Bloomberg Línea — Remittances play a crucial role in Latin American and Caribbean economies, making up a large chunk of several countries’ Gross Domestic Product, as is the case for Nicaragua (29.7% of GDP), Honduras (27.3%), and Jamaica (20.6%). While migrants’ contributions may seem a net positive for economic activity, they also mask underlying issues linked to poor labor conditions and households’ overreliance on foreign currency.
“Migrants contribute to their countries, communities, and families of origin by transferring their income from abroad, helping to meet basic household needs; therefore, they are key in mitigating adverse macroeconomic scenarios,” José Manuel Salazar-Xirinachs, the executive secretary of United Nations Economic Commission for Latin America and the Caribbean (ECLAC), told Bloomberg Línea.
Remittances make up approximately 2.5% of the GDP in Latin America and the Caribbean. However, in specific subregions, such as Central America (12.7%) and the Caribbean (9.4%), the contribution is significantly higher. In South America, the dependency is lower, hovering around 0.7%, as per Inter-American Development Bank (IDB) data.
Projections from the IDB anticipate a record-setting year for remittances in 2023. The estimated figure of US$155.9 billion would imply a 9.5% increase from 2022, rounding out a decade of consistent growth of around 10% per year.
Indeed, within the context of the Covid-19 pandemic, remittances displayed resilient behavior, increasing by 26% between 2020 and 2021 and by 9.3% between 2021 and 2022. It is projected that in 2023, the remittances received in the region will represent 18% of the total global remittances.
José Manuel Salazar-Xirinachs, Executive Secretary of ECLAC
In 2022, the world’s total migrant population surpassed the 250-million mark, meaning that if they were hypothetically grouped together as a country, they would be the fifth largest by inhabitants. According to the International Organization for Migration (IOM), 26% of these migrants reside in the Americas, making up 7% of the regional population.
The Venezuelan exodus is particularly noteworthy, with around seven million migrants globally, six million of whom relocated elsewhere in the Americas.
Highlighting the migration-remittance link, the IOM notes that from 2019 to 2022, the U.S. issued 1.7 million work visas to Latin American and Caribbean individuals, primarily Mexicans (81%), followed by Jamaicans, Brazilians, Colombians, and Guatemalans. Post-pandemic, numbers exceeded 2019 levels.
Manual labor and skilled trades are the main drivers of remittances to Latin America, Manuel Romera, Finance Director at IE Business School, told Bloomberg Línea. The rise of the digital economy has introduced a new form of currency inflow, especially from remote workers, such as those in the IT sector or other professionals like psychologists, contributing to economies by means of service exports, he added.
Remittances are a crucial source of income in several countries. In developing nations, excluding China, remittance inflows surpassed foreign direct investment and official development assistance in 2022. In Latin America and the Caribbean, excluding Brazil, remittances exceeded foreign direct investment. Mexico stands as the largest recipient of remittances, largely due its key role in the US labor market.
United Nations Conference on Trade and Development (UNCTAD)
The contribution of migration and remittances in Latin America and the Caribbean
IOM experts conveyed to Bloomberg Línea that migrants’ contributions to their home countries’ economies goes far beyond remittances, with such individuals serving as accelerators of inclusive growth and sustainable development. According to IOM data, Latin American and Caribbean nations experiencing significant waves of migration could see an annual GDP boost of 0.10% to 0.25% until 2030.
It is crucial to clarify that migrant individuals are powerful driving agents for development and for fostering much stronger and more diverse communities and societies.
IOM
In that sense, remittances, which amounted to US$800 billion globally in 2022, represent an important tool for poverty reduction, with 80% going to low and middle-income countries, as per UNCTAD figures.
UNCTAD representatives told Bloomberg Línea that a 10% increase in remittances as a proportion of GDP correlates with a 1.6% decrease in poverty, enhancing families’ financial resilience, facilitating investments in housing and providing a more stable living environment.
Romera, IE Business School, notes that while humble households primarily rely on remittances, there’s a secondary impact on the middle class, as these funds lubricate the commerce sector and benefit national producers, fostering economic growth.
The challenges to consolidate the contribution of remittances in the region
However, to enhance the reach of these resources, Latin America still faces various barriers. Migrants encounter high transaction costs when they send remittances, limiting their real value upon arrival to their home country, according to UNCTAD.
In the second quarter of 2023, as per the World Bank, the global average cost of sending remittances was 6.2% of the money sent, diminishing effectiveness and posing a burden for vulnerable consumers.
UNCTAD details that while progress has been significant—a decrease of 3.5 percentage points compared to the cost in the first quarter of 2009—there is still a long way to go.
The Sustainable Development Goals (SDGs) set a target of 3% for the global average cost by 2030, aiming to ensure that no service has a transfer cost exceeding 5% of the remitted amount.
According to information shared by UNCTAD, the cost of remittance services varies significantly depending on the region to which the money is sent.
Costs range from 4.3% of the remittance value in South Asia to 7.9% in sub-Saharan Africa. The average cost of sending remittances to Latin America was 5.8% in the fourth quarter of 2022. Costs in this region have remained stable or even increased in smaller remittance corridors since 2015.
Some measures recommended by the entity to enhance the impact of remittances include:
- Regulating transfer fees and exchange rates to reduce costs and ensure that funds reach their recipients.
- Promoting financial education through educational programs to assist consumers in making informed decisions.
- Promoting digital remittance services to provide more affordable and accessible money transfer options.
- Increasing transparency and combating fraud to protect consumers from hidden fees and deceptive practices.
- Developing effective conflict resolution mechanisms to provide resources in cases of transfer delays or discrepancies in received amounts.
The role of digitization in global remittances
Digital transactions accounted for 30% of all global remittance services in the second quarter of this year.
According to UNCTAD, digital financial services are more efficient in remittance transfers and enable greater coverage.
Digital financial inclusion is crucial to harnessing the potential of these services, meaning it’s essential to address these gaps, detailed the report.
“Remittances play a fundamental role in supporting families to meet essential expenses such as food, housing, and education. For many families, especially in rural or disadvantaged areas, remittances are essential to maintain a minimum standard of living and access basic services,” highlighted Santiago Mejía, Colombia’s director at the fintech Global66, in conversation with Bloomberg Línea.
The executive believed that remittances can also contribute to long-term savings and investment in education, benefiting the construction of a more secure future.
However, he warns that the high dependence on remittances in Latin American economies also highlights the need to diversify income sources and promote sustainable economic development to reduce this reliance.
He further explains that when more dollars arrive in the country in the form of remittances, it can increase the demand for the local currency, potentially leading to its appreciation.
“However, this can also make exports less competitive and affect other economic sectors. Therefore, while remittances can influence the appreciation of local currencies, their actual impact depends on a series of macroeconomic and policy factors,” he added.
From a human capital perspective, the ability of a professional or worker in a trade to generate an income in the U.S. or Europe that multiplies several times their earnings in their country of origin underscores the importance of capital investment, as well as educational, social, political (stability), or judicial capital in a country.
Director of Finance at IE Business School, Manuel Romera
The dynamics of remittances and their main triggers
According to the Inter-American Development Bank (BID), the dynamics observed with remittances throughout 2023 are primarily linked to factors such as increased migrant income and improved employment rates.
The International Organization for Migration (IOM) also refers to various incentives for remittance sending, including altruism, solidarity, self-interest (savings), debt payments, income diversification, and household security.
“Several other studies conducted in Central American and Caribbean countries have shown that 72% of remittances are used to cover daily expenses, 7% for savings, 6% for education, and 1.8% for housing acquisition,” mentioned specialists from the organization.
The expectations for the volume of remittances in 2024 will depend on several factors, including global economic events, migration policies in destination countries, labor conditions abroad, and the economic evolution in Latin America.
Santiago Mejía, Colombia's director at the fintech Global66.
Likewise, the progress of the migratory process from previous periods has had an impact, as highlighted by the Inter-American Development Bank (IDB) in its report Remittances to Latin America and the Caribbean in 2023: Resuming Previous Growth.
“The purchasing power of remittance-receiving families in Latin America and the Caribbean depends on the exchange rate at which received remittances are converted into local currency and, similarly, depends on the prices of the products they can purchase (...) Considering that the number of emigrants from the region continues to increase, it is unlikely that remittance flows will decline in the foreseeable future,” states the report.
According to the projections by the IDB for the year-end, the countries in Latin America and the Caribbean that would receive the most remittances are:
- Mexico (US$64.247 billion)
- Guatemala (US$19.982 billion)
- Colombia (US$10.202 billion)
- Dominican Republic (US$10.125 billion)
- Honduras (US$9.369 billion)
- El Salvador (US$8.198 billion)
- Ecuador (US$5.315 billion)
- Nicaragua (US$5.127 billion)
- Brazil (US$4.304 billion)
- Peru (US$4.241 billion)
In 2020, the migrant population from various countries was significant: Mexico had 11.1 million individuals migrating, Guatemala had 1.3 million, Colombia counted 3.02 million, the Dominican Republic had 1.6 million, and Honduras had 985,077 people leaving the country.
Meanwhile, during that period, the migrant population from El Salvador was 1.5 million, from Ecuador was 1.1 million, from Nicaragua was 718,154, from Brazil was 1.8 million, and from Peru was 1.5 million, according to the latest available figures from DataMIG, the migration data site from the IDB.
The IDB report indicates that 59.5% of Latin American migrants are located in North America, primarily in the United States. The second-largest destination is within the various countries of the region itself (26.3%), while the third destination is Europe (12.6%), especially Spain.
“The diasporas are key to driving development solutions and creating robust ecosystems across many fronts, including supporting safe, orderly, and regular migration. They play a crucial role in program implementation and policy formulation, showcasing their significance through capacity development, resource mobilization, and significant contributions to achieving the Sustainable Development Goals (SDGs),” as per the IOM.
IE Business School projects that if there isn’t a major crisis in migrant-receiving countries, and employment remains stable, the trend in the coming years will see a sustained increase in remittance flows, even in situations of weak economic growth.
The rise in migration drives this trend, as well as the increase in wages in the U.S., and to a lesser extent, the strength of the dollar in 2023, although this might not persist, according to the Director of the Finance Sector at IE Business School.
“Emigration, from an economic perspective, can be seen as an export of human capital and labor from one country to another. This phenomenon tends to be deferred, meaning there is a time lapse from when an emigrant arrives until they find employment and are able to send money back to their family and community of origin. It typically persists for a long period, spanning several years or decades, often until the growth of children in the homeland or the survival of parents and ancestors,” concluded the Director.