Remittances, generally defined as the money migrant workers send to their families and communities back in their home country, have proven to be an important factor in global economic development.
For context, in 2024, remittances surpassed foreign direct investments (FDI) and official development assistance (ODA) to low- and middle-income countries combined, according to UN DESA. More importantly, UN DESA points out that remittances are far less volatile when compared with FDI and ODA.
In the same year, approximately $2.47 billion in personal remittances was sent across the world daily, amounting to $905 billion by the year’s end, with nearly $700 billion going to low- and middle-income countries.
At this scale, it is clear that remittances are a quiet but powerful force at various levels of the economic ladder.
This article explores how remittances shape economies at the household, national, and global levels.
Remittances and Household Economies
Money sent back home by migrant workers caters to close to 800 million family members across the world.
For the vast majority of recipients, money from relatives abroad is the only thing keeping them above the poverty line, as they rely on remittances to pay for or access basic needs, including food, housing, education, and healthcare.
Similarly, for many families who rely on remittances to run and earn from small businesses, remittances might form the entire basis of their survival.
Beyond daily necessities, and considering that remittances are less volatile than FDI and ODA, the International Monetary Fund (IMF) suggests that remittances are a crucial lifeline in times of crises.
In fact, while global income shrank by 3% during the pandemic and money transfer operators shut down during the lockdown, migrant workers used digital channels to send money online back home to their families, leading to almost 20% growth in remittances in 2021-2022.
It is well-established that migrant workers send more money back home in the aftermath of natural disasters, with the aim of helping relatives recover from their crises and stabilize their income.
Generally, remittances make up about 60% of the receiving household’s income, substantially contributing to poverty reduction by improving their purchasing power, enhancing household savings, and boosting income distribution.
This translates to long-term well-being, leading to improved quality of life for millions of families in low- and middle-income countries.
The Macroeconomic Impact on Receiving Countries
According to a recent analysis of 30-year data from 130 countries, researchers from Midwestern State University, Texas, and Louisiana State University found that a 10% increase in remittances per capita translated to a decrease in:
- Poverty level by 1.3%
- Poverty severity by 3.12%, and
- Poverty depth by 2%.
This shows that remittances have a direct effect on human capital development in receiving countries.
Interestingly, remittances account for about 3% of GDP in more than 60 countries, according to the World Bank.
For some of these countries, economic development, sustenance, and resilience are highly dependent on remittance inflows. This is especially the case for countries like Comoros, Gambia, El Salvador, Kyrgyzstan, Honduras, Samoa, Lebanon, Tajikistan, Tonga, and Nepal, where remittances account for 22% – 46% of their gross domestic products (GDP).
In countries with heavy reliance on remittances, the inflows substantially:
- Contribute to national income and foreign exchange reserves.
- Support and stabilize the balance of payments by providing a consistent inflow of foreign currencies.
- Contribute to socioeconomic recovery and resilience at times of crises and economic downturns.
Also, by serving as a stable and critical source of income for millions of households in LMICs, remittance inflows fuel a consumption-driven economy, leading to nationwide economic growth.
Remittances and Financial Systems
Like every other financial transaction, remittances typically require two parties: a sender and a receiver.
However, given that the greater part of global remittances flows to LMICs where most of the populations are unbanked or underbanked, there arises a need for recipients to find a way to receive the money being sent.
To meet this need, intended recipients key into formal financial systems by opening a bank account, mobile money account, or a digital wallet, depending on the type of financial services available in their locality, for receiving international transfers.
The $700 billion annual remittance flows to LMICs serve as a fertile ground for remittance service providers to emerge and maximize the market opportunities. Consequently, the past decade has seen a steady rise in remittance service providers, especially fintech remittance apps and mobile payments platforms, breaking into the remittance market.
Logically, households receiving remittances (covering 800 million family members) and migrant workers sending remittances (~200 million) are likely to have a formal account.
But bearing in mind that traditional banking channels are typically slower and their remittance services can cost up to 12% of the transaction amount, both senders and receivers are leaning more towards fintech apps for cheaper and faster remittance transactions.
For context, remittances from the US to Cuba, the Dominican Republic, and Haiti via traditional banks can cost up to 12% of the total remittance amount while taking up to five business days to get to the recipient.
However, when customers choose fintech providers like BOSS Money App to send money to the Dominican Republic, they get far more favorable exchange rates, a $0 fee on the first few transactions, and faster delivery.
Cheaper and more efficient services from fintech providers give both remittance senders and receivers more incentives to get into the formal financial system. Beyond remittances, users tend to also use these channels to access other financial services, including savings and access to credit.
In fact, the International Fund for Agricultural Development (IFAD) emphasizes the impact of fintechs in reducing remittance costs and improving efficiency and speed as a key driver of global financial inclusion.
Remittances, Investment, and Development
The majority of small and medium enterprises (SMEs) in developing countries are typically family/self-operated businesses that are generally capital-constrained with limited access to credit. As such, they are usually bootstrapped by owners, who are often looking for funding from friends, family members, and cooperatives.
Although most recipient households rely on remittances to access essential services, many who are privileged to have some excess after covering essential expenses often invest the extra in their small businesses, property and lands, and better-quality education.
Such scenarios present remittances as a tool for supporting local entrepreneurship and job creation in local economies, as they help finance, establish, and grow new businesses in home countries.
As recipients pump more money into their local economy, the burden of development costs is lessened on the local government, freeing up more government resources for the provision of essential services.
Essentially, remittances complement rather than replace public investment. This notion is further reinforced by the fact that remittances outweigh FDI and ODA to LMICs in an economic downturn or crisis.
Conclusion: A Global Economic Lifeline
The considerable impact and role of remittances as a global economic lifeline are undeniable.
These benefits go beyond the direct impacts on receiving households to extend to global financial inclusion, boosting labor markets in sending countries, and strengthening the economy of receiving countries with enriched FX reserves, thriving consumer markets, investments, and local development.
In a nutshell, one can describe remittances as a stabilizing force in an increasingly connected world.
