some countries in the Pacific area, these account closures potentially deprive people in rural areas of access to funds, which could cause severe economic problems. In 2016, Australia’s four big banks exited from the country’s remittance business, raising concerns that unregulated money transfer providers would spring up to serve migrant needs, making AML control more difficult.
Secondly, exchange rate movements affect the value of international payments. In the last two years, the strong dollar has benefited recipients of funds from the U.S., but adversely affected countries receiving remittances in euros or sterling. The oil price also affects migration patterns in oil-producing countries: migration from Commonwealth of Independent States (CIS) countries to Russia, for example, has declined in the last two years due to the ruble’s weakness and Russia’s recession. Falling migration inevitably reduces remittance flows. The World Bank identifies the prospect of the oil price remaining low as a key risk to the growth of remittances in 2016-17.
For many migrant workers, being able to make international payments to friends and family in their countries of origin is a key driver of their decision to work overseas. Businesses looking to attract migrant workers may wish to consider ways of mitigating adverse developments in the international payments landscape, for example by partnering with a trusted international payment solutions provider to help workers make international payments and manage their FX risk effectively.
Historically, remittances via international payment solutions have provided a strong, stable flow of income for many countries, which can offer rich opportunities for international businesses. However, tighter regulation of banks and adverse exchange rate movements also threaten remittance flows for some countries.
With 17 years experience in the financial industry, Frances is a highly regarded writer and speaker on banking, finance and economics. She writes regularly for the Financial Times, Forbes and a range of financial industry publications. Her writing has featured in The Economist, the New York Times and the Wall Street Journal. She is a frequent commentator on TV, radio and online news media including the BBC and RT TV.