International banks should reduce their charges for transferring remittances because the funds sent home by migrant workers play an important role in the economies of poor countries, says a UN agency.
Governments could also do more to improve domestic financial services so that more remittance funds could be available for investment, small business and job creation, says the United Nations Conference on Trade and Development (Unctad).
Remittances are not a substitute for foreign investment, official development assistance (ODA), debt relief or domestic fund-raising for economic development, the agency points out. However, they still constitute a significant source of external financing for least developed countries (LDCs) and should be mobilised to help expand and diversify productive capacity.
The 162-page Unctad report, “Harnessing Remittances and Diaspora Knowledge to Build Productive Capacities”, examines the role remittances play in 48 least developed countries (33 in Africa, nine in Asia, five in the Pacific and one in the Caribbean).
In many of these countries, it notes, there is a need to develop new sources of income for increasingly urbanised populations who cannot depend for their survival on farming.
Remittances to LDCs were estimated at $27 billion last year, up from $3.5 billion in 1990. Between 2000 and 2010, the number of LDC emigrant workers rose from 19 million to 27 million.
Interestingly, 80% of LDC emigrants migrate within the South (developing countries), mostly to South Asia, the Middle East and Africa, said Anisuzzaman Chowdhury, Unctad’s Commissioner for Macroeconomic Development.
Remittances to LDCs represented 4.4% of GDP and 15% of exports, compared with 1.6% and 4.5% for other developing countries. The top three LDC recipients (of total inflows) are Bangladesh, Nepal and Sudan from 2009-11, Mr Chowdhury said.
In 2011 alone, remittances to LDCs were almost double the value of foreign direct investment ($15 billion) and were only exceeded by ODA as a source of foreign financing ($42 billion), he said.
“We know of the positive impacts of remittances toward the microeconomy as a contribution to household income smoothing and diversification; reducing poverty and improving human capital accumulation through better health and education,” said the economist.
But he added there were also positive macroeconomic impacts, such as support of growth through investment and financial deepening, as remittances are less volatile than other sources of foreign exchange.
Remittances were sent via formal and informal channels; however, Unctad could not provide exact amount or proportion of informal channels as they are hard to track.
But the high transfer costs of up to 12% have prompted the Unctad to urge all parties concerned to help poor countries.
“From a policy perspective, formal channels are preferable as the best use of foreign exchange. It may increase a country’s trustworthiness and stimulate financial deepening too. However, the cost of formal remitting is close to 12% in LDCs or one-third higher than the global average,” said Mr Chowdhury.
The costs of formal remitting range from 4-25%; had countries in sub-Saharan Africa paid world average remittance fees, their receipts would have been US$6 billion higher in 2010, he noted.
“The time of remitting is faster but the cost for the LDCs is still high, so all sides need to help reduce the cost of remitting by increasing competition among remittance service providers, promoting partnerships between banks and microfinance institutions, strengthening involvement of post offices (improving their infrastructure and connectivity), enabling secure and stable financial sectors, and boosting use of mobile payments,” the Unctad economist said.
The banks, he said, should consider a differentiated approach for LDCs. “They have a corporate social responsibility to consider trying cheaper offers,” said Mr Chowdhury.
Khun Aung Naing, 28, a migrant from Myanmar’s Pa-O ethnic group, conceded that currently many migrants in Thailand did not transfer money via legal channels as it was too costly and cumbersome.
“If I send 1,000 baht back home, my parents will get 25,000 kyat, with 150 baht deducted as a transfer fee. The fee is shared equally by three operators — one in Thailand, another at the border, and finally an agent near the remote village where we come from,” said Khun Aung Naing, who has worked in Thailand since 2002 and is currently employed at a Khao San Road guesthouse.
He noted that the villagers back home were uneducated and there was no convenient access to banks, not to mention ATMs.
“It takes time for them and it costs money to travel far to town to retrieve some remittances. When we hear of Thai banks opening in Myanmar we are glad, but those banks are open in Yangon only and don’t have branches in our villages,” he said.
Myanmar authorities have said they would like to work with the Thai side on the issue as they realise the importance of remittances from Myanmar migrants from all over the world, which conservatively account for more than $100 per month per migrant.
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Writer: Achara Ashayagachat